The RIC ReportInvestors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 33 to 34. 11708462 The RIC Report

BofA Merrill Lynch does and seeks to do business with issuers 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 33 to 34. 11708462

The RIC Report Preparing for extremes

14 February 2017

Policy uncertainty could create wide market swings Monetary, fiscal and regulatory policies could be key market drivers in 2017, in our view. However, uncertainty over the timing and scope of those actions, and rhetoric as they unfold, could cause volatile asset prices.

Several industries could gain from Washington action So far, regulatory action seems to favor many stocks in the Financial and Energy sectors. Defense stocks would benefit if outlays rise as expected. Less onerous regulation may also boost Media/Telecom and Biotechnology companies.

Higher rates, inflation, economic growth expected We expect two short-term rate increases from the Fed in 2017 and look for 10-year Treasury yields to reach 3% in Q2. Our forecasts for inflation and near-term GDP growth have also risen.

Bond barbells for higher yields, flatter curve Bond barbells combine short-term and long-term maturities; they usually do better than single securities when the yield curve flattens. Barbells can take advantage of the increase in yields for longer maturities while guarding against additional increases at the shorter end.

Equity barbells combine growth plus defensive stocks The wide possible range of outcomes in asset prices suggests that equity investors own growth/cyclical stocks to benefit from favorable market action but also keep some defensive stocks to guard against negative surprises. Our favorite growth areas include selected Financials, Consumer Discretionary, Industrials, Technology and Energy. Health Care is our favorite defensive sector.

The next RIC report will be published on March 14 The publishing schedule for the RIC is the second Tuesday of each month.

Investment Strategy Global

Table of Contents

Financial markets recap 2

Preparing for extremes 3

The Fed’s $4.2 trillion balancing act 7

The costs and benefits of tax reform 9

RIC asset class views 16

Fixed Income, Economics, Commodities, 17

Global equity markets: views and risks 18

Asset allocation for individual investors 19

US Equity Strategy Sector Views 24

Portfolio of the month 25

Stock lists 26

US economic forecast summary 30

Global economic forecast summary 31

Interest rate forecast summary 31

FX rate forecast summary 31

Research Analysts 35

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 List of Analysts

Timestamp: 14 February 2017 12:01AM EST

http://research1.ml.com/C?q=fL6MPnaMTZKxk8jDkv0yGA

2 The RIC Report | 14 February 2017

Financial markets recap January 2017 review • Some of the worst equity performers in the post-election period (November-December)

rebounded in January, led by the Hang Seng at 6.1%, followed by EM at 5.5%. We alsosaw this play out in the US size-style indexes, as large caps outperformed small caps, andgrowth outperformed value.

• Materials was the best performing sector in January, gaining 4.6%, followed by Tech at4.4%, and Discretionary at 4.2%. Energy was the laggard, falling 3.6%, as oil prices lostground. Telecom and Real Estate were also in the red.

• In bonds, preferreds had the top performance, gaining 2.7%, followed by EM Sovereignbonds at 1.7%, and EM Corporates and high yield both at 1.3%. The laggard was the 10-year Treasury at 0.0%.

• Gold rallied 5% in January, while oil was down 1.7%. The dollar gave back some recentgains, falling 3.1%, while the yen was up 2.7%.

Table 1: Equity indexes – total return (%) As of 31 January 2017

Asset class 1mo 3mo 12mo YTD 3yr2 5yr2 10yr2 Equity Indices (%, US dollar terms) S&P 500 1.9 7.8 20.0 1.9 10.8 14.1 7.0 Dow Jones Industrial Avg. 0.6 10.2 23.9 0.6 10.9 12.3 7.4 NASDAQ Comp 4.3 8.5 23.2 4.3 12.4 16.3 9.8 MSCI All Country World 2.8 5.9 18.6 2.8 6.1 9.3 4.3 FTSE 100 1.2 5.5 7.3 1.2 -2.4 3.7 0.6 DJ Euro Stoxx 50 0.5 4.3 8.6 0.5 -2.5 5.0 -1.3MSCI EAFE 2.9 4.3 12.6 2.9 1.2 6.5 1.4 TOPIX 3.4 1.6 16.3 3.4 6.2 8.6 1.4 Hang Seng 6.1 2.0 23.7 6.1 5.9 6.6 5.1 MSCI Emerging Markets 5.5 0.9 25.9 5.5 1.8 0.5 2.8

Size & Style (%, US dollar terms) Russell 1000 2.0 8.0 20.8 2.0 10.5 14.1 7.1 Russell 1000 Growth 3.4 6.9 17.2 3.4 10.8 13.9 8.4 Russell 1000 Value 0.7 9.1 24.6 0.7 10.2 14.1 5.7 Russell Midcap 2.4 9.2 24.7 2.4 9.5 13.9 7.8 Russell Midcap Growth 3.3 8.2 20.0 3.3 8.2 12.7 7.8 Russell Midcap Value 1.7 10.0 29.2 1.7 10.7 15.0 7.4 Russell 2000 0.4 14.7 33.5 0.4 7.9 13.0 6.9 Russell 2000 Growth 1.6 12.2 26.9 1.6 6.2 12.5 7.7 Russell 2000 Value -0.7 17.1 40.2 -0.7 9.5 13.4 6.0

S&P 500 Sectors (%, US dollar terms) Consumer Discretionary 4.2 9.2 16.5 4.2 12.4 17.4 9.8 Consumer Staples 1.6 0.4 6.4 1.6 11.8 13.4 10.1 Energy -3.6 6.5 26.6 -3.6 -1.6 2.9 4.1 Financials 0.2 18.7 35.0 0.2 13.2 17.7 -0.4Health Care 2.2 5.0 7.7 2.2 9.7 16.6 9.5 Industrials 1.4 10.9 27.9 1.4 10.5 14.4 7.8 Information Technology 4.4 5.7 24.9 4.4 15.8 15.7 10.2 Materials 4.6 11.9 36.5 4.6 7.8 9.2 6.1 Real Estate -0.1 1.1 8.3 -0.1 11.0 10.0 3.3 Telecom Services -2.5 9.3 12.8 -2.5 9.8 11.7 5.7 Utilities 1.3 0.5 12.2 1.3 11.9 11.5 7.1 Notes: * Performance is gross of foreign dividend withholding taxes, 2 3yr, 5yr, and 10yr returns are annualized Source: BofA Merrill Lynch Global Research, S&P, MSCI, Bloomberg

Table 2: Bond/currency/commodity/hedge fund indexes–total return (%) As of 31 January 2017

Asset class 1mo 3mo 12mo YTD 3yr2 5yr2 10yr2 BofA Merrill Lynch Global Research Bond Indices (%, US dollar terms) 2-Year Treasury 0.1 -0.3 0.2 0.1 0.6 0.5 2.2 5-Year Treasury 0.2 -2.4 -1.4 0.2 1.3 0.8 4.2 10-Year Treasury 0.0 -5.0 -3.3 0.0 2.6 1.2 4.9 30-Year Treasury 0.2 -8.9 -4.1 0.2 6.1 2.1 6.6 US Broad Market Index 0.2 -2.1 1.4 0.2 2.7 2.2 4.4 TIPS 0.8 -1.3 4.1 0.8 2.0 0.6 4.5 Municipals* 0.5 -2.1 -0.2 0.5 3.9 3.1 4.5 US Corporate Bonds 0.4 -1.7 5.9 0.4 3.8 3.9 5.4 US High Yield Bonds 1.3 2.9 21.0 1.3 4.9 7.0 7.4 Emerging Mkt Corp Bonds 1.3 -0.3 10.9 1.3 4.3 5.0 6.1 Emerging Mkt Sov Bonds 1.7 -2.0 9.3 1.7 4.9 4.9 6.3 Preferreds 2.7 -1.0 4.4 2.7 8.3 6.5 3.0 Foreign exchange** (%, in local currencies) US dollar -3.1 1.5 -3.2 -3.1 5.8 5.6 1.0 British pound 0.5 4.4 -11.6 0.5 -3.4 -1.0 -3.1Euro 0.1 -1.6 1.9 0.1 -2.4 -0.3 -0.6Yen 2.7 -6.6 7.9 2.7 0.0 -5.7 1.6 Commodities** (%, US dollar terms) CRB Index -0.2 3.1 15.2 -0.2 -12.2 -9.3 -4.4Gold 5.0 -5.0 8.4 5.0 -0.8 -6.9 6.4 WTI Crude Oil -1.7 12.7 57.1 -1.7 -18.5 -11.7 -1.0Brent Crude Oil -2.0 15.3 60.3 -2.0 -19.4 -12.9 -0.3Alternative Investments† (%, US dollar terms) Hedge Fund - CS Tremont¹ 1.0 1.1 1.2 1.2 1.5 4.3 3.7 Hedge Fund - HFRI Fund of Funds¹ 0.9 0.9 0.5 0.5 1.2 3.4 1.3 Notes: *Not tax adjusted. **BoE calculated effective FX indices. ¹Data lagged by one month; 2 3yr, 5yr,

and 10yr returns are annualized; CS AUM-weighted, HFRI equal-weighted; †AI data not comparable to

other asset classes because of reporting delays, lack of standardized reporting, and survivorship and self-selection biases. Crude oil prices are spot USD. Source: S&P, MSCI, Bloomberg, FactSet, BofAML

Bond Indices (US Treasury Current 10yr, Current 2yr, Inflation-Linked; Muni Master, US Corp Master,

US HY Master II, EM Corp Plus Index; EM External Debt Sovereign Index; US Preferred Stock Index).

The RIC Report | 14 February 2017 3

Preparing for extremes

Cheryl Rowan Portfolio Strategist MLPF&S

Martin Mauro Fixed Income Strategist MLPF&S

Matthew Trapp, CFA Investment Strategist MLPF&S

A lot has happened since the momentous election of Donald Trump as president of the United States. Stocks are up over 8%, the yield on the 10-year Treasury note has risen from 1.8% to 2.4%, and small business confidence has climbed off the charts (Chart 1).

We expect monetary, fiscal and regulatory policies to be key drivers of financial markets for much of 2017, but there is considerable uncertainty over the timing, scope and direction of those actions. As these policy developments unfold, asset prices could show wide swings. We suggest that investors prepare by implementing barbells in their stock and bond portfolios, and encourage them to be nimble and flexible throughout the year to adapt to changing circumstances.

Chart 1: National Federation of Independent Business (NFIB) Small Business Optimism Index

Source: BofA Merrill Lynch Global Research, NFIB

Sharp market moves since the election Many asset prices moved sharply since the presidential election. Bond yields spiked, and US stocks, the dollar, and oil prices all rallied into 2017. Cyclical stocks that rely on economic growth like Financials, Industrials and Consumer Discretionary significantly outperformed more defensive Consumer Staples, Health Care and Utilities (Table 3). At the same time, risk measures like gold, credit spreads, and the VIX index remain below their pre-election levels. Most of these price movements stem from the belief that policy changes seem more achievable with a Republican sweep of Congress and the White House. But our strategists see the risk that potential delays and uncertainty about the ultimate effect of the policy changes could set markets back, at least temporarily.

Table 3: Performance of selected cyclical and defensive sectors since Nov. 8 Cyclical Sectors Price Return Defensive Sectors Price Return

Consumer Discretionary 9.0% Consumer Staples 1.7% Industrials 10.6% Utilities 0.3% Financials 18.8% Health Care 5.1%

Source: BofA Merrill Lynch Global Research, Bloomberg

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Policy changes already under way Now that markets have had a chance to digest proposed policy changes and weigh in on the likelihood of implementation, asset prices have adjusted in many cases. Stock prices and bond yields are off their recent highs and gold prices have risen again. There has been considerable rhetoric on topics like health care (undoing and replacing the Affordable Care Act), taxes and trade (Border Adjustment Tax, tariffs), immigration, energy (streamlining permits for pipelines, promoting production and exports), and deregulation of financials (less onerous stress test for certain banks, stay on new regulation related to Dodd-Frank financial reform and the potential rollback of Department of Labor fiduciary rule). In some cases, the regulatory changes have already been significant.

Many industries affected by proposals and policy changes Financials likely to benefit from reduced regulatory hurdles Many industries are likely to be affected by the new administration’s proposals, but perhaps none more than Financials. Banks are subject to an annual Capital Analysis and Review (CCAR) stress test from the Federal Reserve. Recently the Fed removed banks with assets of $50-250 billion from the qualitative requirements of the test. The freed up capital for these mid-sized banks may now be used for revenue-generating activities or may be returned to shareholders. In another regulatory change, Trump has signed orders to review (with the expectation of scaling back) the Dodd-Frank financial reform legislation. Many financials, particularly regional banks and brokers, are poised to benefit from these proposals.

Energy stocks should benefit if oil prices continue to rise In an effort to “unleash an energy revolution,” Trump has proposed promoting oil and natural gas production and exports, streamlining pipeline permits (using US-produced steel for pipeline construction), reducing or removing the mandated use of renewable fuels, revoking Obama’s Clean Power Plan and backing out of international climate change policies. While it may be too early to conclude how these policies could affect stocks and energy prices, on the surface they suggest lower production costs and potentially enhanced productivity, according to our commodity strategists. The drilling rig count recently rose for the first time since late 2014, and we expect 250 incremental rigs by year-end 2018. However, protectionist policies would hurt global trade and drive down energy prices. Border trade wars with Mexico, for example, could have major implications for the energy trade.

Defense outlays likely to go up Defense spending usually rises under Republican administrations, according to Analyst Ron Epstein. Budget constraints have been driving defense spending in recent years, but Senator John McCain has submitted a proposal for rebuilding and reshaping the US military – calling for 4% annual increases over the next five years. In our view, increased frequency of terrorist attacks, shifts in regional powers that are leading to arms races in the Middle East, Eastern Europe and Australia, and investment by the US and Western Europe to secure borders are key to reversing the recent decline in defense spending. We also expect military exports to increase in 2017, as governments continue to prioritize national security. The US may have to increase the Navy budget by $25 billion/year for the next 10 years in order to fund a proposed 350-ship Navy by 2046. Epstein thinks that a US defense budget upcycle could continue to drive significant earnings growth in the stocks.

Media/Telecom and Biotechnology stocks could fare better in 2017 Media and Telecom stocks should fare better as the Republicans gain control of the FCC and broadband rate regulation is likely reversed. Analyst Jessica Reif Cohen thinks that re-working of the Open Internet Order will enable increased pricing power and believes that M&A constraints will be eased.

Uncertainty around Health Care is high, as Republicans propose alternatives to replace parts of the Affordable Care Act, but Analyst Ying Huang believes that Biotechnology stocks could be good performers in 2017. That’s because there are fewer concerns that the Trump Administration will impose measures to control drug pricing, but rather will follow the


suggestions of company executives who argue that lower prices will result from increased competition and less regulation.

Better economic growth expected sooner Capital goods orders are on the rise and the dollar has weakened a bit which, along with greater likelihood of a delay in fiscal spending, prompted our economics team to alter its forecast for US economic growth for 2017 (Chart 2). Michelle Meyer, US economist, now expects Q1 and Q2 GDP growth to be around 2%, up from 1.5% previously. However, Meyer has trimmed her forecast for Q3 growth from 2.3% to 2% on the view that the fiscal stimulus might be delayed.

Chart 2: Nondefense capital goods ex-aircraft orders (year-year percent change)

Source: BofA Merrill Lynch Global Research, US Census Bureau

We’ve also raised our forecast for interest rates. Meyer now expects the Fed to raise short-term interest rates twice in 2017 (from once previously), most likely in June and December. Shyam Rajan, rates strategist, expects the yield on the 10-year Treasury to hit 3% in the second quarter, and then to tail off and finish the year around 2.85%.

The recent stronger economic data comports with what we are seeing from company earnings reports for Q4. So far, with about 85% of S&P 500 companies reporting, earnings growth is tracking +5% vs. 2016, with the acceleration over last quarter driven principally by the cyclicals. In fact, Strategist Savita Subramanian notes that the domestic cyclical sectors Energy and Financials, along with commodities areas, are showing the strongest upward revisions to earnings estimates. Further, sales growth of +4% vs. 2016 is an acceleration after slowing for two years—another sign that the economy is likely improving.

But along with the positives, policy proposals that may result in increased trade tariffs or other trade restrictions could lower our expectations for economic growth. A delay in passing tax cuts or failure to make progress on infrastructure spending would also suggest downside to our forecasts.

Inflation inching up globally Ethan Harris, global economist, sees signs of inflation rising globally, especially in the US and Japan. Wage growth has been creeping higher in both countries. We expect US core CPI inflation to rise by 2.4% during the 12 months of 2017, up from 2.0% in 2016. The potential for tariffs or other restrictions on imports presents a potential upward risk to our inflation call.

Bond barbells good for higher yields and flatter curve Treasury yields have risen since the election, especially for longer maturities. Chart 3 shows that the yield on the 10-year note is about 55 basis points higher, while the 3-month yield is only about 10 basis points higher.

The challenge for investors is to take advantage of the increase in yields for longer maturities, while guarding against additional increases in yields. One approach is a barbell, which is a combination of a short and long-term maturity. For example, an investor might combine a two-year and 20-year maturity. The securities could be Treasuries, corporate bonds, municipals or other bonds.

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Barbells generally perform slightly better than single securities of the same duration when the yield curve flattens, as we expect it to for the remainder of the year. Investors who are not interested in short-term performance could also employ a ladder as a form of a ladder. When the short-term security matures, the funds could be re-invested at the current market yields, which presumably would be higher.

Chart 3: Treasury yields since Nov 8 Steeper curve, higher yields

Source: Bloomberg, BofA Merrill Lynch Global Research

Equity barbell combines growth plus defensives The wide dispersion of potential outcomes from policy uncertainty suggests that investors in stocks should barbell their portfolios. As in the bond world, an equity barbell involves combining two extremes. Our recommended equity barbell combines stocks that provide a moderate amount of dividend income and that may be considered defensive – meaning they should hold up regardless of economic conditions – along with some that are higher growth and more cyclical, that tend to do better when the economy is expanding.

A barbell gives the investor flexibility to allocate the relative weighting to defensive vs. growth stocks dependent on market views and risk tolerance, and to change those weights as circumstances evolve. In this strategy, there should always be part of the portfolio that is in gear with the market environment – even if the entire portfolio is not. Our favorite defensive sector is Health Care, and our favorite cyclical/growth areas are Financials, Consumer Discretionary, Industrials, Technology and Energy. Barbells can offer investors the ability to adapt to changing news as policy unfolds.

In Europe, our strategists also recommend a barbell strategy in equity portfolios. The reflation theme continues to gain traction. Growth data keep beating expectations, EPS revisions have been positive for nearly six months, and leading indicators are moving into mid-teens EPS growth territory. Perhaps even more than growth, evidence of rising inflation globally has surprised expectations in recent weeks. Central bank rhetoric has taken a step in a more hawkish direction. That makes a case for stocks whose returns are correlated with rising inflation and global growth (30% of Eurozone GDP is exports), but concern that rising inflation and higher bond yields could de-rail equities suggests that investors also own defensives. Their defensive recommendations are health care and utilities, while they prefer banks and oils as cyclicals that are leveraged to improving growth.

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The Fed’s $4.2 trillion balancing act Mark Cabana, CFA Rates Strategist MLPF&S

Michelle Meyer US Economist MLPF&S

The Fed’s balance sheet question The future of the Fed’s balance sheet has returned to the spotlight. A mention about the handling of the balance sheet showed up in the latest FOMC minutes and in recent speeches by a number of Fed officials, including Chair Yellen. Does this signal that the Fed is considering a change to its reinvestment policy? We are skeptical. In our view, the conversation about reinvestments has emerged because the prospect of fiscal stimulus has increased the risk of a faster monetary normalization process. In other words, the possibility of a higher fed funds rate speeds up the timeline for considering the end to reinvestments. We recently published a comprehensive pieceon the costs/benefits of the reinvestment policy, the mechanics of the eventual end of reinvestments and the impact on the fixed income markets – we summarize some of the key points below.

Setting guidelines According to the Fed’s latest normalization principles, released in September 2014, the committee decided to “cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.” In speeches, Fed officials have noted that reinvestments will continue until the Fed funds rate returns to a “reasonable” level. In June 2015, NY Fed President Dudley noted that this would be a range of 1.0-1.5%, but hasn’t weighed in since. More recently, Philadelphia Fed President Patrick Harker said he would favor ending reinvestments when the Fed funds rate reaches 1.0%. In our view, the FOMC has not reached a consensus on the appropriate rate, but are likely engaging in the debate.

Weighing the pros and cons Fed officials are constantly weighing the costs and benefits of policy decisions. We take a shot at the potential factors under consideration for the Fed’s reinvestment policy.

Benefits of waiting • Interest rates are the main policy tool. The Fed’s primary tool for setting policy has

been the fed funds rate, and we believe that policymakers will continue to prioritize rates.The goal is to sufficiently normalize interest rates – closer to estimates of short-termequilibrium rates (R*) – before addressing the balance sheet. Bringing rates to reasonablelevels before the next recession allows the Fed to have ammunition to cut rates onceagain. The level of the balance sheet is not as relevant for preparing for the next crisis.Moreover, as discussed later in the piece (and by Ben Bernanke in his latest Brookingsblog post), the ultimate level of the balance sheet has increased, which implies lessurgency to start reducing it.

• The effective lower bound is zero. The Fed is incentivized to focus on increasinginterest rates since rates are still uncomfortably close to the effective lower bound. Andwe think the Fed is operating under the assumption that the effective lower bound iszero given that negative interest rate policy has been shown to be undesirable.

• What is the transmission through the balance sheet? There is still limitedunderstanding about the transmission of policy through the balance sheet. Fed officialsare still trying to quantify the impact of quantitative easing (QE) as well as the impact ofthe current stock of assets on the market. In Fed Chair Yellen’s latest speech, shereferenced a few papers to argue that the Fed’s holdings put “considerable” downwardpressure on longer-term average rates but that as the average maturity of the portfolio


declines, the pressure on rates eases. This is because the stock of duration that the Fed owns gradually declines over time and new duration supply then finds its way back into the market via new longer-dated Treasury issuance. The new duration issued into the market provides upward pressure on longer-term interest rates and this results in an “implicit tightening” of financing conditions. Yellen recently estimated that the gradually reduction in Fed Treasury holdings would put 10-15 bps of increased pressure on 10-year yields this year, which she suggested was roughly similar to 2 rate hikes. But clearly this is just an estimate, and there is much uncertainty about the transmission of balance sheet policy on interest rates. Given this uncertainty, we believe the Fed would prioritize rates that are better understood.

• The political cost of balance sheet usage was already borne. The Fed fought thebattle when QE was first introduced. At this point, the Fed does not accomplish muchpolitically by shrinking the balance sheet.

• When it starts, it should continue. Once the Fed begins to allow its portfolio to mature,it will likely want the balance sheet to continue to run down unless there is materialdeterioration in the outlook. Ideally, the Fed would not want to stop portfolio maturitiesonce begun, and the September 2015 FOMC minutes indicated that the Fed assumed thestoppage of reinvestments would be permanent. If a recession hits during the process ofunwinding the balance sheet, the Fed would simply move to a neutral portfolio stance orreturn to asset purchases, if necessary.

Benefits of ending reinvestments • Desire for a more “normal” balance sheet. In the exit principles, the Fed noted that the

goal is to return to a more normal balance sheet, which is primarily made up of Treasurysecurities. This would minimize the effect of the Fed’s balance sheet on the allocation ofcredit.

• Different sensitivity with the dollar. Using the balance sheet to normalize policy mightresult in less dollar appreciation, therefore allowing the Fed to have more control onoverall financial conditions. As Boston Fed President Eric Rosengren recently argued,exchange rates appear to be more closely tied to changes in short-term interest ratesrather than longer-dated interest rates.

• Balance sheet policy more directly influences the curve. In theory, adjustingreinvestments could more directly target different points of the Treasury curve. Thiscould be useful if the Fed is fighting higher inflation – realized or expectations. However,the ultimate market impact will depend on how Treasury decides to increase funding inorder to pay back maturing holdings at the Fed.

As evident by the above list, we think benefits of a delayed end to the reinvestment policy outweigh the costs of waiting. Our baseline expectation is that the Fed will begin tapering reinvestments once the Fed funds rate is 1.25-1.50%. Importantly, we think that the Fed will be careful not to surprise the markets and will therefore communicate intentions of changing the reinvestment policy well in advance. As such, look out for continued mention of the reinvestment policy in speeches from Fed officials and the FOMC minutes. In our view, we can expect “official” guidance on the timing of reinvestment tapering around six months before it is set to begin.


The costs and benefits of tax reform Savita Subramanian Equity & Quant Strategist MLPF&S

It could be a watershed year for tax reform. Trump continuously has stated that tax reform is a priority, and there is evidence of widespread support in Congress. Tax reform could be enacted through reconciliation without the risk of being filibustered, suggesting the timing could be imminent. Corporate tax reform could have a significant impact on S&P 500 earnings, corporate behavior and capital markets. In this report, we use House Speaker Paul Ryan’s Blueprint proposal as a starting point in quantifying the impact of corporate tax reform on the S&P 500, with some scenario analysis to account for differences included in the final bill (such as Trump’s proposals).

We estimate that the Blueprint proposal would initially boost S&P 500 EPS by $5-6, assuming the end of interest expense deductions only applies to new debt, or is phased in. Over time, the loss of the interest tax shield would be a significant drag on earnings as existing debt is refinanced. Additionally, the corporate tax rate is critical in determining whether or not the tax reform policies end up being accretive to earnings on a sustained basis. We estimate that at a 20% tax rate the Blueprint would be modestly accretive and that the benefit would triple under Trump’s proposed 15% tax rate. However, at a higher 25% tax rate that would appease the deficit hawks in Congress, the benefit would turn to a negative over time (Table 4). We also estimate a one-time $8-9 charge to GAAP EPS that would be associated with the discounted repatriation tax.

Table 4: Estimated impact of tax reform on S&P 500 2018 EPS Tax policy 15% 20% 25% Tax rate change 10.50 8.00 5.00 Ending interest deductibility – initial impact* -0.50 to -1.00 -0.50 to -1.50 -0.50 to -2.00Border adjustments -4.00 -5.50 -6.50Share count reduction from buybacks (50%) 4.00 4.00 4.00

Total initial impact 9.50 to 10.00 5.00 to 6.00 0.50 to 2.00 Ending interest deductibility – recurring impact -3.50 -5.00 -6.00

Recurring impact 7.00 1.50 -3.50

One-time repatriation tax (8.75%), GAAP charge -8.50 -8.50 -8.50Source: BofAML US Equity & Quant Strategy, FactSet, Compustat, S&P *Assumes end to interest deductibility only applies to new debt, where we estimate 70-90% of debt is long-term. Note: For this exhibit, we assume that 100% of the cash is repatriated and 50% of it is spent on buybacks. For different buyback assumptions, please see the section on repatriation.

Cutting the corporate tax rate The best starting point for analyzing corporate tax reform is the US statutory corporate tax rate. If the tax rate were lowered from 35% to 20% and the US moved to a territorial tax system (no longer taxing foreign profits), all else equal, we estimate an initial boost to S&P 500 EPS of 12% ($17 to 2018 EPS). We assume that S&P 500 companies would be able to retain half of the benefit, or roughly $8 of 2018E EPS and the remainder would be passed on to customers or competed away. The benefit would also be offset by some of the other changes discussed in subsequent sections.

While the effective tax rate of the S&P 500 is generally about 28%, we estimate that the tax rate for the S&P 500’s domestic operations is much higher at roughly 33% — although this includes state and local taxes. If the tax rate were to drop to 20%, we estimate the domestic effective tax rate for the S&P 500 would fall in line with its foreign tax rate of roughly 19%. This would represent a 9ppt decrease in the current S&P 500 tax rate and a 12% increase in EPS (Table 5). We show the sensitivity to S&P 500 EPS of different assumed tax rates in the chart below, but reiterate that these estimates exaggerate the actual impact on profits, as about half of these benefits would likely be passed on to consumers via lower prices (Chart 4).


Table 5: Impact of 20% domestic corporate tax rate Sector Current tax rate New tax rate Change Discretionary 30% 19% -12pptStaples 29% 20% -9ppt Energy 41% 32% -9ppt Financials 33% 21% -11ppt Health Care 25% 16% -9ppt Industrials 32% 23% -9ppt Info Tech 18% 14% -4ppt Materials 28% 23% -5ppt Real Estate 9% 7% -2ppt Telecom 29% 20% -9ppt Utilities 32% 20% -12ppt S&P 500 28% 19% -9ppt * Current tax rates may differ from other sources, as this analysis is based on companies’ 5-yr median fiscal year domestic and foreign tax data from annual filings. Source: BofAML US Equity & Quant Strategy, FactSet, S&P

Chart 4: Benefit to 2018 S&P 500 EPS from lower tax rates

Note: Our base case assumes that half of the benefit would be passed on to customers, competed away or offset by other changes to the tax code. Thus, we would expect the uplift to our EPS forecast to be roughly half the calculated benefit from simply lowering the corporate tax rate. Source: BofAML US Equity & Quant Strategy

Repatriation likely under both Blueprint and Trump plans Mandatory tax on overseas profits of 8.75% under Blueprint, 10% under Trump The US currently operates under a tax system in which the domestic earnings of US corporates are taxed at the federal US corporate rate (35%) and any overseas earnings that are repatriated are taxed at this rate less a credit for foreign taxes paid on those same earnings. Many multinationals’ foreign earnings thus remain parked offshore, allowing corporations to avoid the tax hit associated with bringing them back to the US. Both Trump and the House (under Ryan) have proposed a mandatory tax of overseas earnings of US firms’ foreign subsidiaries at reduced rates, such that this cash can be brought back and put to work in the US. This differs from the 2004 repatriation tax holiday, which was optional.

Under the Blueprint, accumulated overseas earnings would be subject to a transition tax of 8.75%1 (for those held in cash/cash equivalents) or 3.5% (for all other holdings), with companies able to pay the tax liability over an eight-year period. This would be part of broader tax reform, where a proposed territorial tax system would exempt companies’ foreign income from US taxes and prevent future buildup of overseas profits as companies would be free to bring them home. Trump’s plan calls for a one-time deemed repatriation of overseas corporate profits at a 10% tax rate.

$8-9 (6-7%) hit to GAAP EPS from the tax on accumulated overseas profit We estimate that a tax of accumulated overseas profits of $1.2tn (with about three-quarters in Tech and Health Care) would result in a cash tax impact of $100-120bn (which may be allowed to be paid over 8-10 years), and a one-time hit to GAAP EPS of $8-9 (a lower $65-80bn, given that a several large multinationals such as Apple already provision for US taxes on a portion of their overseas profit, resulting in effective US tax rates well above the US statutory rate)(Table 6). Our analysis assumes Trump’s/the Blueprint’s proposed rates of 8.75%/10%, and that all overseas profits are hit with this one-time tax, as suggested by their plans. If half was used for buybacks, this could add 3% ($4) to S&P 500 EPS.

Table 6: Tax impact from taxation of accumulated overseas profits at 10%/8.75% rates (assuming mandatory tax i.e. all overseas profits are taxed)

Cash tax impact ($bn) One-time tax hit to GAAP earnings Sector Trump (10%) Blueprint (8.75%) Trump (10%) Blueprint (8.75%) Consumer Discretionary 7.5 6.5 7.5 6.5 Consumer Staples 6.8 5.9 6.8 5.9 Energy 3.9 3.4 3.9 3.4 Health Care 18.7 16.4 18.7 16.4 Industrials 12.7 11.1 12.7 11.1 Information Technology 64.7 56.6 26.0 22.7

1 Note: The effective tax rates of 8.75% and 3.5% under the Blueprint are based on an allowable deduction of 75% (for deferred earnings held in cash/liquid assets) or 90% (for the non-cash portion), with the remainder taxed at the US corporate tax rate, i.e. 35%(1-75%) = 8.75% and 35%(1-90%) = 3.5%. This methodology was proposed by Dave Camp’s (former chairman of the House Committee on Ways and Means) Tax Reform Act of 2014.

0%

5%

10%

15%

20%

15% 20% 25%New Corporate Tax Rate

Estimated impact on 2018 EPS

$10.50 $8.00 $5.00


Table 6: Tax impact from taxation of accumulated overseas profits at 10%/8.75% rates (assuming mandatory tax i.e. all overseas profits are taxed)

Cash tax impact ($bn) One-time tax hit to GAAP earnings Sector Trump (10%) Blueprint (8.75%) Trump (10%) Blueprint (8.75%) Materials 2.4 2.1 2.4 2.1 Telecommunication Services 0.1 0.1 0.1 0.1 Utilities 0.2 0.2 0.2 0.2 S&P 500 ex. Financials & Real Estate 117.0 102.4 78.3 68.5

S&P 500 GAAP EPS impact ($9) ($8) Source: FactSet, Bloomberg, BofAML Global Research estimates, BofA Merrill Lynch US Equity & US Quant Strategy

Border adjustment tax analysis A new tax policy outlined in the Blueprint proposal that has been getting a lot of attention recently is the border adjustment tax, or the application of border adjustments to a company’s imports and exports. This policy would effectively result in the tax authorities recognizing all sales that take place in the US (regardless of where they are produced) and all the domestic costs incurred to produce goods and services for customers (regardless of where the sale takes place). As a result, net importers (such as many retailers) would suffer, as they would have to pay taxes on their domestic sales without being able to deduct a significant portion of their costs of production. Conversely, net exporters (companies with much of their production in the US but sales outside of the US) would stand to benefit from not having to pay taxes on their foreign sales while being able to deduct a significant proportion of production costs Purely domestic companies would be unaffected.

We estimate that at a 20% tax rate, border adjustments would detract $5-6 from 2018 EPS, with nearly 80% of the drag coming from the Consumer Discretionary and Consumer Staples sectors (roughly evenly split). This impact includes a 50% haircut to account for offsets from alternate sourcing, currency rates and pricing power. The second order affects — product pricing, pricing within the supply chain, exchange rates, foreign policy reactions, etc. — while harder to quantify, are important to consider.

Chart 5: Sector EPS impact from border adjustment tax (15% rate)

Source: BofAML US Equity & Quant Strategy, FactSet, S&P





No interest tax shield Another key offset to the lower corporate tax rate is the proposed ending of the deduction of net interest expense. We assume that this rule would apply to new debt and that existing debt would be grandfathered. This tax shield removal would increase the cost of debt by an incremental 25% (not to mention the 100bp+ rise in long-term interest rates seen since the summer of 2016). In the table below, we illustrate the impact on S&P 500 corporate profits. We estimate that over time, the removal of the interest rate deduction would detract about 4%, or $4-5 from S&P 500 2018 EPS, although the initial impact would be less significant given 70-90% of the debt is long term.

3% 1%

0% 0% 0% 0%

-3% -4%

-8% -21%

-23%

-30% -20% -10% 0% 10%

MaterialsIndustrials

Real EstateFinancials

TelecomUtilities

Info TechHealth Care

EnergyDiscretionary

Staples

15% tax rate

4% 1%

0% 0% 0% 0%

-4% -5%

-10% -28%

-31%

-40% -30% -20% -10% 0% 10%



TelecomUtilities


EnergyDiscretionary

Staples

20% tax rate

5% 2%

0% 0% 0% 0%

-5% -6%

-13% -35%

-38%

-50% -40% -30% -20% -10% 0% 10%



TelecomUtilities


EnergyDiscretionary

Staples

25% tax rate


Table 7: Estimated EPS impact from the removal of interest tax shield

S&P 500 Non-Financials Net Debt ($mn) 2,899 Net Debt/EBITDA 1.74 New tax rate 20% After-tax interest rate [interest rate w/ no tax shield * (1 - new tax rate)] 4.2% Interest rate w/ no tax shield [interest expense / net debt] 5.2% Change in cost of debt [(interest rate w/ no tax shield / after-tax interest rate) -1] 25% Potential profit impact (%) [(interest rate w/) no tax shield - after-tax interest rate) * (net debt / net income)] 4% Potential impact on 2018 EPS $4-5 Source: BofAML US Equity & US Quant Strategy, S&P, FactSet

Many investors assume that interest deductions would likely apply only to new debt, and if this were the case, the drag would be gradual for the overall S&P 500 as debt matures and is refinanced. The most negatively impacted companies would clearly be the ones with the most leverage, in addition to those with depressed earnings (Metals & Mining, Energy, etc.). While the Utilities sector has a lot of leverage, there would likely be a pass through to customers in determining their allowed rate increase.

Tax reform screens Lower US corporate tax rate: potential beneficiaries Below we provide a screen of domestically oriented S&P 500 companies (<10% foreign sales exposure) with a high (>35%) median 5-year effective tax rate which could potentially benefit most from a lower US corporate tax rate.

Table 8: S&P 500 companies with high (>35%) median 5-year effective tax rates and low (<10%) foreign sales

Ticker Company Name Sector Industry Foreign Sales

% 5-Year Median Effective Tax

Rate % CHTR Charter Communications, Inc. Class A Consumer Discretionary Media 0% 445.3 DVN Devon Energy Corporation Energy Oil Gas & Consumable Fuels 8% 58.3 REGN Regeneron Pharmaceuticals, Inc. Health Care Biotechnology 0% 44.3 COG Cabot Oil & Gas Corporation Energy Oil Gas & Consumable Fuels 0% 43.5 EOG EOG Resources, Inc. Energy Oil Gas & Consumable Fuels 5% 42.3 RRC Range Resources Corporation Energy Oil Gas & Consumable Fuels 0% 41.9 CNC Centene Corporation Health Care Health Care Providers & Services 0% 41.4 ABC AmerisourceBergen Corporation Health Care Health Care Providers & Services 0% 40.2 CNP CenterPoint Energy, Inc. Utilities Multi-Utilities 0% 39.7 AWK American Water Works Company, Inc. Utilities Water Utilities 0% 39.4 SWN Southwestern Energy Company Energy Oil Gas & Consumable Fuels 0% 39.3 CVS CVS Health Corporation Consumer Staples Food & Staples Retailing 0% 39.3 WFM Whole Foods Market, Inc. Consumer Staples Food & Staples Retailing 3% 38.7 CMG Chipotle Mexican Grill, Inc. Consumer Discretionary Hotels Restaurants & Leisure 1% 38.5 JWN Nordstrom, Inc. Consumer Discretionary Multiline Retail 0% 38.5 AN AutoNation, Inc. Consumer Discretionary Specialty Retail 0% 38.5 TROW T. Rowe Price Group Financials Capital Markets 0% 38.4 KMX CarMax, Inc. Consumer Discretionary Specialty Retail 0% 38.2 PEG Public Service Enterprise Group Inc Utilities Multi-Utilities 0% 38.2 JBHT J.B. Hunt Transport Services, Inc. Industrials Road & Rail 0% 38.1 ULTA Ulta Salon, Cosmetics & Fragrance, Inc. Consumer Discretionary Specialty Retail 0% 38.1 CHK Chesapeake Energy Corporation Energy Oil Gas & Consumable Fuels 0% 38.0 AEE Ameren Corporation Utilities Multi-Utilities 0% 37.9 ALK Alaska Air Group, Inc. Industrials Airlines 0% 37.9 CTL CenturyLink, Inc. Telecommunication Services Diversified Telecommunication Services 0% 37.8 UNP Union Pacific Corporation Industrials Road & Rail 0% 37.7 ROST Ross Stores, Inc. Consumer Discretionary Specialty Retail 0% 37.7 LOW Lowe's Companies, Inc. Consumer Discretionary Specialty Retail 8% 37.6 BBY Best Buy Co., Inc. Consumer Discretionary Specialty Retail 8% 37.5 AAP Advance Auto Parts, Inc. Consumer Discretionary Specialty Retail 0% 37.5 LUV Southwest Airlines Co. Industrials Airlines 0% 37.4 SYF Synchrony Financial Financials Consumer Finance 0% 37.2 DLTR Dollar Tree, Inc. Consumer Discretionary Multiline Retail 8% 37.2 SCHW Charles Schwab Corporation Financials Capital Markets 0% 37.2 NAVI Navient Corp Financials Consumer Finance 0% 37.2 CAH Cardinal Health, Inc. Health Care Health Care Providers & Services 4% 37.1 CXO Concho Resources Inc. Energy Oil Gas & Consumable Fuels 0% 37.1 DFS Discover Financial Services Financials Consumer Finance 0% 37.1 DGX Quest Diagnostics Incorporated Health Care Health Care Providers & Services 2% 37.1 CSRA CSRA, Inc. Information Technology IT Services 0% 37.1 DG Dollar General Corporation Consumer Discretionary Multiline Retail 0% 37.0


Table 8: S&P 500 companies with high (>35%) median 5-year effective tax rates and low (<10%) foreign sales

Ticker Company Name Sector Industry Foreign Sales

% 5-Year Median Effective Tax

Rate % XEC Cimarex Energy Co. Energy Oil Gas & Consumable Fuels 0% 37.0 WEC WEC Energy Group Inc Utilities Multi-Utilities 0% 36.9 CSX CSX Corporation Industrials Road & Rail 0% 36.9 CTAS Cintas Corporation Industrials Commercial Services & Supplies 9% 36.9 ORLY O'Reilly Automotive, Inc. Consumer Discretionary Specialty Retail 0% 36.7 KSS Kohl's Corporation Consumer Discretionary Multiline Retail 0% 36.7 BBBY Bed Bath & Beyond Inc. Consumer Discretionary Specialty Retail 0% 36.6 TSCO Tractor Supply Company Consumer Discretionary Specialty Retail 0% 36.6 HUM Humana Inc. Health Care Health Care Providers & Services 0% 36.5 TSO Tesoro Corporation Energy Oil Gas & Consumable Fuels 0% 36.5 ESRX Express Scripts Holding Company Health Care Health Care Providers & Services 0% 36.4 HD Home Depot, Inc. Consumer Discretionary Specialty Retail 9% 36.4 CME CME Group Inc. Class A Financials Capital Markets 0% 36.4 UNH UnitedHealth Group Incorporated Health Care Health Care Providers & Services 4% 36.4 PAYX Paychex, Inc. Information Technology IT Services 1% 36.3 NSC Norfolk Southern Corporation Industrials Road & Rail 0% 36.2 M Macy's Inc Consumer Discretionary Multiline Retail 0% 36.2 RAI Reynolds American Inc. Consumer Staples Tobacco 5% 36.1 CMCSA Comcast Corporation Class A Consumer Discretionary Media 8% 35.8 AZO AutoZone, Inc. Consumer Discretionary Specialty Retail 6% 35.7 UHS Universal Health Services, Inc. Class B Health Care Health Care Providers & Services 0% 35.5 AET Aetna Inc. Health Care Health Care Providers & Services 2% 35.5 DVA DaVita Inc. Health Care Health Care Providers & Services 0% 35.4 FE FirstEnergy Corp. Utilities Electric Utilities 0% 35.3 ZION Zions Bancorporation Financials Banks 0% 35.2 MO Altria Group, Inc. Consumer Staples Tobacco 0% 35.1 EXC Exelon Corporation Utilities Electric Utilities 0% 35.1 RSG Republic Services, Inc. Industrials Commercial Services & Supplies 0% 35.0 Note: This screen is not a recommended list either individually or as a group of stocks. Investors should consider the fundamentals of the companies and their own individual circumstances/objective before making any

investment decisions. Source: FactSet, BofA Merrill Lynch US Equity & US Quant Strategy

Repatriation: potential beneficiaries Below we provide a screen of S&P 500 companies (excluding Financials and Real Estate) with high (>10%) overseas cash as a percent of market cap, which could potentially benefit most from repatriation.

Table 9: S&P 500 (ex. Financials & Real Estate) companies with the highest overseas cash* as a % of their market cap (>10%) Ticker Company Sector Industry Overseas Cash ($mn) Overseas Cash as a % of Mkt Cap WU Western Union Company Information Technology IT Services 6,100 62% FSLR First Solar, Inc. Information Technology Semiconductors & Semiconductor 1,500 59% NWS News Corporation Class B Consumer Discretionary Media 813 54% ORCL Oracle Corporation Information Technology Software 48,200 40% CSCO Cisco Systems, Inc. Information Technology Communications Equipment 59,800 39% NTAP NetApp, Inc. Information Technology Technology Hardware, Storage & 4,000 39% QCOM QUALCOMM Incorporated Information Technology Semiconductors & Semiconductor 29,600 36% AAPL Apple Inc. Information Technology Technology Hardware, Storage & 216,000 34% JNPR Juniper Networks, Inc. Information Technology Communications Equipment 3,167 30% SYMC Symantec Corporation Information Technology Software 4,900 29% PVH PVH Corp. Consumer Discretionary Textiles, Apparel & Luxury Goo 2,100 28% AMGN Amgen Inc. Health Care Biotechnology 29,000 26% GE General Electric Company Industrials Industrial Conglomerates 64,680 24% MSFT Microsoft Corporation Information Technology Software 108,900 22% TDC Teradata Corporation Information Technology IT Services 819 22% CTSH Cognizant Technology Solutions Corp. Class A Information Technology IT Services 7,495 22% RL Ralph Lauren Corporation Class A Consumer Discretionary Textiles, Apparel & Luxury Goo 1,085 21% CA CA, Inc. Information Technology Software 2,137 21% WAT Waters Corporation Health Care Life Sciences Tools & Services 2,346 20% LRCX Lam Research Corporation Information Technology Semiconductors & Semiconductor 3,500 19% NWSA News Corporation Class A Consumer Discretionary Media 813 18% GOOG Alphabet Inc. Class C Information Technology Internet Software & Services 42,900 18% MCHP Microchip Technology Incorporated Information Technology Semiconductors & Semiconductor 2,559 17% GOOGL Alphabet Inc. Class A Information Technology Internet Software & Services 42,900 17% GILD Gilead Sciences, Inc. Health Care Biotechnology 15,700 17% VRSN VeriSign, Inc. Information Technology Internet Software & Services 1,200 16% PBI Pitney Bowes Inc. Industrials Commercial Services & Supplies 470 16% XLNX Xilinx, Inc. Information Technology Semiconductors & Semiconductor 2,240 15% ADI Analog Devices, Inc. Information Technology Semiconductors & Semiconductor 3,374 15% A Agilent Technologies, Inc. Health Care Life Sciences Tools & Services 2,181 14% NOV National Oilwell Varco, Inc. Energy Energy Equipment & Services 2,034 14%


Table 9: S&P 500 (ex. Financials & Real Estate) companies with the highest overseas cash* as a % of their market cap (>10%) Ticker Company Sector Industry Overseas Cash ($mn) Overseas Cash as a % of Mkt Cap CTXS Citrix Systems, Inc. Information Technology Software 1,970 13% KLAC KLA-Tencor Corporation Information Technology Semiconductors & Semiconductor 1,730 13% GPS Gap, Inc. Consumer Discretionary Specialty Retail 685 13% WDC Western Digital Corporation Information Technology Technology Hardware, Storage & 2,800 13% GT Goodyear Tire & Rubber Company Consumer Discretionary Auto Components 1,042 13% ADSK Autodesk, Inc. Information Technology Software 2,059 13% PCLN Priceline Group Inc Consumer Discretionary Internet & Direct Marketing Re 9,800 13% JNJ Johnson & Johnson Health Care Pharmaceuticals 38,200 13% MRK Merck & Co., Inc. Health Care Pharmaceuticals 20,995 12% GLW Corning Inc Information Technology Electronic Equip., Instruments 3,085 12% MJN Mead Johnson Nutrition Company Consumer Staples Food Products 1,577 11% LLY Eli Lilly and Company Health Care Pharmaceuticals 8,100 11% KO Coca-Cola Company Consumer Staples Beverages 17,900 11% MOS Mosaic Company Materials Chemicals 1,276 11% AMAT Applied Materials, Inc. Information Technology Semiconductors & Semiconductor 4,000 11% PH Parker-Hannifin Corporation Industrials Machinery 2,065 11% *For some companies, total overseas cash may represent total accumulated overseas profits. Overseas cash based on BofAML analyst estimates or Bloomberg data from company disclosures. Note: This screen is not a recommended list either individually or as a group of stocks. Investors should consider the fundamentals of the companies and their own individual circumstances/objective before making any

investment decisions.

Source: FactSet, Bloomberg, BofA Merrill Lynch Global research estimates, BofA Merrill Lynch US Equity & US Quant Strategy

End of interest deductibility: who could be hurt? Below we provide a screen of the top 50 S&P 500 companies (excluding Financials, Real Estate and Utilities) by high net interest expense as a percentage of net income, which could potentially be hurt by an end to the deductibility of interest expense.

Table 10: S&P 500 (ex. Financials, Real Estate & Utilities) with high net interest expense as a % of net income Ticker Company Sector Industry Net Interest Expense (% of L12M Net Income) CHTR Charter Communications, Inc. Class A Consumer Discretionary Media 1387% DVN Devon Energy Corporation Energy Oil, Gas & Consumable Fuels 467% CXO Concho Resources Inc. Energy Oil, Gas & Consumable Fuels 357% MU Micron Technology, Inc. Information Technology Semiconductors & Semiconductor 316% FCX Freeport-McMoRan, Inc. Materials Metals & Mining 280% OKE ONEOK, Inc. Energy Oil, Gas & Consumable Fuels 135% KMI Kinder Morgan Inc Class P Energy Oil, Gas & Consumable Fuels 120% LVLT Level 3 Communications, Inc. Telecommunication Services Diversified Telecommunication 96% WYNN Wynn Resorts, Limited Consumer Discretionary Hotels Restaurants & Leisure 95% CTL CenturyLink, Inc. Telecommunication Services Diversified Telecommunication 94% CF CF Industries Holdings, Inc. Materials Chemicals 92% NFX Newfield Exploration Company Energy Oil, Gas & Consumable Fuels 82% RIG Transocean Ltd. Energy Energy Equipment & Services 81% NFLX Netflix, Inc. Consumer Discretionary Internet & Direct Marketing Re 80% SE Spectra Energy Corp Energy Oil, Gas & Consumable Fuels 78% TDG TransDigm Group Incorporated Industrials Aerospace & Defense 77% HCA HCA Holdings, Inc. Health Care Health Care Providers & Servic 63% MPC Marathon Petroleum Corporation Energy Oil, Gas & Consumable Fuels 56% CAT Caterpillar Inc. Industrials Machinery 56% EVHC Envision Healthcare Corp. Health Care Health Care Providers & Servic 55% URI United Rentals, Inc. Industrials Trading Companies & Distributo 54% DVA DaVita Inc. Health Care Health Care Providers & Servic 52% TGNA TEGNA, Inc. Consumer Discretionary Media 52% DE Deere & Company Industrials Machinery 50% MAS Masco Corporation Industrials Building Products 49% ENDP Endo International Plc Health Care Pharmaceuticals 48% COTY Coty Inc. Class A Consumer Staples Personal Products 47% IP International Paper Company Materials Containers & Packaging 47% R Ryder System, Inc. Industrials Road & Rail 46% DLTR Dollar Tree, Inc. Consumer Discretionary Multiline Retail 46% NEM Newmont Mining Corporation Materials Metals & Mining 46% FOX Twenty-First Century Fox, Inc. Class B Consumer Discretionary Media 46% GT Goodyear Tire & Rubber Company Consumer Discretionary Auto Components 45% RSG Republic Services, Inc. Industrials Commercial Services & Supplies 45% SEE Sealed Air Corporation Materials Containers & Packaging 45% PBI Pitney Bowes Inc. Industrials Commercial Services & Supplies 45% AN AutoNation, Inc. Consumer Discretionary Specialty Retail 44% KSS Kohl's Corporation Consumer Discretionary Multiline Retail 44% F Ford Motor Company Consumer Discretionary Automobiles 43% VIAB Viacom Inc. Class B Consumer Discretionary Media 42% MNK Mallinckrodt Plc Health Care Pharmaceuticals 41% ADS Alliance Data Systems Corporation Information Technology IT Services 41% WRK WestRock Co. Materials Containers & Packaging 40%


Table 10: S&P 500 (ex. Financials, Real Estate & Utilities) with high net interest expense as a % of net income Ticker Company Sector Industry Net Interest Expense (% of L12M Net Income) VRTX Vertex Pharmaceuticals Incorporated Health Care Biotechnology 39% BLL Ball Corporation Materials Containers & Packaging 37% GE General Electric Company Industrials Industrial Conglomerates 37% M Macy's Inc Consumer Discretionary Multiline Retail 37% CVX Chevron Corporation Energy Oil, Gas & Consumable Fuels 37% SLB Schlumberger NV Energy Energy Equipment & Services 37% TSO Tesoro Corporation Energy Oil, Gas & Consumable Fuels 36% Note: This screen is not a recommended list either individually or as a group of stocks. Investors should consider the fundamentals of the companies and their own individual circumstances/objective before making any investment decisions.

Source: FactSet, BofaA Merrill Lynch US Equity & US Quant Strategy


RIC asset class views Table 11: Research Investment Committee asset class views Asset Class RIC view Comments

(+ / = / –) Equity markets

US equities + Low but rising rate expectations, modest inflation and a strong dollar are good for stocks Also EPS and sales growth are favorable. But we have concerns about high valuations and potential for disappointment if policy implementation is delayed. Prefer dividend growers.

Consumer Discretionary + Principally domestic orientation, so less exposed to global trade concerns; beneficiary of lower proposed income taxes (increased spending) and corporate taxes, and improved confidence. Watch rising labor costs as economy heats up.

Consumer Staples – High quality stocks but vulnerable to higher dollar and higher inflation. Global sector that would be hurt by restrictions on trade; still expensive. Energy = Oil price forecast suggests upside, but would be hurt by stronger dollar and higher rates. We remain concerned about production risk.

Financials + Key beneficiary of rising rates, steeper yield curve, higher volatility. Attractive valuations (P/B) and earnings revisions are improving. Banks, brokers, insurers likely beneficiaries of reduced regulation.

Health Care + Should get less pricing scrutiny under new administration; earnings and sales improving and PMs have reduced exposure. Prefer managed care and biotech, pharma for yield; watch exposure to hospitals and devices if ACA gets revised/repealed.

Industrials = Highest quality sector, beneficiary of higher commodity prices and improving global growth; benefits from infrastructure and defense spending. Information Technology = Repatriation would benefit but other tax plans less helpful. Vulnerable to trade friction issues. Balance sheets strong, inexpensive. Materials – Benefits from commodity price strength and “buy American,” but most exposed sector to China and still has excess capacity. Real Estate = Most GDP-sensitive sector; good combination of dividend yield plus dividend growth. Hurt by rising rates but can lead to better property cash flows. Telecom Services + Yield at a reasonable price; beneficiary of less anti-broadband regulation and lower corporate taxes; opportunities for growth as data usage rises. Utilities – Expensive and hurt by rising rates; leverage and earnings volatility are both high. Should benefit from lower corporate tax rates.

Growth – Growth may lose momentum as profits growth accelerates, but it is cheap and we like exposure to selected Technology and Industrials. Prefer “half growth, half yield” stocks.

Value + Value tends to outperform when profits are accelerating as we believe they are today. Value indices have high exposure to Energy and Financials.

Small cap + Should benefit from pro-growth policy action and lower corporate taxes. Less vulnerable to global trade friction but premium valuation to large cap. Large cap = Prefer high quality stocks with good dividend growth potential.

Europe (ex. UK) = Expect 11% growth in EPS in 2017 on better growth, weaker euro, strong commodity prices. PMIs hitting multi-year highs. Take balanced sector approach between cyclicals/defensives. O/W energy,banks, pharmaceuticals, utilities.

United Kingdom − Brexit fallout is GBP weakness and slower economic growth. Current growth looks unsustainable. Avoid domestic UK stocks.

Japan + We think yen weakens in 2017 (shifting spending to services). BoJ monetary policy, as well as fiscal policy, endorses reflation. Expect GDP growth forecasts to rise. Like cyclicals/exporters along with domestic demand beneficiaries. Favor financials.

Asia Pac (ex. Japan) + Valuations are attractive. Fundamentals strong due to competitive currencies and current account surplus. Expect improving cash flow/EPS.

Emerging markets + Beneficiary of rising global growth and rising inflation expectations in DM. China debt service stability and shift to inflation should deflect pessimism. Currencies competitive but “too strong” dollar a risk. China, Russia, Taiwan, Korea favored.

Fixed income markets Treasuries –- Treasuries will benefit from risk-off trades as they occur, but we see better yield opportunities elsewhere. One risk is rising federal deficits. Agencies / MBS = Historically, MBS have had a good mix of returns and volatility. TIPS = Inflation will likely rise modestly in the coming 12-18 months, but the market appears to be priced for much of that. US IG Corporates + Investment grade (IG) debt offers a good yield pickup over Treasuries, while still high quality. US HY Corporates – High debt levels, narrowing spreads, and weak earnings pose a risk, but potentially better growth and higher energy prices are a positive. Preferred securities = Favor QDI payers and fixed-to-floating structures. Non-US DM Sovereigns – Yields remain low. EM $ Sovereigns = Economic growth is likely to outpace that in developed nations, higher US rates are a risk. EM local currency Sovereigns = Favorable growth, fiscal, and current account prospects. Rising dollar is a risk.

Commodities/FX Gold = We expect the price to average $1,275/oz in 2017. Fed rate hikes are the key obstacle to a sustained bull market. Oil + We forecast Brent Crude oil to rise to $70/bbl by mid-year, and $60/bbl at year-end. US dollar = We expect the US dollar to rise modestly against most currencies. Source: BofA Merrill Lynch Global Research

Notes to RIC views Ratings designations are as follows: (+) favorable view; (=) neutral view; (-) unfavorable view. Ratings reflect the Research Investment Committee’s view for an investment time horizon of 12 months. Typically, the RIC view will agree with regional/product strategists, but at times there may a difference of opinion based on investor suitability or time frame.


Fixed Income, Economics, Commodities, Currencies: views and risks Table 12: Regional strategist views and associated risks

Views Risks Global Economics (Ethan Harris) • We expect 2% growth from 1Q to 3Q as growth momentum is slowed by policy uncertainty. However,

by late in the year we expect moderate fiscal stimulus to kick in moving growth higher. This should allow the Fed to hike twice in June and December.

• The UK is likely to skirt a recession following Brexit, but we expect growth to slow to 1.3% this year. Euro area growth should fall more modestly to 1.4%, with external developments posing the greatest risks to the forecast.

• With a few clear exceptions, such as Mexico and Turkey, we expect a better growth/inflation mix across EM, driven by a recovery in commodity exporters as commodity prices will likely remain supportive. The recovery seems more cyclical than structural in nature. We forecast GEMs growth to improve 0.6pp to 4.6% this year. Inflation is gradually converging across regions, receding in LatAm (setting aside Mexico and Venezuela) while moving a tad higher in Asia and EEMEA. We forecast most central banks to keep easing, with the exception of China, Turkey and Mexico.

• Downside risks: the main risk comes from polices driven by populism. This includes trade protectionism in the US and a move toward anti-EU parties in Europe.

• Upside risks: stronger animal spirits in after the US election could spill over into the new year, and US fiscal expansion could be larger than expected. Better growth in EM is another upside risk.

Global Rates (Shyam Rajan, Ralf Preusser) • US: The sweep election outcome is a game changer. Fiscal stimulus would clear the path for expectations of

faster Fed hikes and bring more front-end supply, giving the 5y sector in the US a lot more room to underperform. We expect 10y rates to test 3% and the 5s-30s curve to bear flatten.

• Europe: Politics have taken over as main driver of European rates, with short positioning in core EUR rates now reduced and positioning in the periphery turning negative. While higher US rates, shorter German QE purchases and rising inflation prints support a bearish bias, investors may remain close to neutral until political risks recede.

• US: The biggest risk to our higher rates view is extended expectations in risk assets and the upcoming election cycle in Europe.

• Europe: A large selloff in US rates could drive EUR rates higher despite existing political risks. Reduced risks associated with French elections could also lead to a significant selloff in rates, especially as headline inflation continues rising.

Global Commodities (Francisco Blanch) • Oil: OPEC agreed to cut crude oil output by 1.2mn b/d with key non-OPEC producers indicating a 600k

b/d curb, a first since 1998. Country quotas and an independent production monitoring committee are also part of the deal, so we expect firmer compliance. We see Brent crude oil averaging $61/bbl in 2017 and hitting $70 by mid-year on the seasonal ramp-up in demand.

• Gold: The outcome of the US presidential elections has changed gold market dynamics. A sharp push higher in nominal and real yields is a headwind to gold. For gold to rise, inflation needs to pick up so real yields stabilize. This may happen through 2017.

• OECD demand will grow by 80k b/d this year as Americans drive over 3tn miles, but we project flat OECD demand in 2017. Yet we see EM oil demand expanding by 1.2mn b/d in 2017 but acknowledge downside risks on the back of higher US rates.

• OPEC's action won't propel prices much above our $70 mid-year target. Longer term, we estimate global oil demand will increase by 1.2mn b/d per year over five years at $55-75, and by 1.7mn b/d at $30/bbl.

Global Credit (Michael Contopoulos, Hans Mikkelsen) • We expect US high grade spreads to tighten to 115bp in 2017. • We are bullish on high grade spreads due to continued positive technicals and improving fundamentals. We

expect supply to decline 17% in 2017 while demand remains strong. Also earnings are rebounding for companies with considerable foreign sales exposure, and releveraging activity is declining.

• High yield faces both headwinds and tailwinds into 2017. While rising rates, volatility, reversal of positive technicals, and expected dollar strength are issues for HY, improving fundamentals, a relatively accommodative Fed, and a decent spread cushion provide some countermeasures. As such we expect HY to return sub-coupon returns but can visualize any number of scenarios ranging from -2% to +9% returns. We expect US default losses and primary issuance to decline, both good for HY spreads. We think leveraged loans will outperform bonds on a risk-adjusted return basis, although our base case is for more absolute returns from HY bonds. Loans are expected to enjoy investor favor as a result of rising LIBOR, leading to strong technicals in the form of retail inflows and the CLO bid. On the other hand, their price appreciation is limited due to their perpetual callability.

• The biggest risk to US investment grade is the possibility of wider credit spreadsfollowing a rates shock, likely prompted by a rebound in the global economy, leading to fund outflows and institutional repositioning.

• The tail risk consists of the two extreme scenarios we can envision for HY. In case economic expansion takes off but a patient Fed lets inflation overshoot, this will be a Goldilocks scenario for HY. In such a case, we could see strong retail inflows and major spread compression leading to coupon+ returns. On the other hand, if we realize protectionist policies from Washington instead of pro-growth ones, OPEC has trouble sustaining the promised cut while the stock of negative yielding assets continues to fall globally, this would be bad news, even leading to negative total returns for the year.

Municipals (Philip Fischer) • We think that the second wave rally, which started on 1/26, should extend to late February or later.

The 10-year AAA should reach approximately 2% in 1Q, and 1.70% in 1H. • According to a 6 February S&P report, the so-called “Grand Bargain” the Illinois Senate is working

on to end the state’s nearly two-year long budget impasse could “improve the state’s near-term fiscal outlook relative to its trajectory otherwise,” but “a failure by the state to take action could cause its 'BBB/Negative' rating – currently the lowest among the states – to decline further.”

Global FX (David Woo) • A clean sweep for the Republicans at the US election provides the green light for fiscal loosening and a

stronger USD. Our highest conviction is for a higher USD/JPY given its interest rate sensitivity and as Japan domestic flows turn JPY negative. Politics will be an important theme for EUR.

• The ECB extended QE but at a slower pace, consistent with our view that the market increasingly will focus on the potential end of QE, pushing EUR/JPY higher. In the near term we do not preclude some pullback in the USD given its aggressive moves and stretched positioning.

• EM: We are starting to see divergence in EM FX. In particular, we are seeing real signs of reflation in CEE FX, which makes PLN and CZK the most likely candidates for appreciation given their more hawkish central banks. In LatAm, we forecast weaker FX vs USD with MXN and BRL to remain volatile, while PEN and CLP and ARS, to a lesser extent, are more resilient, driven by local dynamics.

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

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

• EM: A slowdown in China, higher US rates and policy uncertainty in the US remains a major risk for global trade, with direct implications for Mexico and Asia.

Source: BofA Merrill Lynch Global Research


Global equity markets: views and risks Table 13: Regional strategist views and associated risks

Views Risks Global Equities (Michael Hartnett) • Peak liquidity, peak globalization and peak inequality suggest peak returns, but also big rotation in 2017. • Asset allocation: long stocks, real estate, commodities, US dollar and short bonds. • 2017 expected returns: double digits for Japan, Europe, UK stocks, and oil; single digits for US stocks,

commodities, the USD & Emerging Markets; low/negative returns for corporate & government bonds. • We expect inflation & interest rates to surprise to the upside in 2017, leading to a rotation from “deflation” to

“inflation”, from “ZIRP winners” to “ZIRP losers”, from Wall Street to Main Street. • We believe fiscal stimulus accelerates, trade and immigration policies tighten, and wage growth

accelerates, boosting domestic demand across the G7. • Disruptive technology and aging demographics remain powerful secular forces; they won’t likely prevent a

cyclical pick-up in inflation; but they are likely to constrain the magnitude of the rise in rates and inflation.

• Boom-bust scenario where Fed is forced to respond to macro inflation via bear flattening of yield curve, inducing wider credit spreads, forced liquidation and a bond crash (see Orange County/Mexico 1994).

• US protectionism (global trade war) + weaker-than-expected US growth (policy disappointment) could lead to elevated volatility and stagflationaryreturns.

United States (Savita Subramanian) • Our 2017 year-end S&P 500 target is 2300 and our long-term (year-end 2025) S&P 500 target is 3500. • We forecast 2016 EPS of $118.50 (flat y/y), 2017 EPS of $129 (+9% y/y), and 2018 EPS of $137 (+6% y/y). • Valuations are above historical levels across most metrics, but most metrics are far from stretched, and

stocks still look attractive relative to bonds. • We prefer large caps and small caps to mid caps, Value over Growth, and dividend growth stocks to high

dividend yield stocks. • Overweight Health Care, Financials, Telecom, and Cons. Discr. Underweight: Materials, Utilities and

Consumer Staples. • Post-US election, we believe that tax reform beneficiaries could outperform, whereas fiscal stimulus

beneficiaries could disappoint. See 2017 Theme Screens report for details.

• Risks: protectionism and trade wars crimp growth and squeeze margins,sales growth fails to materialize, global growth disappoints, economic shock tied to credit, global recession; a slowdown in corporate buybacks is not offset by rotation out of fixed income into equities.

• We expect volatility to remain elevated in 2017 as the likelihood of meaningful growth policies wax and wane with political rhetoric.

Europe (James Barty) • The improving nominal growth outlook makes us constructive on European equities. Growth data keeps

beating and there is evidence of rising inflation globally. We have 6% upside to our 12m Stoxx 600 rolling target of 390 and forecast 11% EPS growth.

• Rising inflation breakevens is positive for equities and we see 30-50bp runway for them to rise back to longer term levels before real rates lead the move, which is typically equity negative.

• Longer-term we think Europe can outperformance the US if we get past H1 political risks and the earningsrecovery in Europe gathers pace.

• Our sector allocation is framed around three themes: 1) skew to reflation beneficiaries with o/w Banks, Oils and Chemicals on the short duration side. 2) preference for beneficiaries of rising energy prices / inflation (o/w Autos) and avoid sectors negatively exposed to rising inflation (u/w Retail and Travel). 3) value preference in Defensives. (Utilities and Pharma overweight vs Food & Beverage underweight).

• Political risks likely to dominate into elections in Holland, France: downside from populism gaining further ground; upside if reformers come to power.

• Escalation of US trade policy risks causing risk-off move or upside surprise to tax reform/ fiscal spending expectations causing dollar / US rates overshoot.

• More hawkish ECB policy and / or sharp rise in bond yields without a complementary pick-up in growth and inflation expectations would put pressure on periphery yields in particular.

• Chinese growth or financial stability concerns resurface.

Japan (Shusuke Yamada) • We expect USD/JPY to rise to 122 in 1H17 and the Nikkei 225 index to end the year at 21,000. • Constructive on Japanese equity for five reasons. 1) Contrarian resumption of JPY weakness to end

Japanese deflation. We expect $/¥ to rise back to 120 next year. 2) A policy return to nominal reflation with the new economic package closing much of the existing GDP gap and the BoJ's September policy meeting strengthening the sustainability of monetary policy. 3) Portfolio rebalancing by Japanese investors. 4) Stretched pessimism over undervaluation of Japanese shares. 5) Long-term chart technical remain bullish with a long-term technical objective of 28,500 for the Nikkei.

Risks: • Heightened US protectionism and a weak dollar policy.• Adverse effects from rising interest rates.• RMB and oil weakening.

Asia-Pac ex-Japan (Ajay Kapur) • We remain structurally and tactically bullish on the region – AxJ valuations are attractive, earnings growth to

surprise positively this year (up 20% YoY), investor positioning still only neutral. Fundamentally, the region is on a strong foothold as financial vulnerability is at a 10-year low, driven by competitive currencies and robust current account surplus.

• We expect free cash flow (FCF) in Asia ex-Japan to more than double from 2016 to 2018. The projected FCF-to-sales ratio is likely to hit close to a record high of 5.8% by 2018 from 3.2% at end-2016 (the past high was 6.9% during 2002-2003). Asian markets are not pricing this in, trading at a P/B of 1.5x, the bottom20th percentile since 1975. We think this degree of mispricing versus FCF has been seen only once - in 2002. The Asian markets went on to rise 250% by 2007.

• Overweight: China, Korea and Taiwan; Underweight: The Philippines, India, Malaysia and Hong Kong.

Downside risks • Stronger USD• Protectionism• China policy tightening• European politics

Emerging Markets (Ajay Kapur)• Our structural as well as tactical bullishness on EMs remains intact. EM valuations are attractive, EM Risk-

Love (sentiment) is recovering from panic. A slew of indicators are suggesting REAL global growth is likely to pick up while inflation expectations are also rising across the developed world. EMs, being global nominal growth plays, stand to benefit from this. Our proxy for China’s nominal growth is also rising sharply – from an estimated 0% late last year to around 12.5% now.

• EM currencies are the most competitive since 2003, while EM’s current accounts stand at 1.7% of GDP (vs 0.1% in 2013). This has driven the EM financial vulnerability to a 10-year low.

• Overweight: Russia, China, Korea, Taiwan and Turkey; Underweight: The Philippines, India, Malaysia, South Africa, and Mexico.

Downside risks • Policy tightening in China. • Stronger USD. • US growth is weaker and inflation is higher than what consensus expects.

Source: BofA Merrill Lynch Global Research

The RIC Report | 14 February 2017

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Asset allocation for individual investors The tables below represent asset allocation recommendations by investor profile (Conservative – Aggressive). Strategic allocations are designed to be long-term, 20- to 30-year benchmarks developed by the Global Wealth & Investment Management Chief Investment Office (GWIM CIO). RIC Tactical allocations have a 12-month horizon,and are provided by the BofA Merrill Lynch Global Research Investment Committee. Both Strategic and RIC Tactical allocations are intended for individual investors.

Asset allocation for US clients Table 14: Strategic and Tactical allocations without alternative assets (Tier 0 liquidity) Tier 0 (highest liquidity): Highest liquidity needs with none of the portfolio invested in less liquid alternative asset categories.

All Fixed Income Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive All Equity Strategic RIC Tactical Strategic RIC Tactical Strategic RIC Tactical Strategic RIC Tactical Strategic RIC Tactical Strategic RIC Tactical Strategic RIC Tactical

Equities 0% 0% 21% 24% 37% 42% 53% 60% 69% 74% 84% 89% 98% 98% Large Cap Growth 0% 0% 5% 4% 9% 8% 12% 11% 16% 15% 19% 18% 23% 22% Large Cap Value 0% 0% 8% 10% 14% 16% 19% 22% 25% 27% 29% 31% 36% 36% Small Cap Growth 0% 0% 1% 1% 1% 2% 2% 3% 2% 3% 3% 4% 3% 3% Small Cap Value 0% 0% 1% 2% 1% 2% 2% 4% 2% 3% 3% 4% 4% 5% International Equity 0% 0% 5% 5% 9% 10% 13% 14% 17% 18% 21% 22% 24% 24% Emerging Markets 0% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 8% 8%

Fixed Income 98% 98% 55% 52% 61% 56% 45% 38% 29% 24% 14% 9% 0% 0% Governments 28% 27% 17% 15% 17% 14% 14% 10% 9% 6% 5% 2% 0% 0% Mortgages 23% 23% 12% 11% 15% 14% 11% 9% 7% 6% 3% 2% 0% 0% Corporates 24% 28% 10% 12% 15% 17% 14% 16% 9% 10% 4% 5% 0% 0% High Yield 7% 5% 4% 3% 5% 3% 4% 2% 3% 2% 1% 0% 0% 0% Intl Fixed Income 16% 15% 12% 11% 9% 8% 2% 1% 1% 0% 1% 0% 0% 0%

Cash 2% 2% 24% 24% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Weights have been adjusted qualitatively to be in increments of 1% and the total adds to 100%.

Table 15: Strategic and Tactical allocations with alternative assets (Tier 1 liquidity) Tier 1 (higher liquidity): Up to 15% of the portfolio may be unavailable for 3–5 years.




Cash 2% 2% 15% 15% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Alternatives 0% 0% 11% 11% 13% 13% 15% 15% 15% 15% 15% 15% 0% 0%

Hedge Funds 0% 0% 8% 8% 10% 10% 11% 11% 11% 11% 11% 11% 0% 0% Private Equity 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Real Assets* 0% 0% 3% 3% 3% 3% 4% 4% 4% 4% 4% 4% 0% 0%

Weights have been adjusted qualitatively to be in increments of 1% and the total adds to 100%. * Real Assets is defined to include commodities and private real estate.

20 The RIC R

eport | 14 February 2017

Asset allocation for US investors (continued) Table 16: Strategic and RIC allocations with alternative assets (Tier 2 liquidity) Tier 2 (moderate liquidity): Up to 30% of the portfolio may be unavailable for 3–5 years.







Table 17: Strategic and RIC allocations with alternative assets (Tier 3 liquidity) Tier 3 (lower liquidity): Up to 45% of the portfolio may be unavailable for 3–5 years.






Weights have been adjusted qualitatively to be in increments of 1% and the total adds to 100%. * Real Assets is defined to include commodities and private real estate. Notes: Global Wealth & Investment Management Chief Investment Office’s (GWIM CIO) Strategic Asset Allocation for the US investor was developed for private Merrill Lynch Wealth Management Clients. The Strategic allocations are identified by the GWIM CIO and are designed to serve as guidelines for a 20-30 year investment horizon. The RIC Tactical allocations are provided by the BofA Merrill Lynch Global Research Investment Committee. The GWIM CIO 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. GWIM CIO 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, The BofA Merrill Lynch Global Research Investment Committee does not make RIC Tactical allocation recommendations for portfolios that include these asset classes. Merrill Lynch Wealth Management clients should consult with their financial advisor about any of these allocations.

The RIC Report | 14 February 2017

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Asset allocation for global investors The Asset Allocation for global investors is designed to reduce “home country bias” and introduce a currency perspective. Strategic allocations are designed to be long-term, 20- to 30-year benchmarks developed by the Global Wealth & Investment Management Chief Investment Office (GWIM CIO). RIC Tactical allocations have a 12-month horizon, and are provided by the BofA Merrill Lynch Global Research Investment Committee. Both Strategic and RIC Tactical allocations are intended for individual investors.

Table 18: Strategic and RIC Tactical allocations without alternatives (Tier 0 liquidity) Tier 0 (highest liquidity): Highest liquidity needs with none of the portfolio invested in less liquid alternative asset categories.


Equities 0% 0% 22% 25% 37% 42% 52% 59% 66% 71% 81% 86% 98% 98% North America 0% 0% 13% 15% 21% 24% 30% 35% 38% 41% 46% 49% 56% 57% Europe ex UK 0% 0% 3% 3% 5% 5% 7% 7% 9% 9% 11% 11% 13% 13% UK 0% 0% 2% 2% 4% 3% 5% 4% 6% 5% 8% 7% 8% 7% Japan 0% 0% 1% 2% 1% 2% 2% 3% 3% 4% 3% 4% 8% 8% Asia-Pac ex Japan 0% 0% 1% 1% 2% 3% 3% 4% 4% 5% 5% 6% 5% 5% Emerging Markets 0% 0% 2% 2% 4% 5% 5% 6% 6% 7% 8% 9% 8% 8%

Fixed Income 98% 98% 54% 51% 61% 56% 46% 39% 32% 27% 17% 12% 0% 0% Global Governments 55% 53% 30% 28% 33% 29% 23% 18% 15% 12% 8% 5% 0% 0% Global Corporate 18% 21% 8% 9% 10% 11% 9% 11% 7% 8% 4% 5% 0% 0% Global Mortgages 18% 18% 12% 11% 13% 12% 10% 8% 7% 5% 4% 2% 0% 0% Global HY, EM debt 7% 6% 4% 3% 5% 4% 4% 2% 3% 2% 1% 0% 0% 0%

Cash 2% 2% 24% 24% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Weights have been adjusted qualitatively to be in increments of 1% and the total adds to 100%.

Table 19: Strategic and RIC Tactical allocations with alternatives (Tier 1 liquidity) Tier 1 (higher liquidity): Up to 15% of the portfolio may be unavailable for 3–5 years.







22 The RIC R


Asset allocation for global investors (continued) Table 20: Strategic and RIC Tactical allocations with alternatives (Tier 2 liquidity) Tier 2 (higher liquidity): Up to 30% of the portfolio may be unavailable for 3–5 years.







Table 21: Strategic and RIC Tactical allocations with alternatives (Tier 3 liquidity) Tier 3 (higher liquidity): Up to 45% of the portfolio may be unavailable for 3–5 years.







Notes: Global Wealth & Investment Management Chief Investment Office’s (GWIM CIO) Strategic Asset Allocation for the global investor was developed for private Merrill Lynch Wealth Management Clients. The Strategic allocations are identified by the GWIM CIO and are designed to serve as guidelines for a 20-30 year investment horizon. The RIC Tactical allocations are provided by the BofA Merrill Lynch Global Research Investment Committee. The GWIM CIO 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. GWIM CIO 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, The BofA Merrill Lynch Global Research Investment Committee does not make RIC Tactical allocation recommendations for portfolios that include these asset classes. Merrill Lynch Wealth Management clients should consult with their financial advisor about any of these allocations.


BofA Merrill Lynch Global Research Fixed Income Strategy standalone fixed income allocation for US clients Table 22: Combined municipal and taxable recommended sector allocations by Investor Profile

Conservative Moderate** Aggressive Federal tax bracket

Sector <25%* 28% 43.40% <25%* 28% 43.40% <25%* 28% 43.40% Munis 0% 45% 50% 0% 58% 63% 0% 75% 80% Treasuries & CDs 50% 28% 25% 31% 13% 11% 24% 6% 5% TIPS 5% 3% 3% 6% 3% 2% 8% 2% 2% Agencies (GSEs) 5% 3% 2% 0% 0% 0% 0% 0% 0% Mortgages 15% 8% 7% 21% 9% 8% 17% 4% 3% Corporates 25% 13% 13% 27% 11% 10% 30% 8% 6% Preferreds 0% 0% 0% 2% 1% 1% 2% 1% 0% High Yield* 0% 0% 0% 3% 1% 1% 5% 1% 1% International: Developed Markets 0% 0% 0% 1% 0% 0% 1% 0% 0% International: Emerging Markets USD 0% 0% 0% 6% 3% 3% 8% 2% 2% International: Emerging Markets Local 0% 0% 0% 3% 1% 1% 5% 1% 1% TOTALS 100% 100% 100% 100% 100% 100% 100% 100% 100%

TAXABLE-Maturity 1-4.99 years 100% 100% 100% 38% 38% 38% 34% 34% 34% 5-14.99 years 0% 0% 0% 53% 53% 53% 55% 55% 55% 15+ years 0% 0% 0% 9% 9% 9% 11% 11% 11% TOTALS 100% 100% 100% 100% 100% 100% 100% 100% 100% TAX EXEMPT-Maturity1-4.99 years 90% 90% 10% 10% 10% 10% 5-9.99 years 10% 10% 40% 40% 20% 20% 10-14.99 years 0% 0% 20% 20% 25% 25% 15+ years 0% 0% 30% 30% 45% 45% 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 Fixed Income Strategy

BAML Global Research Portfolio team's US equity sector allocations Table 23: BofA Merrill Lynch Global Research Portfolio team's US equity sector weightings by investor profile. These are longer-term in nature and do not reflect current market conditions. These equity sector weights are meant to be used as part of a multi-asset portfolio.

Weight in S&P 500 Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Consumer Discretionary 12.3% 10.0% 6.0% 12.0% 16.0% 16.0% Consumer Staples 9.3% 20.0% 17.0% 9.0% 8.0% 3.0% Energy 7.2% 9.0% 12.0% 8.0% 9.0% 9.0% Financials 14.6% 11.0% 13.0% 15.0% 6.0% 6.0% Health Care 13.7% 14.0% 8.0% 11.0% 16.0% 18.0% Industrials 10.2% 11.0% 12.0% 14.0% 15.0% 15.0% Info Technology 21.3% 6.0% 8.0% 18.0% 25.0% 27.0% Materials 2.9% 3.0% 0.0% 2.0% 2.0% 3.0% Real Estate 2.8% 4.0% 6.0% 4.0% 3.0% 3.0% Telecom Services 2.5% 3.0% 8.0% 3.0% 0.0% 0.0% Utilities 3.2% 9.0% 10.0% 4.0% 0.0% 0.0%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: BofA Merrill Lynch Global Research Portfolio team, S&P; S&P 500 Sector Weights are as of previous month end; weights may not add up to 100% due to rounding.

Table 24: Equity only weights for Strategic and RIC Tactical allocations without alternatives for US clients(Tier 0 liquidity)

Conservative Moderately conservative Moderate Moderately aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC

Large Cap Growth 23% 17% 24% 19% 23% 18% 23% 20% 22% 20% Large Cap Value 38% 42% 38% 38% 36% 37% 36% 37% 34% 35% Small Cap Growth 5% 4% 3% 5% 4% 5% 3% 4% 4% 4% Small Cap Value 5% 8% 3% 5% 4% 7% 3% 4% 4% 5% International Equity 24% 21% 24% 24% 24% 23% 25% 24% 25% 25% Emerging Markets 5% 8% 8% 9% 9% 10% 10% 11% 11% 11% Weights have been adjusted qualitatively to be in increments of 1% and the total adds to 100%. Global Wealth & Investment Management Chief Investment Office’s (GWIM CIO) Strategic Asset Allocation for the US investor was developed for private Merrill Lynch Wealth Management Clients. The Strategic Allocations are identified by the GWIM CIO are designed to serve as guidelines for a 20-30 year investment horizon. The RIC tactical allocations are provided by the BofA Merrill Lynch Global Research Investment Committee. The GWIM CIO models allocate assets among specified asset classes and, within each class, reflect broad investment diversification. The models are designed to provide allocation benchmarks based on risk/return profiles. Merrill Lynch Wealth Management clients should consult with their financial advisor about these allocations.


US Equity Strategy Sector Views Table 25: US Equity Strategy sector views and Research Portfolio team’s tactical sector weights Sector Weight

in S&P 500

Research Portfolio

team weight

BofAML view

Details Highlighted subsectors

Health Care 13.7% 16% O/W • Close to an all-time low on valuation, continues to surprise to the upside on earnings and sales, fund managers have reduced their overweight to a multi-year low.

• Good hedge against elevated volatility; beneficiary of aging demographics. • Less pricing scrutiny post-election benefits Pharma/Biotech. Pharma offers yield at a reasonable price and Biotech offers growth

at reasonable price. • Uncertainty surrounding the Affordable Care Act (ACA) could continue pressure Hospital & Medical Devices multiples. • Risks: Leverage has significantly increased (chiefly from M&A) though remains low relative to other sectors, wage pressure could

hurt labor-intensive Health Care Providers & Services stocks, highest government exposure of any sector; revision and surprise tends have started to roll over.

Prefer Pharma and Biotech

Financials 14.6% 16% O/W • Beneficiary of rising rates, less regulation risk, lower investment taxes, and higher volatility. • Valuation cheap vs. history on relative P/B, but could re-rate on dividend growth. In line on relative fwd P/E but arguably under-earning.• Earnings revisions are trending higher, guidance is strong and dividend growth is well above the S&P 500. • Risks: Contagion risk from European banking sector, QE in EU/Japan could keep a lid on rates, risk of policy delays or credit

deterioration. Investor sentiment has materially improved.

Banks, Capital Markets, interest rate-sensitive Ins. stocks

Telecom 2.5% 3% O/W • Yield at a reasonable price – higher dividend yield and lower payout ratio than Utilities, but at lower valuation. • Good hedge against macro uncertainty; our preferred hedge if interest rates do not rise. • Beneficiary of potentially lower corporate tax rates and less anti-broadband regulation under Republican administration. • Opportunities for growth: monetization of data given exponential increase in data usage; continued focus on self-help. • Risks: high earnings volatility despite a low beta, high payout ratios (but lower than Utilities).

Consumer Discretionary

12.3% 13% O/W • Beneficiary of potentially lower income tax rates / lower domestic tax rates, which should boost spending. • Multiples have compressed, trades roughly in line with history on relative forward P/E. • Historically one of the best sectors for stock-picking. • Risks: Most crowded sector by fund managers, historically underperforms during tightening cycles; ongoing Apparel Malaise;

wage inflation affects this sector most from a cost basis; demographic trends unfavorable to traditional discretionary spending.

Domestically-oriented Retailers

Real Estate 2.8% 3% M/W • Highest US GDP beta of any sector in the S&P; rents typically rise with inflation. • Underweight by large cap active funds (particularly when compared to other bond proxy sectors). • More attractive dividend yield than Staples and Utilities along with dividend growth opportunity. • Hurt by rising rates, benefits least from lower domestic taxes/repatriation, some rents rolling over.

Specialty REIT

Industrials 10.2% 10% M/W • Highest quality sector; globally diversified; heterogeneous (contains both defensive industries and ultra-cyclical industries). • Many mega-cap multinationals have attractive dividend yields/dividend growth potential along with diversified end market

exposure (such as Multi-Industrials). • Domestic stocks exposed to infrastructure spending could benefit – but be cognizant of valuations. Defense likely to benefit under

Republican administration. • Benefit from a rise in commodity prices (contains many suppliers to commodity producers). • Hurt by stronger dollar (and potential impact of higher rates & USD on EM); risks that infrastructure spending disappoints.

Defense, domestic Road & Rail, Air Freight

Information Technology

21.3% 20% M/W • Less benefit from domestic tax cuts (low effective tax rate); at risk from potential for mandatory tax on foreign profit. Stocks with high overseas cash may benefit from repatriation.

• Risks from trade friction, rising political pressure from offshore manufacturing, earnings revisions already at a 6-year high. • Less sensitive to dollar strength than other sectors with high foreign exposure. • Strong balance sheets (only sector with net cash), inexpensive vs. history, low payout ratios, earnings have grown more stable

over time (higher quality). • Historically good for stock selection – uncorrelated stocks, most with above average secular growth prospects.

Tech Hardware

Energy 7.2% 8% M/W • Beneficiary of higher oil prices, but hurt by a stronger dollar/higher rates. Risks surrounding OPEC's decision, and potentially less US regulation = more production risk.

• Remains underweight by large cap active managers, but the underweight is at its lowest level in five years. • Many mega-caps have attractive dividend yields and are less sensitive to oil prices. • Valuations still cheap on relative price to book, but expensive on P/E, leverage remains elevated.

Consumer Staples

9.3% 7% U/W • Hurt by higher inflation; multinationals hurt by a stronger dollar; has high EM exposure; higher oil prices are a headwind to low-end consumption.

• Expensive; most of performance over last five years has been driven by multiple expansion. • Rising rates could negatively impact flows as assets leave Low Vol funds. • Benefits: High quality (stable earnings), lower payout ratios than Utilities/Telecom, underowned by active managers; best hedge

against recessions (saw earnings growth in every recession except 2007-09).

Food & Staples Retailing

Utilities 3.2% 2% U/W • Expensive valuation vs. history; lower dividend yield and higher payout ratios than Telecom. • Negatively impacted by rising rates, many Utilities have high leverage; has high earnings volatility (low quality) despite its low beta. • Good hedge against macro uncertainty, may benefit from flight to defensive stocks during risk-off periods; low correlation with the market. • Beneficiary of potentially lower corporate taxes.

Materials 2.9% 2% U/W • Very sensitive to commodity prices; may continue to be driven more by macro and less by themes, excess global capacity still needs to be rationalized.

• Most correlated with China (where other globally oriented cyclical sectors have more diversified global exposure). • Strengthening USD and rising rates could pose a risk to EM demand and balance sheets. Infrastructure spending may disappoint. • Sales growth remains negative; unattractive risk-reward (highest beta but among lowest long-term growth of cyclical sectors).

*Weights in S&P 500 as of previous month-end. May not add to 100% due to rounding. Note: Research Portfolio team’s weights are based on the Core Portfolio and are generated by the Research Portfolio team based on the US Equity Strategy team’s sector views. Source: BofA Merrill Lynch US Equity & US Quant Strategy


Portfolio of the month Growth Portfolio

• The primary objective is appreciation of capital, rather than generating currentincome, over a long-term time horizon. A buy-and-hold strategy of well positionedcompanies in strategically favored economic sectors and industries is utilized.

• The focus is on companies with consistent and above average earnings growth thathas been demonstrated over time under a variety of economic circumstances.

• Investors are willing to consider a higher price/earnings multiple for faster pace offuture earnings per share growth.

Table 26: Growth Portfolio

Price Sectors/Target Weights Symbol Proposed Weight Close 2/10/17 Average Cost Yield † QRQ Rating Footnote Consumer Discretionary (16%) Starbucks Corp SBUX 3.0% 56.22 $60.60 1.78% C-1-7 Bbgijopsvw Amazon.com AMZN 4.0% 827.46 $248.74 0.00% B-1-9 Bbijopsv Walt Disney Co. DIS 4.0% 109.26 $90.51 1.43% B-1-7 BObgijopsvw TJX Companies TJX 2.0% 77.05 $67.91 1.35% B-1-7 Bbgijopsvw AutoZone AZO 3.0% 740.65 $745.29 0.00% B-1-9 BObgijopsvw Consumer Staples (8%) Mondelez Int MDLZ 4.0% 44.99 $37.06 1.69% B-1-7 Bbgijopsvw Costco COST 4.0% 172.00 $80.76 1.05% B-1-7 Bbijopvw Energy (9%) Anadarko Petro APC 3.0% 69.34 $66.30 0.29% C-1-7 BObgijopsvw Continental Res. CLR 3.0% 46.52 $47.84 0.00% C-1-9 BObijopv Pioneer PXD 3.0% 194.46 $149.10 0.04% C-1-7 BObgijopsv Financials (6%) ICE ICE 2.0% 57.65 $58.51 1.39% B-1-7 Bbijopsvw Affiliated Mgrs. AMG 4.0% 167.62 $96.64 0.48% C-1-7 Bbgijopsvw Health Care (16%) Zimmer ZBH 3.0% 117.33 $100.38 0.82% B-1-7 Bbgijopsvw Danaher DHR 3.0% 83.98 $56.33 0.60% B-1-7 Bbijopsvw Zoetis Inc. ZTS 2.0% 55.73 $51.65 0.75% B-1-7 Bbgijopsvw Thermo Fisher TMO 3.0% 154.89 $55.65 0.39% A-1-7 BObgijopsvw Medtronic MDT 2.0% 76.15 $78.38 2.26% A-2-7 Bbijopsvw Celgene Corp. CELG 3.0% 115.61 $106.92 0.00% B-1-9 BObijopsvw Industrials (15%) Dover Corp DOV 4.0% 79.28 $67.23 2.22% B-1-7 Bbgijopsvw Honeywell HON 3.0% 121.85 $43.06 2.18% B-1-7 BObgijopsvw General Dynamics GD 4.0% 184.40 $131.91 1.65% B-1-7 BObgijopsvw FedEx Corp. FDX 4.0% 190.86 $87.32 0.84% B-1-7 Bbgijopsvw Information Technology (25%) Facebook FB 4.0% 134.19 $104.58 0.00% C-1-9 Bbijopv Alphabet A GOOGL 4.0% 834.85 $436.65 0.00% B-1-9 Bbijopsv Apple Inc. AAPL 4.0% 132.12 $72.57 1.73% B-1-7 BObgijopsv Broadcom AVGO 3.0% 205.52 $33.79 1.99% C-1-7 Bbijopsvw Nvidia NVDA 3.0% 113.62 $62.52 0.49% C-1-7 Bb Salesforce.com CRM 3.0% 80.64 $23.04 0.00% C-1-9 Bbijopsvw Adobe ADBE 4.0% 116.85 $67.04 0.00% B-1-9 Bbijopsvw Materials (2%) LyondellBasell LYB 2.0% 91.86 $83.17 3.70% C-1-7 Bbijopsvw Real Estate (3%) American Tower AMT 3.0% 105.49 $87.80 2.20% B-1-7 BObgijopsvw Telecomm. Services (0%) Utilities (0%) Cash (0%) 0.0%

100.0% 0.96% †: Yields are estimated based on historical information. There is no assurance that the yield will remain the same or increase. Yields may decrease. Yields do not reflect transaction costs/fees or taxes and may be affected by currency fluctuations. One or more analysts responsible for selecting the securities held in the Research Portfolios own such securities: Apple, Costco, Facebook Source: Bloomberg, BofA Merrill Lynch Global Research


Stock lists US 1 List (link to latest report) Table 27: US 1 list (February 10, 2017)

Ticker Company Rating Date added Price when added Price as of Feb. 10 Footnotes AGN Allergan C-1-7 06/28/16 227.72 246.36 Bbijopsvw AVGO Broadcom C-1-7 04/26/16 148.98 205.52 Bbijopsvw AXP Amer Express B-1-7 01/17/17 76.60 78.48 BObijopsv BURL Burlington Stores C-1-9 06/21/16 64.12 86.61 Bbijopsvw CCE CCEP C-1-7 04/18/16 37.90 35.03 Bbgijopvw CCK Crown Holdings B-1-9 10/18/16 55.98 53.08 BObijoprsvw CMCSA Comcast Corp A-1-7 11/22/16 68.75 75.15 #BObgijopsvw CVS CVS Health Corp B-1-7 12/06/16 78.94 78.53 Bbgijoprsvw DAL Delta Air C-1-7 12/06/16 49.43 49.26 Bbijopsv DHR Danaher B-1-7 11/15/16 79.50 83.98 Bbijopsvw DIS Walt Disney Co. B-1-7 12/19/16 105.30 109.26 BObgijopsvw DLR Digital Realty Trust B-1-7 09/28/16 98.35 107.20 Bbgijmopsvw DOV Dover Corp B-1-7 07/26/16 71.48 79.28 Bbgijopsvw DVN Devon Energy C-1-7 08/16/16 42.36 45.41 BObgijopsvw FB Facebook C-1-9 02/08/17 134.20 134.19 Bbijopv GD General Dynamics B-1-7 02/02/16 130.78 184.40 BObgijopsvw LOW Lowe's B-1-7 08/24/16 76.21 73.97 BObgijopsvw MHK Mohawk Industries B-1-9 11/15/16 197.16 222.72 Bbijopv NWL Newell C-1-7 10/18/16 52.47 46.99 BObijopsv PCAR PACCAR Inc B-1-7 05/10/16 56.20 68.73 Bbijopsvw PNC The PNC Financial B-1-7 10/25/16 92.72 123.10 Bbijopsvw SIVB SVB Financial B-1-9 04/11/16 99.62 177.47 Bbjopw T AT&T A-1-7 01/24/17 41.36 41.38 BObijopsvw XL XL Group C-1-7 11/08/16 36.00 39.85 Bb Source: BofA Merrill Lynch Global Research; Note: Please see the original report for details, including price objectives and investment rationale. Please see Footnote Key at the back of this report. One or more members of the US 1 Committee (or a household member) owns stock of one or more companies on the US 1 list; ***Coca-Cola European Partners (‘‘new CCE’’) replaced Coca-Cola Enterprises Inc. (‘‘old CCE’’) post-merger on May 31, 2016.

Endeavor, the Small Cap US Buy List (link to the latest report) Table 28: Endeavor Stocks / US Small Cap Buy List (10 February 2017)

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

GICS Sector Company Symbol BofA ML Opinion Price 2/10/17

Mkt Value ($ Millions) Aurora

Enhanced Contrarian Add Date

Price on Add date Footnote

Cons. Discr. American Eagle Outfitters Inc AEO C-1-7 15.70 2,855 40 80 8/17/2016 18.33 Bbijopsw Cons. Discr. Intl Game Technology Plc IGT C-2-7 26.96 5,399 99 100 6/20/2016 19.14 Bbijopv Energy Nabors Industries Ltd NBR C-1-8 15.74 4,460 69 11 10/17/2016 12.68 BObgijopsw Energy Oasis Petroleum Inc OAS C-1-9 14.30 2,591 100 93 12/12/2016 15.62 BObiopv Financials Mgic Investment Corp/Wi MTG C-1-9 11.20 3,869 90 94 12/12/2016 10.33 Bbo Financials Selective Ins Group Inc SIGI B-2-7 43.25 2,507 75 88 3/9/2015 26.73 Bbijopvw Health Care Charles River Labs Intl Inc CRL B-1-9 83.34 3,944 48 70 12/10/2015 75.56 Bbijopsw Health Care Hill-Rom Holdings Inc HRC B-1-7 61.51 4,019 85 91 9/8/2015 51.46 Bbijopsvw Industrials Air Lease Corp AL C-1-7 38.34 3,943 80 97 12/10/2015 32.22 Bbgijopsv Industrials Spirit Airlines Inc SAVE C-1-9 53.88 3,735 91 91 12/12/2016 56.98 Bbjop Industrials Greenbrier Companies Inc GBX C-2-7 44.65 1,267 72 97 11/12/2014 62.45 Bbijopvw Industrials Swift Transportation Co SWFT C-1-9 23.64 3,129 78 94 8/15/2013 17.50 Bbjopw Info Tech Advanced Energy Inds Inc AEIS C-2-9 61.99 2,460 100 100 2/5/2015 26.32 Bbw Info Tech Take-Two Interactive Sftwr TTWO C-1-9 57.88 5,834 70 10 3/13/2014 20.88 Bbjow Info Tech Tech Data Corp TECD C-1-9 85.79 3,022 90 93 12/12/2016 87.71 Bbgijopsv Info Tech Tessera Holding Corp TSRA C-1-7 43.85 2,129 NM NM 5/11/2015 38.76 Bbijopsw Materials Ak Steel Holding Corp AKS C-1-9 8.39 2,636 99 84 12/12/2016 9.86 Bbgijopsw Materials Summit Materials Inc SUM C-2-9 24.41 1,867 50 85 5/18/2016 20.82 Bbgijopsw Real Estate Cyrusone Inc CONE C-1-7 48.45 4,047 37 48 10/17/2016 48.03 Bbgijopsvw Real Estate Corp Office Pptys Tr Inc OFC B-1-7 32.96 3,133 73 58 2/16/2016 21.50 Bbijopvw Real Estate Kennedy-Wilson Holdings Inc KW C-1-7 20.95 2,374 91 94 9/20/2016 21.81 Bbgijopsw Utilities Southwest Gas Holdings Inc SWX B-1-7 82.81 3,932 92 92 12/12/2016 75.19 Bbgijops Source: BofA Merrill Lynch Global Researc. **RSTR: RESTRICTED. SOLICITATION OF COMMISSION ORDERS PROHIBITED.


US High Quality & Dividend Yield Screen (methodology) Table 29: High Quality and Dividend Yield Screen February 2017

Date Added Ticker Name Sector ROE (%) Debt/

Equity Yield (%) Quality

Market Val ($mn)

Cost Price Price QRQ

FCF/ DIV Footnotes

4/1/2012 ADP ADP Information Technology 34.3 0.5 2.1 A 45,564 55.19 100.99 B-1-7 1.7 Bbijopsvw 12/1/2016 CVS CVS Health Corp Consumer Staples 14.0 0.7 2.2 A+ 84,046 77.62 78.81 B-1-7 2.7 Bbgijoprsvw 2/1/2017 EMR Emerson Industrials 20.3 0.9 3.2 A 37,705 58.66 B-2-7 1.4 Bbijopv11/1/2016 HON Honeywell Industrials 25.4 0.8 2.1 A 90,175 108.46 118.32 B-1-7 2.5 BObgijopsvw 3/1/2013 JNJ Johnson & Johnson Health Care 22.1 0.4 2.8 A 308,100 76.70 113.25 A-2-7 1.9 Bbgijopsvw 3/1/2016 PG Procter & Gamble Consumer Staples 16.9 0.6 3.0 A 234,417 82.55 87.60 A-1-7 2.1 Bbgijopsvw 3/1/2016 QCOM QUALCOMM Information Technology 15.9 0.4 3.9 A- 78,910 52.85 53.43 B-1-7 1.9 Bbijopvw 1/3/2017 RTN Raytheon Co. Industrials 21.9 0.5 2.0 A 42,332 146.68 144.16 A-1-7 2.5 BObijopvw2/1/2016 TIF Tiffany & Co. Consumer Discretionary 15.7 0.4 2.2 A- 9,797 63.76 78.72 B-1-7 1.9 Bbijopsvw 6/1/2015 UNP Union Pacific Industrials 20.8 0.8 2.1 A 87,834 101.60 106.58 B-1-7 1.5 BObgijopsvw 2/1/2017 UTX United Tech Industrials 18.4 0.9 2.4 A+ 90,303 109.67 B-1-7 2.5 BObgijopsvw 12/3/2012 WMT Wal*Mart Stores Consumer Staples 18.4 0.6 3.0 A 205,105 72.02 66.74 A-2-7 2.2 Bbijopv

Average 20.3 0.6 2.6 109,524 2.1 S&P 500 benchmarks: 13.8 1.1 2.0

Source: BofA Merrill Lynch Global Research, BofA Merrill Lynch US Quantitative Strategy, FactSet, S&P Note: Calculations are based on data from the last 12 months. Financials stocks are excluded because they typically

have very high Debt/Equity ratios that have nothing to do with their capital structure. We calculate the benchmark S&P 500 ROE by taking the average of the aggregate ROE (S&P 500 EPS ÷ by book value per share) and the median ROE. Disclaimer: These stocks have been selected according to the specified screening criteria and do not constitute a recommended list. Investors looking for a high quality dividend yield oriented investment

can consider this analysis as one part of their decision making process, but should also consider other factors including fundamental opinions, financial risk, investment risk, management strategies and operating and

financial outlooks.

International Low Volatility & Dividend Yield Screen (link to latest report) Table 30: International Low Volatility & Dividend Yield screen (February 2017)

BofAML Ticker Company Country GICS Sector

Market Value

Price as of Feb. 10

LT Debt / Equity†

Gross Div.

Yield1†

5 Year Annualized Dividend Growth† QRQ Footnote

ABB ABB Switzerland Industrials 50,075 22.88 39.9 3.2 1.9 B-1-7 BObijopsv AZN AstraZeneca United Kingdom Health Care 72,425 29.53 76.4 3.2 0.7 B-1-7 Bbijopsvw BMO Bank of Montreal Canada Financials 48,877 76.52 10.5 3.6 4.2 B-2-7 Bbgijopsv BNS Bank of Nova Scotia Canada Financials 73,040 61.36 13.2 3.7 1.2 B-1-7 Bbgijopsv BCE BCE Inc. Canada Telecommunication Services 38,494 44.52 88.8 4.9 0.3 A-2-7 Bbgijopsv DEO Diageo United Kingdom Consumer Staples 71,767 113.83 79.3 2.8 3.7 A-1-7 BNbijopsvw HSBC HSBC Holdings Plc United Kingdom Financials 169,184 42.97 56.5 4.7 5.5 B-1-7 Bbgijopsv MFC Manulife Financial Corporation Canada Financials 36,902 18.65 22.8 2.9 1.2 B-1-7 Bbgijopsv NVS Novartis Switzerland Health Care 195,983 75.21 23.9 3.7 2.8 A-2-7 Bbijopsv DCM NTT DoCoMo Japan Telecommunication Services 94,649 24.11 4.1 3.0 0.2 B-2-7 BbijopvPHG Philips NV Netherlands Industrials 26,904 28.99 29.8 3.1 1.3 B-1-7 Bbijopsvw PUK Prudential Corporation United Kingdom Financials 50,849 40.46 38.7 3.5 11.5 B-1-7 Bbgijopsv SNY Sanofi France Health Care 106,488 42.57 22.6 4.1 3.2 B-1-7 Bbijopsv SKM SK Telecom Korea, Republic Of Telecommunication Services 16,024 22.20 42.7 4.6 1.2 A-1-7 BbijopvSMFG Sumitomo Mitsui FG Japan Financials 56,350 7.93 84.2 3.4 2.0 B-1-7 BObgijopsv SU Suncor Energy Incorporated Canada Energy 51,238 31.71 37.1 2.8 14.9 B-1-7 Bbgijopsv TRI Thomson Reuters Canada Financials 32,502 44.26 52.1 3.1 1.9 B-2-7 Bbgijopsvw TD Toronto-Dominion Bank Canada Financials 95,730 52.17 14.7 3.2 4.5 B-1-7 Bbgijopsvw TOT Total France Energy 122,654 50.90 43.6 5.2 1.4 B-2-7 BObgijopsvw TM Toyota Motor Japan Consumer Discretionary 184,800 112.89 54.0 3.1 24.6 B-2-7 Bbgijopsv WPPGY WPP Group, Plc Jersey Consumer Discretionary 29,844 117.09 58.2 2.8 16.6 A-1-7 BNbijopsv

Average: 42.5 3.5 5.0 MSCI ACWI ex-USA index: 92.8 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. **RSTR: RESTRICTED. SOLICITATION OF COMMISSION ORDERS PROHIBITED. BofA Merrill Lynch is currently acting as financial advisor to Onex Corp in connection with its proposed acquisition, alongside Baring Private Equity Asia, of Thomson Reuters' Intellectual Property & Science business, which was announced on July 11, 2016. Source: Bloomberg; FactSet Research Systems; BofA Merrill Lynch Global Research


Research portfolios and stock lists Stock lists

Note: Please be aware that links on this page are directed to lists that are updated as of the date of this publication. There may have been updates to one or more lists. Financial Advisors should check for the latest available constituents.

Regional Focus or 1 Lists are best investment ideas chosen among our Buy-rated stocks.

US

Europe

Growth 10 & Value 10each chosen by the highest five-year EPS growth rates (Growth 10) or the lowest trailing 12-month P/E ratio (Value 10) based on 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


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 ourmain measure of quality. These rankings are based primarily on the growth andstability 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 asthe likelihood that the dividend will remain the same or be increased (ie, a dividendrating of “7”).

• The ratio of the last 12 months’ free cash flow to dividends must be greaterthan 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 thesame 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%.

• If a stock from the prior month’s screen is put on the Extended Review list (XRVW),the stock will remain on the screen as long as it meets the other screening criteria.

30 The RIC R


US economic forecast summary

Real Economic Activity, % SAAR 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17 4Q 17 2015 2016 2017 2018 Real GDP 2.6 2.0 0.9 0.8 1.4 3.5 1.9 2.0 2.0 2.0 2.3 2.6 1.6 2.1 2.5 % Change, Year Ago 3.0 2.2 1.9 1.6 1.3 1.7 1.9 2.2 2.3 1.9 2.1 Final Sales 3.2 2.5 1.2 1.3 2.6 3.0 0.9 2.1 1.9 1.9 2.2 2.4 2.0 2.0 2.4 Domestic Demand 3.2 3.1 1.7 1.3 2.4 2.2 2.6 2.4 2.3 2.3 2.6 3.1 2.1 2.4 2.8 Consumer Spending 2.9 2.7 2.3 1.6 4.3 3.0 2.5 2.3 2.3 2.3 2.5 3.2 2.7 2.6 2.6 Residential Investment 14.8 12.6 11.5 7.8 -7.8 -4.1 10.2 2.0 4.0 4.0 5.0 11.7 4.9 2.9 5.8 Nonresidential Investment 1.6 3.9 -3.3 -3.4 1.0 1.4 2.4 5.5 3.7 3.7 4.7 2.1 -0.4 3.5 5.3 Structures -2.7 -4.3 -15.2 0.1 -2.1 12.0 -4.9 3.0 3.0 3.0 4.0 -4.4 -3.1 2.3 4.6 Equipment -0.3 9.1 -2.6 -9.5 -3.0 -4.5 3.1 7.0 3.0 3.0 4.0 3.5 -2.8 2.7 4.6 Intellectual Property 8.0 2.1 4.5 3.8 9.0 3.2 6.4 5.0 5.0 5.0 6.0 4.8 5.0 5.3 6.6 Government 3.2 1.9 1.0 1.6 -1.7 0.8 1.2 0.5 0.5 0.5 0.8 1.8 0.9 0.5 0.9 Exports 2.8 -2.8 -2.7 -0.7 1.8 10.0 -4.3 1.0 1.0 1.0 0.8 0.1 0.4 1.1 0.8 Imports 2.9 1.1 0.7 -0.6 0.2 2.2 8.2 3.0 3.0 3.0 3.5 4.6 1.1 3.7 3.5 Net Exports (Bil 09$) -525 -547 -567 -566 -559 -522 -600 -615 -630 -645 -665 -540 -562 -639 -719 Contribution to growth (ppts) && -0.1 -0.5 -0.5 0.0 0.2 0.9 -1.7 -0.3 -0.3 -0.3 -0.4 -0.7 -0.1 -0.4 -0.4 Inventory Accumulation (Bil 09$) 93.8 70.9 56.9 40.7 -9.5 7.1 48.7 45.0 45.0 45.0 50.0 84.0 21.8 46.3 62.5 Contribution to growth (ppts) () -0.5 -0.6 -0.4 -0.4 -1.2 0.5 1.0 -0.1 0.0 0.0 0.1 0.2 -0.4 0.1 0.1Nominal GDP (Bil $, SAAR) 17998 18142 18223 18282 18450 18675 18861 19054 19227 19408 19604 18037 18567 19323 20156 % SAAR 4.9 3.2 1.8 1.3 3.7 5.0 4.0 4.2 3.7 3.8 4.1 3.7 2.9 4.1 4.3Key Indicators Industrial Production (% SAAR) -2.7 1.5 -3.4 -1.8 -0.8 1.8 -0.5 2.1 1.5 2.3 2.6 0.3 -1.0 1.3 2.3 Capacity Utilization (%) 76.7 76.6 75.8 75.4 75.2 75.5 75.3 75.5 75.6 75.9 76.3 76.7 75.3 75.8 77.0 Nonfarm Payrolls (Avg mom change, 000s) 271 170 277 196 164 239 148 182 163 170 175 226 187 173 171 Civilian Unemployment Rate (%) 5.4 5.1 5.0 5.0 4.9 4.9 4.7 4.7 4.6 4.6 4.5 5.3 4.9 4.6 4.4 Civilian Participation Rate (%) 62.7 62.5 62.6 62.9 62.7 62.8 62.7 62.8 62.8 62.9 62.9 62.7 62.8 62.8 62.9 Productivity (% SAAR) 1.2 2.0 -2.4 -0.6 -0.2 3.5 1.3 1.1 1.4 1.4 1.8 0.9 0.2 1.5 1.9 Personal Savings Rate (%) 5.7 5.9 6.1 6.1 5.9 5.8 5.6 5.0 5.0 5.0 4.9 5.8 5.9 5.0 4.9 Light Vehicle Sales (Millions SAAR) 17.2 17.7 17.9 17.3 17.1 17.5 18.0 17.5 17.6 17.7 17.7 17.4 17.5 17.6 17.9 Housing Starts (Thous. SAAR) 1156 1156 1135 1151 1159 1145 1216 1195 1216 1236 1256 1108 1168 1225 1300 Current Account (% of GDP) -2.6 -2.7 -3.0 -3.3US Budget Balance ($bn, Fiscal Year) -439 -587 -610 -800Inflation GDP Price Index (% SAAR) 2.2 1.2 0.9 0.5 2.3 1.4 2.1 2.1 1.7 1.9 1.7 1.1 1.3 1.9 1.8 % Change, Year Ago& 1.1 1.0 1.1 1.2 1.2 1.3 1.6 2.0 1.8 1.9 1.8 PCE Chain Prices (% SAAR) 1.8 1.1 0.4 0.3 2.0 1.5 2.2 2.6 1.3 1.9 1.5 0.3 1.1 1.9 1.7 % Change, Year Ago$* 0.3 0.3 0.4 0.9 1.0 1.0 1.5 2.1 1.9 2.0 1.8 Core PCE Chain Prices (% SAAR) 1.8 1.4 1.2 2.1 1.8 1.7 1.3 2.0 1.9 1.9 1.7 1.4 1.7 1.8 2.0 % Change, Year Ago$ 1.4 1.3 1.4 1.6 1.6 1.7 1.7 1.7 1.7 1.8 1.9 CPI, Consumer Prices (% SAAR) 2.4 1.4 0.8 -0.3 2.5 1.6 3.4 3.1 1.6 2.2 1.8 0.1 1.3 2.5 2.0 % Change, Year Ago! 0.0 0.1 0.4 1.1 1.1 1.1 1.8 2.7 2.4 2.6 2.2 CPI ex Food & Energy ( % SAAR) 2.3 1.8 2.2 2.7 2.1 1.9 2.0 2.6 2.3 2.4 2.4 1.8 2.2 2.3 2.5 % Change, Year Ago@ 1.8 1.8 2.0 2.3 2.2 2.2 2.2 2.1 2.2 2.3 2.4 Shaded regions represent BofA Merrill Lynch US Economics Research forecast Source: BofA Merrill Lynch US Economics Research


Global economic forecast summary

GDP growth, % CPI inflation, % Short-term interest rates, % 2015 2016F 2017F 2018F 2015 2016F 2017F 2018F Current 2016 2017F 2018F

Global 3.3 3.0 3.4 3.8 2.5 2.4 3.0 2.9 3.42 3.43 3.47 3.59 Global ex US 3.5 3.3 3.7 4.1 3.1 2.6 3.1 3.2 4.04 4.05 3.98 3.96 Euro Area 1.9 1.6 1.4 1.5 0.0 0.2 1.6 1.3 0.00 0.00 0.00 0.00 UK 2.2 2.0 1.3 1.2 0.0 0.7 2.6 2.6 0.25 0.25 0.10 0.10 Japan 1.2 1.0 1.5 1.2 0.8 -0.1 1.3 1.2 -0.10 -0.10 -0.10 -0.10Canada 1.1 1.1 1.5 1.6 1.1 1.5 1.4 1.4 0.50 0.50 0.50 0.25Emerging EMEA 1.3 1.4 1.8 2.4 8.9 5.4 5.8 6.2 6.75 6.43 6.21 6.09Latin America -0.3 -1.3 1.4 2.5 6.0 6.0 4.5 4.1 9.92 10.64 9.99 9.93 Brazil -3.8 -3.5 1.0 3.0 9.0 8.7 4.2 4.6 13.00 13.75 9.75 8.25Emerging Asia 6.2 6.0 6.1 6.3 2.4 2.6 2.9 3.1 4.36 4.33 4.37 4.36 China 6.9 6.7 6.6 6.6 1.4 2.0 1.8 2.1 4.35 4.35 4.35 4.35Shaded regions represent BofA Merrill Lynch Global Economics Research forecast. Source: BofA Merrill Lynch Global Economics Research

Interest rate forecast summary

(% EOP) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2014 2015 2016 2017 Fed Funds 0-0.25 0-0.25 0-0.25 0.25-0.50 0.25-0.50 0.25-0.50 0.25-0.50 0.50-0.75 0.50-0.75 0.75-1.00 0.75-1.00 1.00-1.25 0-0.25 0.25-0.50 0.50-0.75 1.00-1.25Fed effective 0.06 0.08 0.07 0.20 0.25 0.30 0.25 0.62 0.62 0.87 0.87 1.13 0.06 0.20 0.62 1.13 3-Month T-Bill 0.02 0.01 -0.02 0.16 0.20 0.26 0.25 0.40 0.60 0.75 0.80 1.00 0.04 0.16 0.40 1.00 3-Month LIBOR 0.27 0.28 0.33 0.61 0.63 0.65 0.84 1.00 1.05 1.25 1.30 1.50 0.26 0.61 1.00 1.50 2-Year T-Note 0.56 0.64 0.63 1.05 0.72 0.58 0.75 1.19 1.35 1.50 1.65 1.80 0.66 1.05 1.19 1.80 5-Year T-Note 1.37 1.65 1.36 1.76 1.20 1.00 1.13 1.92 2.20 2.50 2.45 2.45 1.65 1.76 1.92 2.45 10-Year T-Note 1.92 2.35 2.04 2.27 1.77 1.47 1.60 2.44 2.65 3.00 2.95 2.85 2.17 2.27 2.44 2.85 30-Year T-Bond 2.54 3.12 2.85 3.02 2.61 2.28 2.29 3.07 3.25 3.45 3.30 3.25 2.75 3.02 3.07 3.25 2-Year swap 0.81 0.90 0.75 1.18 0.84 0.73 0.99 1.45 1.53 1.66 1.75 1.80 0.90 1.18 1.45 1.80 5-year swap 1.53 1.79 1.38 1.74 1.17 0.98 1.15 1.97 2.10 2.15 2.20 2.25 1.77 1.74 1.97 2.25 10-year swap 2.02 2.46 2.00 2.19 1.64 1.36 1.14 2.33 2.57 2.95 2.95 2.85 2.28 2.19 2.33 2.85 30-year swap 2.39 2.94 2.52 2.62 2.14 1.83 1.74 2.59 2.85 3.10 3.00 3.00 2.70 2.62 2.59 3.00 Note: Federal funds rate forecasts are modal expectations; other values are for market rates. Shaded regions represent BofA Merrill Lynch US Rates Research forecast. Source: BofA Merrill Lynch US Rates Research

FX rate forecast summary

Spot 17-Mar 17-Jun 17-Sep 17-Dec 18-Mar 18-JunG3 EUR-USD 1.07 1.05 1.02 1.02 1.05 1.06 1.07 USD-JPY 113 118 122 119 117 117 115 EUR-JPY 121 124 124 121 123 124 123 Dollar Bloc USD-CAD 1.31 1.38 1.40 1.41 1.43 1.43 1.41 AUD-USD 0.76 0.73 0.72 0.71 0.70 0.70 0.71 NZD-USD 0.72 0.69 0.68 0.68 0.67 0.67 0.68 Europe EUR-GBP 0.85 0.91 0.89 0.88 0.88 0.88 0.87 GBP-USD 1.25 1.15 1.15 1.16 1.19 1.20 1.23 EUR-CHF 1.07 1.09 1.10 1.11 1.12 1.12 1.13 USD-CHF 1.00 1.04 1.08 1.09 1.07 1.06 1.06 EUR-SEK 9.48 9.40 9.30 9.20 9.15 9.10 9.00 USD-SEK 8.90 8.95 9.12 9.02 8.71 8.58 8.41 EUR-NOK 8.89 8.90 8.80 8.70 8.60 8.50 8.50 USD-NOK 8.34 8.48 8.63 8.53 8.19 8.02 7.94 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


Footnote key # - One or more analysts responsible for covering the securities in this report owns stock of the covered issuer. ## - One or more analysts responsible for covering the securities in this report owns bonds of the covered issuer. ### - One or more analysts responsible for covering the securities in this report owns options on the financial instrument 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 issuer within the last 12 months. i - The issuer 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 issuer for non-investment banking services or products within the past 12 months. o - The issuer 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 issuer 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 issuer. s - MLPF&S or an affiliate has received compensation for investment banking services from this issuer 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 issuer or an affiliate of the issuer within the next three months. w - MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this issuer. If this report was issued on or after the 9th day of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 9th day of a month reflect the ownership position at the end of the second month preceding the date of the report. z - The country in which this issuer is organized has certain laws or regulations that limit or restrict ownership of the issuer's shares by nationals of other countries. A - One of the analysts covering the issuer is a former employee of the issuer and, in that capacity, received compensation from the issuer 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 issuer on a principal basis. C - The covered issuer and/or one or more of its affiliates owns 2% or more of the common stock of Bank of America Corporation F - MLPF&S or one of its affiliates trades or may trade as principal in the debt securities (or in related derivatives) that are the subject of this research report. G - MLPF&S or one of its affiliates acts as a market maker for the preferred securities recommended in the report. H - MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the preferred securities of the issuer on a principal basis. N - The issuer 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 15th day of the month, it reflects a significant financial interest on the last day of the previous month. Reports issued before the 15th day of the month reflect a significant financial interest at the end of the second month preceding the report. P - Class A shares are variable voting Q - Class A shares are subordinate voting R - Class A shares are nonvoting. S - Class B shares are voting T - Class B shares are nonvoting. U - Class B shares are restricted voting. V - Class B shares are subordinate voting. W - Class S shares are subordinate voting. X - Common shares are subordinate voting. Y - Common shares are limited voting.


Disclosures Important Disclosures

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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.

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Research Analysts Additional Research Investment Committee (RIC) Contributors James Barty >> Investment Strategist MLI (UK)

Francisco Blanch Commodity & Deriv Strategist MLPF&S

Jill Carey Hall, CFA Equity & Quant Strategist MLPF&S

Michael Contopoulos HY Credit Strategist MLPF&S

Philip Fischer Municipal Research Strategist MLPF&S

Christina Giannini, CFA Portfolio Strategist MLPF&S

Ethan S. Harris Global Economist MLPF&S

Michael Hartnett Chief Investment Strategist MLPF&S

Ajay Singh Kapur, CFA >> Equity Strategist Merrill Lynch (Hong Kong)

Hans Mikkelsen Credit Strategist MLPF&S

Ralf Preusser, CFA Rates Strategist MLI (UK)

Shyam S.Rajan Rates Strategist MLPF&S

Savita Subramanian Equity & Quant Strategist MLPF&S

Stephen Suttmeier, CFA, CMT Technical Research Analyst MLPF&S

Dan Suzuki, CFA Equity & Quant Strategist MLPF&S

Nigel Tupper >> Strategist Merrill Lynch (Hong Kong)

Mark Ulrich Portfolio Strategist MLPF&S

David Woo FX, Rates & EM Strategist MLPF&S

Shusuke Yamada, CFA >> FX/Equity Strategist Merrill Lynch (Japan)

>> 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.

Documents

The RIC ReportInvestors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 33 to 34. 11708462 The RIC Report