Global Strategy
Equity Strategy
Equity Strategy | Global
27 June 2012 (Corrected)
The Longest Pictures
Michael Hartnett
Chief Global Equity Strategist
MLPF&S
„ The Longest Pictures illustrate long-run trends in financial markets.
A picture guide to financial markets since 1800
Kate Moore
We plot almost 100 charts on asset price returns, correlations, volatility, valuations
and many other market and macro factors for the US, UK, Europe, Japan and
Emerging Markets.
Investors can view US equity prices since 1871, Dutch bond yields since 1517,
the oil price since 1861, risk premia since 1900 and German dividend yields since
1869 among many other charts.
The study shows the historical significance of today’s asset markets with 2012
seeing multi-century lows in government bond yields in Developed Markets, the
cheapest European equities since the 1920s and the conclusion of the greatest
US real estate bear market since the early 1990s.
Global Equity Strategist
MLPF&S
Brian Leung
Global Equity Strategist
MLPF&S
Swathi Putcha
Global Equity Strategist
MLPF&S
Secular trends in bonds, equities and other asset classes allow us to advise what
the long-term contrarian investor should do. We believe a secular contrarian
should be buying Equities, European assets, Japan and Financial & Telecom
stocks and selling Gold, Bonds, Emerging Markets and Resources & Consumer
Staples stocks.
We nonetheless remain of the view that the catalyst for a decisive change in
secular market leadership (or “Great Rotation”) awaits a “good” bear market in
bonds caused by real estate, labor and banking markets ending the current Era of
Deleveraging (Chart 1).
Chart 1: Equity prices & bond yields since 1900
15.5
Table of Contents
100000
14%
13.5
10000
11.5
1000
9.5
7.5
5.5
3.5
Click the image above to watch the video.
100
Asset prices & interest rates
Long-run equity returns
Long-run fixed income & commodity returns
Returns of US assets by decade
Risk, volatility, correlation & valuation
Ownership & market composition
Growth, demographics & debt
5
29
32
37
48
69
87
5%
10
2%
2.5%
1.5
1
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Long Term Treasury Yields
DJIA (right hand scale)
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Haver
BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Refer to important disclosures on page 100 to 102. Link to Definitions on page 99.
11179543
c58da9b710df662c
2 7 Jun e 201 2
2
The long-run in numbers
ƒ 1.45%: the yield of US 10 year Treasuries on June 1, 2012; a 220-year low
ƒ 1958: the last time US AAA corporate bond yields were this as low as they are today
ƒ 1517: Dutch government bond yields currently at lowest level in almost 500 years
ƒ 320bps: the current spread between European dividend yields and German bund yields, an all-time
high
ƒ $1900/oz: record high gold price reached in September 2011
ƒ 43%: the drop in US real home prices since the 2006 peak, making the current US real estate bear
market the greatest since 1921
ƒ 8%: Japan’s share of global equity market cap; close to an all-time low and down from 44% in 1988
ƒ $3,642,000: What $1 invested in US large company stocks in 1824 would be worth today with dividends
reinvested
ƒ 1 out of 2: the number of years since 1871 that the S&P 500 has had a negative real price return in
ƒ 44%: the share of US Treasuries owned by foreigners; up from just 1% in 1945
ƒ 280mn: the number of people India’s working age population will grow by over the next 25 years; this
is more than the current working age population in the US and Germany combined
Global Strategy
ƒ 63x: the amount EM equities are up since the late 1960s
2 7 Jun e 201 2
The long-run in words
ƒ “Those classes of investments considered ‘best’ change from period to period. The
pathetic fallacy is what are thought to be the best are in truth only the most popular—
the most active, the most talked of, the most boosted, and consequently, the highest in
price at that time.”
-Fred Schwed, Where are the Customer’s Yachts?
ƒ “History does not repeat itself but it does rhyme.”
ƒ “The four most dangerous words in investing are ‘This time it’s different.’”
-John Templeton
ƒ “There are no new eras—excesses are never permanent.”
-Bob Farrell
ƒ “The average long-term experience in investing is never surprising, but the short term
experience is always surprising.”
-Charles Ellis
ƒ “We simply attempt to be fearful when others are greedy and to be greedy only when
others are fearful.”
-Warren Buffett
ƒ “Buy on the cannons, sell on the trumpets.”
-Old French Proverb
ƒ “Buy when there’s blood in the streets.”
-Baron Rothschild
Global Strategy
-Mark Twain
3
2 7 Jun e 201 2
4
The long-run in years
ƒ 1602: the Dutch East India Company becomes the first company to issue stocks and bonds
on the Amsterdam Stock Exchange
ƒ 1685: Germany establishes the second stock exchange in the world
ƒ 1790: an $80 million U.S. Government bond offering to refinance Revolutionary War debt
becomes the first publicly traded security in the US
ƒ 1810: Russia is the first “emerging market” country to establish a stock market
ƒ 1879: US stocks record their best year ever, returning 57%*
ƒ 1891: the first US equity bear market (>20% loss) is caused by the “Baring Brothers Crisis”
ƒ 1918: US Inflation hits an all-time high of 20.4%
ƒ 1931: US stocks record their worst year ever, declining 43%*
ƒ 1932: the most volatile year ever for US stocks as volatility hits 68%
ƒ 1981: monthly US 10 year Treasury yields hit an all-time high of 15.8%
ƒ 1982: the best year of total return for long-term Treasuries of 40%*
ƒ 1987: on “Black Monday,” October 19th, the Dow falls 23%, the largest daily drop ever
ƒ 2009: the worst year for long-term Treasury returns with losses of 15%*
ƒ 2012: a year marked by multi-century lows in many DM government bond yields (including
the Netherlands, France, US)
*Figures are based on annual total returns
Source: BofA Merrill Lynch Global Equity Strategy, Ibbotson, Dimson, Marsh, and Staunton, Triumph of the Optimists, Haver
Global Strategy
ƒ 1792: the NYSE is organized and the Bank of New York becomes the first company listed
2 7 Jun e 201 2
Bond yields & equities in the long-run
ƒ The Dow Jones Industrials & long-term US
Treasury yields back to 1900.
Equity prices & bond yields since 1900
15.5
100000
14%
13.5
10000
1000
9.5
7.5
5.5
100
5%
10
3.5
2%
2.5%
1
1.5
1900 1910 1920 1930
1940 1950 1960 1970 1980 1990 2000 2010
Long Term Treasury Yields
DJIA (right hand scale)
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Haver
ƒ Every equity breakout from a long-run trading
range has coincided with a secular inflection
point in the bond market.
ƒ This was the case after WWI, after WWII, and
during the war against inflation in the early
1980s.
ƒ A new secular bull market in equities in
coming years therefore requires a secular
bear market in bonds and a “good” rise in
interest rates.
Global Strategy
11.5
ƒ The chart shows equities are in their 4th
secular trading range while bonds are
enjoying their 2nd great secular bull market of
the past 110 years.
5
2 7 Jun e 201 2
6
US equity prices since 1824
US large company stock total returns, log scale
ƒ $1 invested in US large company stocks in
1824 would be worth roughly $376 today in
nominal terms.
$10,000,000
$1,000,000
1654%
Log Scale
$10,000
$1,000
423%
$100
$10
ƒ An even better stat for the bulls: $1 invested
in US large company stocks in 1824 would be
worth close to $3,642,000 with dividends
reinvested, illustrating the power of
compounding.
ƒ When were the great equity bull markets?
ƒ 1860-1872 = 332% total return
332%
ƒ 1920-1928 = 423% total return
$0
1824 1839 1854 1869 1884 1899 1914 1929 1944 1959 1974 1989 2004
Annual data. Shading denotes great bull markets
Source: BofA Merrill Lynch Global Equity Strategy, Ibbotson
ƒ and (the greatest of them all) 1982-1999
= 1654% total return
Global Strategy
$100,000
$1
ƒ In the long-run stock prices rise.
2 7 Jun e 201 2
US equities since 1871 in real terms
S&P 500 Real Price Index (log values)* Dot-Com Bubble Burst
3.5
2000-2002
3.0
Inflationary Bear
2.5
Market of 1973-74
Great Depression
Crash of
1929-1945
2.0
2007-08
Global Strategy
Panic of 1907
1.5
1.0
0.5
0.0
Post-War Bear Market 1948-1950
Auto Bubble Burst 1920-1924
-0.5
1871
1881
1891
1901
1911
1921
1931
1941
1951
1961
1971
1981
1991
2001
2011
*U.S. large company stock market returns, logarithmic values of real monthly average price return
Source: BofA Merrill Lynch Global Equity Strategy, Robert Shiller, Ibbotson
ƒ Long-run stock prices adjusted for inflation illustrate a more nuanced picture of equity returns.
ƒ Two good stats for the bears. First, the S&P 500 has had a negative real price return in nearly 1 out
of every 2 years since 1871. Second, equity prices in real terms last peaked in August 2000; after
prior secular tops in 1907, 1929 and 1968, stocks took 20-30 years to recover back to their old highs.
7
2 7 Jun e 201 2
8
Japanese equity prices since 1914
Japan Nikkei 225 Price Index (USD), log scale
1000
Nikkei 225 Stock Av erage (USD), log scale
ƒ But since their 1989 peak, Japanese equities
are down 60% (in USD terms).
ƒ Japan’s two-decade bear market is currently
the longest of the major equity markets.
10
1
0
1914 1921 1928 1935 1942 1949 1956 1963 1970 1977 1984 1991 1998 2005
Monthly data. No data available: September 1945 – June 1946
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data
Global Strategy
100
ƒ Japanese equity prices soared 138X between
the end of WWII and their all-time high in
December 1989.
2 7 Jun e 201 2
German equity prices since 1924
German CDAX Price Index (USD), log scale
1000
Germany CDAX Composite Price Index (USD), log scale
ƒ German equity prices are down 45% in USD
terms from December 2007.
on trading during
WWII
10
1
1924
1934
1944
1954
1964
1974
1984
1994
2004
Monthly data. No data available: October 1931 – March 1932. In January
1943 price limits were placed on trading which essentially froze share prices
at their existing levels. These price limits continued until July 1948 when
prices were allowed to seek market levels as part of the currency stabilization
process.
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data
Global Strategy
ƒ And since the introduction of the Euro in
January 1999, German equities are down
about 3% in USD terms.
Price limits placed
100
ƒ German equity prices soared over 3100%
between the end of WWII and their all-time
high in December 2007.
9
2 7 Jun e 201 2
10
French equity prices since 1900
ƒ Unlike Japan & Germany, French equities did
not experience massive post-war upside in
the 50s, 60s & 70s.
France CAC Price Index (USD), log scale
10000
1000
ƒ French equities are currently 53% lower than
their October 2007 peak.
100
10
1900
1910
1920
1930
1941
1951
1961
1971
1981
1991
2001
2011
Monthly data. No data available: August 1914 - December 1914; June 1940 February 1941; March 1979
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
Global Strategy
ƒ The strongest returns from French equities
were seen in the 80s & 90s, a period during
which French interest rates collapsed (see
page 19).
France CAC All-Tradable Price Index (USD terms), log scale
2 7 Jun e 201 2
UK equity prices since 1900
ƒ UK equity returns were poor over the first
half of the last century, damaged by two
vicious bear markets during the 1930s (a 65%
drop 1929-1932 and a 63% drop 1936-1940).
UK FTSE Price Index (USD), log scale
10000
UK FTSE All-Share Price Index (USD), log scale
1000
ƒ The UK’s three great bear markets of the
1900s was rivaled by the recent 62% decline
during the 2007-2009 Financial Crisis.
100
ƒ UK equities are currently 41% from their alltime high set in October 2007.
10
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data
2010
Global Strategy
ƒ Like other stock markets, UK equities rose
dramatically over the second half of the last
century, interrupted by the 74% collapse in
stock prices in the 1972-74 bear market.
11
2 7 Jun e 201 2
12
Emerging Market equities since 1920
ƒ Emerging Market equities were notably out in
the wilderness after WWII and the creation of
the Bretton Woods system of fixed exchange
rates.
EM Equity Price Index (USD), log scale
10000
EM equity price index (USD), log scale
1000
ƒ In contrast to developed markets, EM equities
have trended higher in the past 15 years but
are still down 32% from their October 2007
peak (in USD terms).
100
10
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
Global Strategy
ƒ The great bull market in Emerging Market
equities began as the Bretton Woods system
and the gold peg started to unravel in the
late-1960s. Since then to today, EM equities
are up 63X.
2 7 Jun e 201 2
US 10 year Treasury yields since 1790
ƒ The US 10 year Treasury yields fell to a 220
year low of 1.45% in June 2012.
US 10 year Treasury yields since 1970
15%
ƒ US bonds have had the following distinct
secular bull and bear markets:
US 10-y ear Treasury y ield (constant maturity )
11%
9%
ƒ 1902-1920: the First Bear Bond Market,
yields rise from 3% to 5-6%.
7%
ƒ 1920-1946: the Great Bull Bond Market,
yields decline from 5-6% to below 2%.
5%
3%
1%
1790
1810
1830
1850
1870
1890
1910
1930
1950
1970
1990
2010
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
ƒ 1946-1981: the Second Bear Bond Market,
yields soar from 2% to above 15% during
1981.
ƒ 1981-today: the Greatest Bull Bond
Market, as yields tumble from 15% to
1.5% today.
Global Strategy
ƒ 1790-1902: erratic yield fluctuations and
then a sustained decline in yields to
below 3%.
13%
13
2 7 Jun e 201 2
14
US short-term rates since 1921
ƒ The US 3-month Treasury bill yields 0.07%
today.
US 3-month Treasury yield
ƒ The last time short rates were this low was
during the 1930s-40s, when rates stayed near
zero for roughly 15 years.
16%
14%
ƒ The all-time low for 3-month Treasury yields
was 0.02% in 1940.
10%
8%
6%
5/31:
0.07%
Average: 3.7%
4%
2%
0%
1921
1929
1937
1945 1953 1961
1969 1977
1985
1993
2001
2009
Annual data
Source: BofA Merrill Lynch Global Research, Haver Analytics, Bloomberg
ƒ Between 1940 and 1980, 3-month Treasury
yields rose to an all-time daily high of 17.1%
in December 1980.
Global Strategy
12%
2 7 Jun e 201 2
US corporate bond yields since 1857
ƒ Moody’s AAA US corporate bond yields is
currently 3.6%.
AAA Corporate bond yields
ƒ The long-run trend in corporate bond yields
largely follows that of government bonds.
16%
14%
12%
ƒ Today, corporate bond yields are at their
lowest levels since 1958, and just 1.1ppt
away from their all-time low in March 1946
(2.5%).
10%
8%
Av erage: 5.8%
6%
4%
2%
1857
1887
1917
1947
1977
Monthly data. Moody’s AAA corporate bond yields. Data was unavailable
during August - November 1914
Source: BofA Merrill Lynch Global Research, Global Financial Data
2007
Global Strategy
ƒ In October 1981, Moody’s AAA corporate bond
yields rose to an all-time high of 15.5%.
15
2 7 Jun e 201 2
16
Japanese bond yields since 1870
Japanese 10 year government bond yields
14%
Japan 10-y ear Gov ernment Bond Yield
12%
8%
6%
4%
2%
0%
1870 1880 1890 1900 1910 1920 1930 1940 1952 1962 1972 1982 1992 2002
Monthly data. Data was unavailable during February 1915 - December 1915;
August 1931 - March 1932; July 1936 - November 1940; December 1943 December 1945
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
ƒ For the past 50 years, Japanese interest rates
have headed decisively lower, interrupted
briefly by oil shocks and the last-1980s
Japanese equity bubble.
ƒ Japanese bond yields fell to an all-time low in
May 2003. Since then Japanese yields have
been remained exceptionally low and stable.
ƒ Today the Japanese 10-year bond yield of
0.82% is only 30bp above its 140-year low.
Global Strategy
10%
ƒ Japanese 10 year government bond yields
surged higher after WWII rising to a peak of
almost 15% in December 1961.
2 7 Jun e 201 2
UK bond yields since 1730
UK 2.5% consol yield
18%
United Kingdom 2.5% Consol Yield
16%
12%
10%
ƒ As with almost all developed bond markets, a
major inflection point in the trend of UK longterm interest rates occurred in the early-80s.
This happened as policy makers won their
War against Inflation.
ƒ Following in the path of inflation, UK and
other bond yields have fallen sharply in the
past 30 years.
8%
6%
ƒ UK bond yields are currently 3.6%, the lowest
yield since January 1951.
4%
2%
1730 1750 1770 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010
Monthly data. Data was unavailable July 1738, July 1769, August 1914December 1914
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data
Global Strategy
14%
ƒ After WWII, UK bond yields rose from 2.5% in
1946 to an all-time high of 17.1% in December
1974.
17
2 7 Jun e 201 2
18
German bond yields since 1807
German benchmark 10 year bond yields
16%
German Benchmark 10y r Bond Yield
14%
10%
Period of
hy perinflation
8%
6%
4%
2%
0%
1827
1847
1867
1887
1907
1927
1950
1970
1990
2010
Monthly data. Data was unavailable from August 1931 – March 1932 and
December 1943 – December 1945
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
Global Strategy
ƒ The post-WWII high for German bond yields
was 10.8% in July 1974 and following the 1973
oil shock.
12%
1807
ƒ German 10 year bund yields recently tumbled
to 1.2% in May 2012, the lowest in the past
200 years (bar the volatile hyperinflation
period of 1923 & 1924).
2 7 Jun e 201 2
French bond yields since 1746
French 10-year government bond yields
France 10-y ear Gov ernment Bond Yield
60%
50%
Hy perinfaltion
during the French
30%
Rev olution
20%
10%
0%
1746 1766 1786 1809 1829 1849 1869 1889 1909 1929 1949 1969 1989 2009
Monthly data. Data was unavailable July 1793 - December 1796
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
ƒ Following their peak of 17.3% in June 1981,
French yields fell to a 260 year low of 2.3% in
June 2012.
Global Strategy
40%
ƒ Like most other major bond markets, French
10-year government bond yields also recently
fell to historic lows.
19
2 7 Jun e 201 2
20
Dutch bond yields since 1517
ƒ In June 2012, Dutch government bonds
yielded just 1.53%, the lowest in 500 years.
Dutch 10 year government bond yields
20%
Netherlands 10-y ear Gov ernment Bond Yield
18%
14%
12%
10%
ƒ Asset allocators must now grapple with the
reality of low expected returns from
government bonds in coming years. Bonds
look unattractive to a long-run contrarian
investor.
8%
6%
4%
2%
0%
1822
1842
1862
1882
1902
1922
1943
1964
1984
2004
Annual data prior to 1815, monthly thereafter. Data was unavailable during
1577-1599; 1700-1746; 1748-1761; 1763-1797; 1977-1813
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
Global Strategy
ƒ With the notable exception of Peripheral
European bond yields, long-term interest
rates in the US, UK and Core Europe have
experienced “Japanification” in recent years.
16%
1517
ƒ Dutch 10-year government bond yields peaked
at 12.5% in August 1981.
2 7 Jun e 201 2
Indian bond yields since 1800
ƒ The trend of Indian interest rates for much of
the past two centuries has been linked to the
fortunes of the sterling bloc and the London
money market.
Indian 10 year government bond yields
16%
India 10-Year Gov ernment Bond Yield
12%
ƒ For example, the all-time high in Indian yields
was 15.8% in October 1994, much later than
the early-80s peak in Developed Markets.
10%
8%
6%
4%
2%
1800
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
ƒ And in the past 10 years, Indian yields have
risen rather than fallen to all-time lows, as
Indian inflation has risen. Indeed, the 3.4%
annual return from Indian government bonds
in the past decade is very low compared to
other bond markets (see page 32).
Global Strategy
ƒ Over the past 100 years the trends in Indian
yields are similar to the UK and Europe but
they have diverged in recent decades.
14%
21
2 7 Jun e 201 2
22
South African bond yields since 1860
South African 10-year government bond yields
20%
South Africa 10-Year Bond Yield
18%
16%
12%
10%
8%
6%
4%
2%
1860 1870 1880 1890 1900 1910 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
ƒ South African government bond yields have
been relatively stable for long periods but
during the 1980s South Africa became a
country of relatively high interest rates.
ƒ South African yields peaked at 18.4% in
September 1998, during the Asia crisis and 5
months prior to the secular low in commodity
prices.
ƒ Since then South African yields have dropped
to below 8% and are currently close to their
lowest levels since 1966. Indeed, the 12.5%
annualized returns from South African
government bonds in the past decade is close
to historic highs.
Global Strategy
14%
ƒ As with India, the long run trend of South
African interest rates for much of the past
two centuries has been linked to the UK.
2 7 Jun e 201 2
US house prices since 1890 real terms
ƒ Since the 2006 high, US housing prices in real
terms have fallen 43% and are now at the
same price level as in 1998.
Annual real home price index
200
175
150
ƒ After the greatest housing bear market in
history, prices went sideways until the end of
WWII in 1945 and then jumped 21% in 1946
alone.
125
100
ƒ Home prices moved modestly upward
throughout much of the post-war period with
periods of strength that were then dwarfed
by a housing bubble that began in 1997.
75
50
1890
1900
1910 1920 1930 1940
1950
1960
1970
1980
1990
Annual data prior to 1953, quarterly thereafter (through 1Q12)
Source: BofA Merrill Lynch Global Equity Strategy, Case-Shiller
2000 2010
ƒ During the 1997-2006 housing bubble, home
prices in the United States soared 85%.
ƒ In 2012, US home prices have stabilized and
in April rose in year over year terms for the
first time since 2007.
Global Strategy
ƒ This makes the current bear market in
housing the greatest since 1894-1921, when
real home prices fell 47%.
23
2 7 Jun e 201 2
24
The gold price since 1920
Gold spot price per ounce since 1920, log scale
$10,000
Introduction of
Stock market
ZIRP & QE*
$1,000
1934: US
Gov ernment
rev alued gold
1971: End of
Bretton Woods
$100
Tech Bubble
(2000-02)
Gold Standard
1976-1980: gold lifted by
stagflation
$10
1920 1927 1934 1941 1948 1955 1962 1969 1976 1983 1990 1997 2004 2011
*ZIRP = Zero interest rate policy; QE = Quantitative easing
Log scale of monthly gold spot price ($/oz)
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, World Gold
Council
ƒ In the midst of the Great Depression, under
the Gold Reserve Act of 1934, Roosevelt
revalued gold (devaluing the dollar) from $20
to $35.
ƒ In 1944 the Bretton Woods Agreement
established a system of fixed exchange rates
in terms of gold for major currencies. In
1971, the US abandoned Bretton Woods and
gold became a floating asset.
ƒ From 1976-1980, stagflation lifted gold from
$100/oz to over $660/oz; the bull market was
ended by successful anti-inflationary
monetary policy in the early 80s.
ƒ Today zero interest rate policies across the
G7 are fueling another bull market in gold: in
the past five years gold prices have soared
from $600/oz to as high as $1900/oz in
September 2011.
Global Strategy
crash of 1987
ƒ Until 1933 the price of gold was fixed at
$20/oz under the Gold Standard Act.
2 7 Jun e 201 2
The oil price since 1861
ƒ In 1861, a barrel of oil cost 49 cents, its alltime low.
Oil price per barrel since 1861, log scale
$1,000
crisis
1979: Iran oil
crisis
$100
$10
ƒ In 1973-4 during the Arab oil embargo, the oil
price quadrupled. Then during the Iranian oil
crisis in 1979, the oil price more than
doubled.
1960: OPEC
founded
1990: Gulf
War
$1
ƒ The all-time high in oil prices was $145/bbl
on July 3rd 2008, before prices plummeted
below $40/bbl during the credit crisis.
1973: OPEC oil
embargo
$0
1861
1951
1960
1968
1976
1985
1993
2001
2010
Annual data through 1950, monthly thereafter. Bloomberg Crude Oil History:
1861-1950 from BP statistical review; 1950-1983 Bloomberg Arabian Gulf Arab
Light Crude Spot Contracts, 1983-current are WTI Cushing Crude Spot prices.
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg
ƒ In the past 18 months, WTI crude has twice
topped $100/bbl but currently the oil price is
$80/bbl.
Global Strategy
ƒ In 1960, OPEC was founded to stabilize oil
prices. Since then, political disruptions in the
Middle East have intermittently caused
volatility in world oil markets.
2008: Credit
25
2 7 Jun e 201 2
26
The US dollar since 1967
ƒ The US dollar came off the Gold Standard
after the Bretton Woods Agreement in 1944.
Monthly US Dollar Index
ƒ Since 1967, on a trade-weighted basis the
USD has fallen over 30%. Over that period the
USD has enjoyed two bull markets.
160
150
140
120
110
100
ƒ The second bull market occurred in the Asia
Crisis and Tech Bubble of the late 1990s.
90
80
70
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg
2007
2011
ƒ Since its 2001 high, just prior to the events of
9/11, the US dollar has primarily been in a
bear market, and hit an all-time low in March
2008 during the financial crisis.
ƒ The US dollar looks very attractive to a longrun contrarian investor.
Global Strategy
ƒ The first was during the Reagan era of the
early 1980s, when we saw tight monetary and
loose fiscal policy. The US dollar index hit an
all-time high of 160 in February 1985 and USD
approached parity with the British Pound.
130
2 7 Jun e 201 2
Value versus Growth since 1926
Relative performance: US Value / Growth, log
scale
3
ƒ The average annual price return of Growth
stocks has been 12.4% since 1926, versus a
16.7% return from Value stocks.
ƒ Since 1926 Value has outperformed Growth in
roughly 3 out of every 5 years.
2
1
ƒ Periods of normal expansion tend to favor
Value stocks.
0
-1
1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010
Recessions
Log Scale of Value v s Grow th, relativ e performance
Monthly data. Average returns of Fama-French Large/Small Growth and
Large/Small Value Benchmark Portfolios
Source: BofA Merrill Lynch Global Equity Strategy, Fama-French
ƒ Since December 2006, Growth stocks have
outperformed Value stocks, making this one
of the longer relative bull markets in Growth
stocks.
Global Strategy
ƒ Growth has tended to outperform during
periods of depression, recession and belowtrend growth. Note the outperformance of
growth was marked during the 1930s.
27
2 7 Jun e 201 2
28
Small cap versus Large since 1926
Relative performance: US small / large, log scale
2
ƒ Small-cap’s annual average total return has
been 16.5% since 1926 versus 11.8% for largecap stocks.
ƒ Since 1926 small-cap has outperformed large
in almost 3 out of every 5 years.
1.5
ƒ The outperformance of large-cap was marked
during the 1930s. Large-cap has also
outperformed over long stretches of time:
May 1946 to January 1964; July 1983 to March
1999.
0.5
0
-0.5
-1
-1.5
1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010
Recessions
Small cap v s large cap relativ e performance (log scale)
Monthly data. The 1933 Small Company Stocks total return was 142.9%.
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson
ƒ In recent years, despite a financial crisis,
deleveraging and massive policy stimulus,
large-cap and small-cap stocks have largely
performed in-line with each other.
Global Strategy
1
2 7 Jun e 201 2
Equity rolling returns
Equity total returns (USD) by country
Average Annual
Return since 1926 (%)
EM
13.1
12.1
Germany
6.3
13.7
UK
5.3
12.0
US
4.1
11.8
France
4.0
12.3
Japan
1.8
11.9
Annualized monthly total returns, USD
Source: BofA Merrill Lynch Global Equity Strategy, Ibbotson, Bloomberg,
Global Financial Data
ƒ The strongest equity returns over the past 10
years have come from Emerging Markets.
Indeed, EM is the only region in the past 10
years where returns (13.1% p.a.) exceed their
long-term average (12.1% p.a.).
ƒ In contrast, 10-year rolling returns in the US,
UK, Germany & France are in the 4-6% range,
all below their long-term averages.
ƒ And holders of Japanese equities in the past
10-years have averaged a return of just 1.8%
p.a., well below their 11.9% historic average.
Global Strategy
10 year Annualized
Return (%)
Country
ƒ Rolling equity returns (or compound annual
total returns) over the past 10 years and since
1926 are shown in the table.
29
2 7 Jun e 201 2
30
US equity rolling returns
US rolling 10-year annualized total returns since
1936, large-cap stocks
24%
20%
16%
ƒ US equity rolling returns are on the rise.
ƒ This chart argues that in the absence of a
Japan-like deflationary economy in coming
years, the 5-7 year outlook for equities looks
fairly promising.
8%
4%
0%
ƒ But the vigorous rise in equity prices since
2009 has boosted the rolling return to its
current 4.1%.
-4%
-8%
1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Large cap equity rolling 10 y r annualized returns, %
Source: BofA Merrill Lynch Global Equity Strategy, Ibbotson, Bloomberg
Global Strategy
ƒ Large-cap equities have averaged a return of
roughly 10-12% per annum since 1926. But at
its low point in February 2009, the rolling
return had collapsed to -3.4%, the worst
holding period return since 1940.
12%
2 7 Jun e 201 2
EM equity rolling returns
EM rolling 10 yr annualized total returns since
1935
ƒ EM equities have averaged a return of roughly
12% per annum since 1926.
ƒ In the past ten years, the annualized total
return from EM equities has been 13.1%.
30%
25%
15%
10%
5%
0%
-5%
1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
EM rolling 10y r annualized monthly returns
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
Global Strategy
ƒ While the rolling return from EM equities has
peaked in recent years, they remain much
stronger than US and global equity rolling
returns.
20%
31
2 7 Jun e 201 2
32
Government bond rolling returns
Government bond total returns (USD) by country
Average Annual
Return since 1933 (%)
South Africa
12.5
6.7
Germany
10.0
7.2
Netherlands
9.9
7.7
France
9.3
5.4
US
6.9
5.9
Japan
6.7
6.7
UK
6.6
6.7
India
3.4
3.4
Annualized monthly total returns of 10 year government bonds, USD
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data
ƒ Government bond returns pretty much
everywhere, but especially in Europe and
South Africa, have exceeded long run
averages in the past 10 years.
Global Strategy
10 year Annualized
Return (%)
Country
ƒ Rolling fixed income returns (or compound
annual total returns from government bonds)
over the past 10 years and since 1933 are
shown in the table.
2 7 Jun e 201 2
US government bond rolling returns
Rolling 10yr annualized total returns since 1936,
long term (>15 yrs) govt bonds
18%
ƒ The 10-year rolling return from long-term US
government bonds is 9.3%, well in excess of
equity returns over the same holding period.
14%
12%
10%
8%
6%
4%
2%
0%
1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
LT Gov t Bonds (+15y rs) rolling 10 y r annualized returns, %
Source: BofA Merrill Lynch Global Equity Strategy, Ibbotson, DataStream
Global Strategy
ƒ Indeed, the rolling returns from Treasuries
has rarely been less than 7-8% in the past
three decades.
16%
33
2 7 Jun e 201 2
34
US corporate bond rolling returns
Rolling 10yr annualized total returns since 1936,
corporate bonds
ƒ The 10-year rolling return from long-term US
corporate bonds is 8.4%, well in excess of
equity returns.
14%
12%
10%
ƒ Fixed income funds have received roughly
$540 billion of inflows since the beginning of
2009. In fact, in 2010 alone bonds had more
inflows than they had in the six years from
2003-2008.
8%
6%
4%
2%
0%
1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Corporate Bonds rolling 10 y r annualized returns, %
Source: BofA Merrill Lynch Global Equity Strategy, Ibbotson, DataStream
Global Strategy
ƒ Government and corporate bond returns have
been strong for a number of years, and as a
result fixed income is still seeing substantial
inflows.
16%
2 7 Jun e 201 2
US cash rolling returns
Rolling 10yr annualized total returns since 1936,
91 day T-bills (cash)
ƒ The annualized return from cash has been
1.8% in the past 10 years.
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Cash rolling 10y r annualized returns, %
Source: BofA Merrill Lynch Global Equity Strategy, Ibbotson, DataStream
Global Strategy
ƒ The 10-year rolling return on cash is currently
the lowest it has been in over 50 years,
unsurprising given that short-rates are close
to zero.
10%
35
2 7 Jun e 201 2
36
Copper rolling returns
Rolling 10yr annualized Copper price returns
since 1920
20%
ƒ In stark contrast to the rolling return from
holding cash, investors in commodities in the
past 10 years have experienced very strong
returns.
12%
8%
4%
0%
-4%
-8%
-12%
1920 1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010
Copper rolling 10 y r annualized monthly returns, %
Source: BofA Merrill Lynch Global Equity Strategy, Ibbotson, Bloomberg
Global Strategy
ƒ The rolling return from copper reached a 90year high of 20.5% in July 2011 and the
current rolling return of 16.5% is well above
copper’s long-term average annual price
return of 7%.
16%
2 7 Jun e 201 2
US asset returns by decade
Compound Annual Rates of Return by Decade (%)
1930s
1940s
1950s
1960s
1970s
1980s
1990s
2000s
2010s**
Large Company Stocks
19.2%
-0.1%
9.2%
19.4%
7.8%
5.9%
17.6%
18.2%
-0.9%
9.1%
Small Company Stocks
-4.5%
1.4%
20.7%
16.9%
15.5%
11.5%
15.8%
15.1%
6.3%
12.3%
LT Corporate Bonds
5.2%
6.9%
2.7%
1.0%
1.7%
6.2%
13.0%
8.4%
7.6%
14.7%
LT Government Bonds
5.0%
4.9%
3.2%
-0.1%
1.4%
5.5%
12.6%
8.8%
7.7%
18.1%
IT Government Bonds
4.2%
4.6%
1.8%
1.3%
3.5%
7.0%
11.9%
7.2%
6.2%
7.3%
Treasury Bills
3.7%
0.6%
0.4%
1.9%
3.9%
6.3%
8.9%
4.9%
2.8%
0.1%
Inflation
-1.1%
-2.0%
5.4%
2.2%
2.5%
7.4%
5.1%
2.9%
2.5%
2.8%
*Based on the period 1926-1929
**Based on the period 2010-May 2012
IT Government Bond return for 2010s period is BofAML US Treasury 5 yr index
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson
ƒ In decades of deflation (1930s), bonds outperform stocks.
ƒ In decades of reflation (1940s), stocks outperform bonds.
ƒ In decades of high inflation/stagflation (1970s), real returns from stocks and bonds are poor.
ƒ In decades of disinflation (1980s, 1990s), real returns from stocks and bonds are very good.
Global Strategy
1920s*
37
2 7 Jun e 201 2
38
Real equity & bond returns by decade
Real annualized US equity & government bond
returns by decade
16%
ƒ Asset returns can look very different when
adjusted for inflation. The chart shows real
annualized returns for US bonds and equities
since the 1930s.
11%
6%
ƒ Meanwhile, inflation-adjusted equity returns
have only been negative in the 1970s and
2000s.
1%
-4%
1930s
1940s
1950s
1960s
1970s
Inflation adjusted gov t bonds
1980s
1990s
2000s
2010s
Inflation adjusted equities
Total returns, USD. 2010’s data based on the period 2010-May 2012
Source: BofA Merrill Lynch Global Equity Strategy, Ibbotson, Bloomberg
Global Strategy
ƒ In the 40s, 50s, 60s & 70s, US government
bonds has negative returns when adjusted for
inflation. But that was followed by over three
decades of very positive real returns.
2 7 Jun e 201 2
Asset returns in the 1930’s
ƒ How did asset markets perform during
different decades?
US asset returns – 1930’s
6%
4%
2%
ƒ Annual US GDP growth averaged -0.2% and
inflation -2%, i.e. the 1930s = deflation.
0%
ƒ Winners: bonds and notably growth stocks.
-2%
ƒ Losers: commodities, value stocks, real
estate.
-4%
Corp
bonds
Grow th
Gov t
Small
bonds
cap
Cash
Lg. cap
Real
US CPI
Value
Copper
estate
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson,
Fama-French growth/value series, Case-Shiller, Bureau of Economic Analysis,
Homer & Sylla, A History of Interest Rates
Global Strategy
ƒ The 1930s were a decade of economic
depression and deflation, the Smoot-Hawley
Tariff Act, Britain abandoning the gold
standard, Glass-Steagall, widespread debt
defaults, the New Deal and the beginning of
World War II.
8%
39
2 7 Jun e 201 2
40
Asset returns in the 1940’s
ƒ The decade of World War II, massive defense
spending, Pearl Harbor, atomic bombs, the
Marshall Plan, nationalization and restoration
of collective bargaining and the beginning of
the Cold War.
US asset returns – 1940’s
20%
10%
ƒ Winners: equities, especially small-cap and
value stocks.
5%
ƒ Losers: cash, bonds.
0%
Small
cap
Value
Grow th Lg. cap
Real
estate
US CPI Copper
Gov t
Corp
bonds
bonds
Cash
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson,
Fama-French growth/value series, Case-Shiller, Bureau of Economic Analysis,
Homer & Sylla, A History of Interest Rates
Global Strategy
ƒ There was a surge in nominal economic
growth; annual US GDP growth averaged
11.7% and inflation jumped to a rate of 5.4%
per annum.
15%
2 7 Jun e 201 2
Asset returns in the 1950’s
ƒ The decade of the Korean War, the Warsaw
Pact, the formation of the EEC (European
Economic Community), and the economic
recovery of a war-torn Europe.
US asset returns – 1950’s
23%
15%
11%
ƒ Winners: equities, especially large-cap &
value stocks and copper.
7%
ƒ Losers: cash, bonds.
3%
-1%
Value
Lg. cap Grow th
Small
cap
Copper
Real
estate
US CPI
Cash
Corp
Gov t
bonds
bonds
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson,
Fama-French growth/value series, Case-Shiller, Bureau of Economic Analysis,
Homer & Sylla, A History of Interest Rates
Global Strategy
ƒ There was a very favorable economic climate
with strong average annual US GDP growth of
6.7% and much lower inflation of 2.2% per
annum.
19%
41
2 7 Jun e 201 2
42
Asset returns in the 1960’s
US asset returns – 1960’s
16%
ƒ A decade which began with US political and
economic preeminence and ended with the
“American Century” unraveling with Vietnam,
social dissent and monetary instability.
12%
8%
ƒ Winners: equities, especially small-cap and
value stocks.
4%
ƒ Losers: commodities, bonds, real estate.
CP
I
Re
al
es
tat
e
Co
rp
bo
nd
s
Go
vt
bo
nd
s
Co
mm
od
.
US
Ca
sh
Co
pp
er
ap
Lg
.c
ow
th
Va
lue
Gr
Sm
a ll
ca
p
0%
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson,
Fama-French growth/value series, Case-Shiller, Bureau of Economic Analysis,
Homer & Sylla, A History of Interest Rates
Global Strategy
ƒ Annual US GDP growth averaged a strong 6.9%
and inflation averaged a low 2.5%; but from
1965 onward a dangerous inflationary spiral
began.
2 7 Jun e 201 2
Asset returns in the 1970’s
ƒ The decade of great and protracted inflation,
monetary instability, large budget and trade
deficits, wage and price controls, OPECinduced spikes in oil prices, Watergate and
the Soviet invasion of Afghanistan.
US asset returns – 1970’s
14%
12%
8%
ƒ Winners: small-cap & value stocks,
commodities, REITS, real estate.
6%
ƒ Losers: large-cap & growth stocks, bonds.
4%
2%
bo
nd
s
Gr
ow
th
ap
Lg
.c
Go
vt
Ca
sh
Co
rp
bo
nd
s
Co
pp
er
IT
s
Co
mm
od
.
Re
al
es
tat
e
US
CP
I
RE
ca
p
all
Sm
Va
lue
0%
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson,
Fama-French growth/value series, Case-Shiller, Bureau of Economic Analysis,
Homer & Sylla, A History of Interest Rates
Global Strategy
ƒ “Stagflation” arrived with average annual US
GDP growth of 10.1% and inflation of 7.4%.
10%
43
2 7 Jun e 201 2
44
Asset returns in the 1980’s
21%
17%
13%
ƒ Annual US GDP growth averaged 7.9% and an
era of disinflation began with inflation rates
declining sharply to average 5.1% for the
decade as a whole.
9%
5%
ƒ Winners: equities, particularly large-cap and
value stocks, REITs, bonds.
1%
I
Co
pp
er
Co
mm
od
.
CP
US
Ca
sh
Re
al
es
tat
e
ow
th
Co
rp
bo
nd
s
Go
vt
bo
nd
s
Gr
IT
s
RE
ap
all
c
ap
Sm
Lg
.c
Va
lue
-3%
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson,
Fama-French growth/value series, Case-Shiller, Bureau of Economic Analysis,
Homer & Sylla, A History of Interest Rates
ƒ Losers: commodities.
Global Strategy
ƒ The decade started with a second oil shock
and the LatAm debt crisis, ended with the
savings and loan crisis, Black Monday, the fall
of the Berlin Wall and an asset bubble in
Japan. But critically, the 1980’s saw a major
peak in global inflation and interest rates and
thereafter a sustained economic expansion.
US asset returns – 1980’s
2 7 Jun e 201 2
Asset returns in the 1990’s
US asset returns – 1990’s
18%
15%
ƒ The decade in which Japan bubble burst, the
Maastricht Treaty, NAFTA, and Uruguay Round
of GATT were all signed, balanced budgets,
the Tequila & Asian financial crises, the
introduction of Euro and the Tech Bubble.
9%
6%
ƒ Winners: equities, especially large-cap &
growth stocks, REITS & bonds.
3%
ƒ Losers: real estate, commodities.
0%
US
CP
I
Re
al
es
tat
e
Co
pp
er
Ca
sh
bo
nd
s
Co
mm
od
.
bo
nd
s
Co
rp
IT
s
RE
Go
vt
Va
lue
Lg
.c
ap
Gr
ow
th
Sm
all
ca
p
-3%
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson,
Fama-French growth/value series, Case-Shiller, Bureau of Economic Analysis,
Homer & Sylla, A History of Interest Rates
Global Strategy
ƒ Annual US GDP growth averaged a healthy
5.5% and inflation was a low and stable 2.9%.
12%
45
2 7 Jun e 201 2
46
Asset returns in the 2000’s
ƒ The decade of the Tech Bubble burst, the
9/11 terrorist attacks, China becoming a WTO
member, wars in Afghanistan & Iraq, China’s
equity market bubble & burst, the subprime
mortgage crisis and the massive global
financial crisis.
US asset returns – 2000’s
16%
14%
12%
8%
6%
4%
ƒ Winners: copper, REITS, bonds, commodities.
2%
ƒ Losers: equities, especially large-cap &
growth stocks.
0%
ap
Gr
ow
th
I
CP
Lg
.c
US
Ca
sh
ap
Re
al
es
tat
e
all
c
Sm
Va
lue
bo
nd
s
bo
nd
s
Co
rp
od
.
Go
vt
IT
s
RE
Co
mm
Co
pp
er
-2%
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson,
Fama-French growth/value series, Case-Shiller, Bureau of Economic Analysis,
Homer & Sylla, A History of Interest Rates
Global Strategy
ƒ US GDP growth averaged 4.1%, the weakest
since the 1930s, and inflation declined
further, averaging 2.5%. CPI actually turns
negative (deflation) in 2009.
10%
2 7 Jun e 201 2
Asset returns so far in the 2010’s
US asset returns – thus far 2010’s
ƒ Thus far, the 2010’s have been a very good
period of return for most asset classes.
16%
12%
ƒ Winners: high-yielding REITS, government and
corporate bonds, high beta small cap, Growth
stocks.
8%
4%
ƒ Losers: cash, commodities, real estate.
0%
Ca
sh
Co
mm
od
.
Re
al
es
tat
e
CP
I
Co
pp
er
US
Va
lue
IT
s
RE
Go
vt
bo
nd
s
Co
rp
bo
nd
s
Sm
all
ca
p
Gr
ow
th
Lg
.c
ap
-4%
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson,
Fama-French growth/value series, Case-Shiller, Bureau of Economic Analysis,
Homer & Sylla, A History of Interest Rates
Global Strategy
ƒ All asset classes bar real estate have been
“inflated” by central bank quantitative
easing, zero rates and the near-miss
experience of depression.
20%
47
2 7 Jun e 201 2
48
Risk & return since 1926
Summary Statistics of Annual Total Returns of US Assets (1926-2011)
Standard Deviation
(%)
Large Company Stocks
11.8
20.3
Small Company Stocks*
16.5
32.5
Long-term Corporate Bonds
6.4
8.4
Long-term Government Bonds
6.1
9.8
Intermediate-Term Government Bonds
5.5
5.7
US Treasury Bills
3.6
3.1
Inflation
3.1
4.2
*The 1933 Small Company Stocks total return was 142.9%
Source: BofA Merrill Lynch Global Equity Strategy, Ibbotson
ƒ This table shows the mean return of US asset classes with the standard deviation (or volatility
or “risk”) of those returns.
ƒ In the long-run, the data shows the higher the risk of the asset class, the higher the return.
ƒ All asset classes, including cash, have generated a positive real return as inflation has averaged
3% over the period.
Global Strategy
Arithmetic Mean
(%)
2 7 Jun e 201 2
Equities: risk & return
Summary Statistics of Annual Total Returns (1926-2011)
Country
St. Deviation (%)
US
11.8
20.3
UK
12.0
26.7
Germany
13.7
35.9
France
12.3
36.4
Japan
11.9
34.8
EM
12.1
24.9
Equity total returns, USD
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data, Bloomberg
ƒ Since 1926, returns from US, UK and EM equities have had comparable returns but with
considerably less volatility than the returns from German, French and Japanese stock prices.
Global Strategy
Average Return (%)
49
2 7 Jun e 201 2
50
Government bonds: risk & return
Summary Statistics of Annual Total Returns (1933-2011)
Country
St. Deviation (%)
US
5.9
8.4
UK
6.7
13.8
Germany
7.2
21.1
France
5.4
22.1
Netherlands
7.7
15.2
Japan
6.7
22.3
South Africa
6.7
17.9
India
3.4
13.7
10 year government bond total returns, USD
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data, Bloomberg
ƒ Since 1933, Dutch 10-year government bonds have had the highest return, while the standard
deviation of the returns has been fairly modest in comparison to Japan, France and Germany.
ƒ US 10-year government bond returns have been the least volatile over this period.
Global Strategy
Average Return (%)
2 7 Jun e 201 2
Bonds & equities: volatility of returns
5yr rolling standard deviation of US equities &
government bonds
14
12
ƒ The 5-year rolling standard deviation of US
equities and government bond returns are
both currently high by historical standards
(although in the case of equities, still well
below the levels reached in the 1930s).
8
ƒ US equities have almost always been more
volatile than bonds based on 5yr rolling
standard deviations.
6
4
2
0
1931
1941
1951
1961
US Equities
1971
1981
1991
2001
US Gov ernment Bonds
5 year rolling standard deviations of monthly returns
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson
2011
ƒ The exceptions were 1983-1986 and 20072008. In those years the volatility of returns
from government bonds exceeded those of
equities.
Global Strategy
ƒ The standard deviation of US bonds is now
approaching its all-time high, which was in
October 1984.
10
51
2 7 Jun e 201 2
52
US & EAFE stocks: volatility of returns
5yr rolling average standard deviation US &
international stocks
7
ƒ The last time EAFE equity returns were this
volatile over a 5-year period was 1991.
5
4
3
2
1978
1981
1984
1987
1990
1993
US Stocks
1996
1999
2002
2005
2008
MSCI EAFE
5 year rolling standard deviations of monthly returns
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson
2011
Global Strategy
ƒ The last time US equity returns were this
volatile over a 5-year period was 1990 and
2003.
6
1975
ƒ The volatility of returns from both US and
international equity returns are currently at
historic highs.
2 7 Jun e 201 2
Correlation between bonds & equities
5yr rolling correlations of US equities &
government bonds
ƒ This chart shows that the correlation between
equity and US Treasury returns has flipped
over time.
0.6
ƒ Bond and equity returns are currently
negatively correlated.
0.5
0.4
0.2
0.1
0.0
ƒ In the 1950s-1960s and during the past
decade, higher government bond prices (or
lower bond yields) have gone hand-in-hand
with lower equity prices.
-0.1
-0.2
-0.3
-0.4
1931
1941
1951
1961
1971
1981
1991
2001
Gov bonds v s Large Cap S&P 500 stocks, rolling 5y r correlation
5 year rolling correlations of monthly returns
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson
2011
Global Strategy
ƒ In the 1970s, 1980s and 1990s higher bond
prices went hand-in-hand with higher equity
prices.
0.3
53
2 7 Jun e 201 2
54
Correlation of US, EAFE & EM equities
5yr rolling average correlation US & international
stocks
1.0
0.9
ƒ The returns from US and international
equities have always been positively
correlated but the correlation was relatively
low between 1980 and 1997.
0.8
0.7
0.6
ƒ The correlation between US equities and both
developed and Emerging Market equities is
fairly similar.
0.5
0.4
0.3
0.2
1975
1978 1981
1984 1987 1990 1993
US Stocks & MSCI EAFE
1996
1999
2002
2005 2008 2011
US Stocks & MSCI EM
5 year rolling correlations of monthly returns
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Ibbotson
Global Strategy
ƒ Since the Asia Crisis of the late-90s and the
internet bubble, the correlation has risen
sharply and has remained consistently high in
recent years.
2 7 Jun e 201 2
Correlations with large cap equities
Correlations of US assets with the S&P 500
Corp
bonds
Cash
Real
Estate
Commodities
Copper
Small cap
REITs*
1930s
15%
23%
-7%
1%
N/A
23%
0.9
N/A
1940s
36%
24%
16%
3%
N/A
2%
0.9
N/A
1950s
-16%
-1%
-28%
14%
N/A
1%
0.8
N/A
1960s
7%
21%
-13%
-10%
13%
8%
0.8
N/A
1970s
41%
53%
-10%
15%
-12%
-19%
79%
64%
1980s
31%
29%
-17%
6%
15%
7%
84%
65%
1990s
36%
45%
1%
0%
6%
-12%
68%
45%
2000s
-15%
12%
-9%
15%
28%
29%
72%
59%
2010s**
-80%
-40%
-3%
-15%
80%
79%
96%
87%
*1970’s data based on years 1972-1979
**Based on Jan 2010 – May 2012
Source: BofAML Global Equity Strategy, Bloomberg, Datastream, Ibbotson, Case-Shiller
ƒ This table shows the correlation of various asset classes’ total returns with the S&P 500.
ƒ By and large over this period equity and bond returns have been more positively correlated.
But in recent years, the correlation between equities and bonds has been very negative.
ƒ Today, equities and commodities are very highly correlated by historical standards.
ƒ Currently real estate & cash have low correlations with equities.
Global Strategy
Gov't
bonds
Decade
55
2 7 Jun e 201 2
56
The history of volatility
US equity market total return volatility and VIX
100%
90%
Oct 1929: The
Oct 2008: S&P
Great Crash
loses 22% in 6
trading day s
80%
Oct 1987: Black
Monday , Dow falls
23%, greatest 1 day
60%
loss in history
50%
ƒ A two standard deviation event would be
associated with volatility in excess of 37%. On
average, such an event has occurred once
every 25 months in the past 90 years.
ƒ Note that monthly volatility exceeded 50% on
15 different occasions during the 1930s.
40%
30%
ƒ Since the 1930s there have been only 5 such
occasions: September 1946, October 1987 and
September, October & November 2008.
20%
10%
0%
1920 1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010
Total return monthly v olatility
VIX - Av g. of daily v ol. for month
Source: BofA Merrill Lynch US Equity & Quant Strategy, Bloomberg
ƒ Today, the VIX index is at 18%, slightly below
its long-term average of 20%.
Global Strategy
70%
ƒ The most volatile month in equity history was
October 1987, the month of “Black Monday”,
when the Dow fell 23% in one day. That
month volatility reached 91%.
2 7 Jun e 201 2
The great equity bear markets
Date of Market
Trough
Peak to
Trough
Performance
Duration of
Bear Market
(mos)
Recovery One
Year from
Trough
Recovery 39
Months from
Trough*
9/16/29
6/1/32
-86%
33
121%
155%
3/10/37
3/31/38
-54%
13
29%
16%
5/29/46
6/13/49
-30%
37
42%
82%
8/2/56
10/22/57
-22%
15
31%
55%
12/12/61
6/26/62
-28%
7
33%
73%
11/29/68
5/26/70
-36%
18
44%
48%
1/11/73
10/3/74
-48%
21
38%
51%
11/28/80
8/12/82
-27%
21
58%
93%
7/16/90
10/11/90
-20%
3
29%
60%
3/24/00
10/9/02
-49%
31
34%
66%
10/9/07
3/9/09
-57%
17
65%
96%
*Today we are 39 months from the March 2009 low
Source: BofA Merrill Lynch Global Research, Ibbotson, Bloomberg
ƒ There have been 11 bear markets in the S&P 500 since 1929.
ƒ The longest (1946-1949) lasted 37 months, the shortest (1990) lasted 3 months.
ƒ The rally from a bear market low tends to be extremely powerful.
ƒ The most recent bear market (-57%) and equity price recovery (+96%) have been exceeded
once before during the 1929-34 period.
Global Strategy
Date of Market
Peak
57
2 7 Jun e 201 2
58
The great equity bear market rallies
ƒ Today we are 39 months from the March 2009
low. During this period we have seen the
second greatest post-recessionary gain since
the 1930s, with markets gaining 96%.
Recovery from trough (39 months)
1932-35
155%
2009-12
96%
1982-85
1949-52
82%
1962-65
73%
2002-06
66%
1990-94
60%
1957-61
55%
1974-78
51%
1970-73
48%
1938-41
16%
0%
20%
40%
60%
80%
100%
120%
Source: BofA Merrill Lynch Global Research, Bloomberg
140%
160%
180%
Global Strategy
ƒ The greatest recovery after a recession
followed the bear market in the early years of
the Great Depression. Equities surged 121% in
12 months from the June 1932 lows. Indeed
1933, the year in the US unemployment rate
touched 25%, was the best year ever for US
stock returns.
93%
2 7 Jun e 201 2
Equity risk premium since 1900
Spread of US large company stock earnings yield
over real 10yr Treasury yield
13%
ƒ The Equity Risk Premium (ERP) is the
difference between earnings and bond yields,
and represents the return demanded by
investors to hold equities over Treasuries.
9%
7%
Av erage: 5%
5%
3%
1%
-1%
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Spread (Large Company Stock Earnings Yield - Real 10y r Treasury Yield)
Annual data
Source: BofA Merrill Lynch Global Research, Cowles Commission Indices,
Livingston Survey
Global Strategy
ƒ At 7.8%, the return demanded by investors to
hold equities over Treasuries is the highest
since 1979, and well above the long-term
average of 5%.
11%
59
2 7 Jun e 201 2
60
Bond & dividend yield spread: US
Spread of US equity dividend yield over 10 year
US Treasury yields (ppt)
8
ƒ This chart show the percentage point spread
between the dividend yield of the S&P500 and
the 10 year US Treasury yield since 1871.
4
2
ƒ But in most of the post war period, 10 year
Treasuries have on average yielded 227bps
more than equity dividends.
0
-2
ƒ The widest spread of Treasuries over dividend
yields was 1023bps in 1981.
-4
-6
-8
S&P 500 div y ld - 10y UST y ld (ppt spread)
-10
1871 1881 1892 1903 1914 1925 1936 1946 1957 1968 1979 1990 2001 2011
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg
ƒ Today, in a sign that equity valuations are
becoming more competitive versus fixed
income, the spread between dividend yields
and Treasury yields is close to its narrowest
since the late 1950s.
Global Strategy
ƒ Before WWII S&P 500 dividend yields were in
excess of the 10 year Treasury yield, with an
average premium of 136bps.
6
2 7 Jun e 201 2
Bond & dividend yield spread: Europe
Spread of European equity dividend yield over
10 year German bund yields (ppt)
3
European stock div y ld - German 10y r benchmark gov t bond y ld (ppt)
ƒ In short, relative to German bonds, European
equities are the cheapest they have been in
90 years.
-1
-3
-5
-7
1925 1931 1937 1943 1949 1955 1961 1967 1973 1979 1985 1991 1997 2003 2009
Monthly data. Dividend yields from Global Financial Data prior to December
1969, MSCI Europe thereafter. No German bund yield data available from
August 1931 – March 1932 and December 1943 – December 1945
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
Bloomberg, DataStream
Global Strategy
1
ƒ The spread of European equity dividend yields
over 10 year German bund yields has hit an
all-time high of 320bp in May 2012 as
dividend yields have increased and
government bond yields have fallen to
historic lows.
61
2 7 Jun e 201 2
62
US price-earnings ratio since 1900
The 12-month trailing Price-to-Earnings Ratio
30
ƒ Turning to valuation, this chart shows the
trailing price-to-earnings ratio of the S&P 500
since 1900.
25
ƒ The all-time P/E high was 29.7X in June 1999.
20
ƒ The all-time low was 5.9X in June 1949.
15
14.6x
10
5
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
Trailing 4Q PE (GAAP until 1960, Pro-forma thereafter)
*As of 1Q12. Annual data through 1935, quarterly thereafter
Source: BofA Merrill Lynch US Equity & Quant Strategy
2000
Av erage
2010
ƒ The cheapest years to buy equities were 1916
to 1917, 1948 to 1950, 1974 and 1980. During
these years the S&P 500 could have been
bought for a trailing P/E ratio of less than 7X.
Great bull markets in equities followed these
buying opportunities.
Global Strategy
ƒ The average trailing P/E ratio since 1900 is
14.6X, so today’s ratio of 14.3X* is in line
with the long-run average.
2 7 Jun e 201 2
US dividend yield since 1871
ƒ The S&P 500 dividend yield hit an all time
high of 9.6% in 1932.
The Dividend Yield, %
ƒ The S&P 500 dividend yield hit an all-time low
near 1.1% in 2000.
10%
9%
7%
Av erage 4.9%
6%
5%
Av erage: 3.5%
4%
3%
2%
1%
1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Monthly data. Nominal dividend yield
Source: BofA Merrill Lynch Global Research, Global Financial Data, Bloomberg
ƒ Note that the dividend yield was much higher
in the period before WWII (average was 4.9%)
than in the post-war era (when the average
has been 3.5%).
Global Strategy
ƒ Dividend yields are currently 2.2%, on the rise
but still below the long-term average of 4.3%.
8%
63
2 7 Jun e 201 2
64
US real dividend yield since 1871
The Real Dividend Yield, %
ƒ The inflation adjusted S&P 500 dividend yield
hit an all-time low of -11.4% in 1946.
18%
Av erage: 4.4%
8%
3%
ƒ Today, real dividend yields are currently
-0.8%, below the long-term average of 2%.
-2%
Av erage: -0.4%
-12%
1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Annual data. Inflation data is from GFD prior to 1914, and Bloomberg thereafter
Source: BofA Merrill Lynch Global Research, Global Financial Data, Bloomberg
Global Strategy
ƒ Note that the real dividend yield was much
higher in the period before WWII (average
was 4.4%) than in the post-war era (when the
average has been -0.4%).
13%
-7%
ƒ The inflation adjusted S&P 500 dividend yield
hit an all-time high of 18.9% in 1931.
2 7 Jun e 201 2
Global dividend yield since 1925
ƒ The dividend yield on global equities fell to
an all-time low of 1.29% in 2000, in the midst
of the Tech bubble.
Global equity dividend yield
8%
6%
ƒ Today, global equities yield 3.0%.
5%
4%
Av erage: 3.7%
3%
2%
Global Div idend Yield
A
1%
1925
1935
1945
1955
1965
1975
1985
1995
2005
Monthly data. Dividend yields from GFD prior to October 1995, MSCI All
Country World Index thereafter.
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
DataStream
Global Strategy
ƒ Since then, dividend yields have remained
below their long-term average of 3.7%, but
have steadily been on the rise.
7%
65
2 7 Jun e 201 2
66
European dividend yield since 1925
ƒ European equity dividend yields have been
fairly volatile over the past 85 years.
European equity dividend yield
6%
5%
Av erage: 3.9%
4%
3%
2%
European Div idend Yield
1%
1925
1935
1945
1955
1965
1975
1985
1995
2005
Monthly data. Dividend yields from GFD prior to December 1969, MSCI
Europe thereafter.
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data,
DataStream
ƒ Today, European equities yield 4.4%, above
the long-term average of 3.9%. Europe is
clearly the most attractive region right now
for value investors.
Global Strategy
ƒ But similar to the trend of global dividend
yields, European yields have been on the rise
after having fallen to a record low of 1.7%
during the Tech Bubble.
7%
2 7 Jun e 201 2
German dividend yield since 1869
German equity dividend yield
ƒ The dividend yield on German equities is
currently 3.9%, well above the 10 year bund
yield of 1.2%.
Germany Div idend Yield
12%
10%
Global Strategy
8%
6%
4%
Av erage: 4.2%
2%
0%
1869 1879 1889 1899 1909 1919 1929 1939 1955 1965 1975 1985 1995 2005
Monthly data. Dividend yields from GFD prior to December 1969, MSCI
Germany thereafter.
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data
67
2 7 Jun e 201 2
68
Japanese dividend yield since 1886
ƒ Dividend yields in Japan fell close to zero in
1988, and were relatively flat for well over a
decade.
Japanese equity dividend yield
21%
Toky o SE Div idend Yield
18%
12%
9%
6%
Av erage: 3.8%
3%
0%
1886
1933
1943
1957
1967
1977
1987
1997
2007
Annual data through 1925, monthly thereafter
Source: BofA Merrill Lynch Global Equity Strategy, Global Financial Data
Global Strategy
15%
ƒ Japanese equity dividend yields have been on
the rise in recent years and today yield 2.6%.
But they remain very low by historic
standards and relative to other equity
markets, despite the 20-year bear market in
Tokyo.
2 7 Jun e 201 2
US Treasury ownership since 1945
100%
Priv ate pension funds & corporate***: 5%
90%
Financial**: 15%
80%
70%
60%
Rest of w orld: 44%
50%
30%
Gov ernment*: 24%
20%
10%
Household sector: 12%
0%
1945
1950
1955
Household Sector
1960
1965
Gov ernment*
1970
1975
1980 1985
Rest of w orld
1990
Financial**
1995
2000
2005
2010 1Q12
Priv ate pension funds & corporate***
*State & local governments, GSEs, Federal retirement funds, State & local retirement funds
**Financial includes Insurance, mutual funds, commercial & savings banks, credit unions, REITs, brokers & dealers, funding corps
***Private pension funds, nonfinancial corporate business, nonfarm noncorporate business
Source: BofA Merrill Lynch Global Equity Strategy, Federal Reserve Board Flow of Funds, Factset, Haver
ƒ Who owns the $10.7 trillion US Treasury market?
ƒ In 1945 foreigners owned 1% of the US Treasury market; today foreigners own 44%.
ƒ In contrast, the holdings of the financial & household sectors have shrunk from almost 80% to 27%.
Global Strategy
40%
69
2 7 Jun e 201 2
70
Equity ownership since 1945
100%
Priv ate pension funds: 9%
90%
80%
Financial**: 32%
70%
60%
Rest of w orld: 13%
50%
Gov ernment*: 9%
30%
20%
Household sector: 37%
10%
0%
1945
1950
1955
1960
Household Sector
1965
1970
Gov ernment*
1975 1980 1985 1990 1995
Rest of w orld
Financial**
2000
2005
2010 1Q12
Priv ate pension funds
* State & local governments, GSEs, Federal retirement funds, state & local retirement funds
** Financial includes Insurance, mutual funds, commercial & savings banks, credit unions, REITs, brokers & dealers, funding corps
Source: BofA Merrill Lynch Global Equity Strategy, Federal Reserve Board Flow of Funds, Factset, Haver
ƒ Who owns the $25.2 trillion corporate equity market?
ƒ In 1945 over 90% of equities were owned by households; now it’s 37%.
ƒ Over time the financial sector has steadily become one of the largest owners of US equities.
ƒ Since 1980 the share of equities owned by the US government and foreigners has risen to over 20%.
Global Strategy
40%
2 7 Jun e 201 2
Corporate bond ownership since 1945
100%
Priv ate pension funds: 4%
90%
80%
70%
Financial**: 53%
60%
50%
Rest of w orld: 21%
30%
20%
Gov ernment*: 6%
10%
Household sector: 16%
0%
1945
1950
1955 1960
Household Sector
1965 1970
Gov ernment*
1975
1980
Rest of w orld
1985
1990
Financial**
1995
2000
2005
2010 1Q12
Priv ate pension funds
*State & local governments, GSEs, Federal retirement funds, state & local retirement funds
**Financial includes Insurance, mutual funds, commercial & savings banks, credit unions, REITs, brokers & dealers, funding corps
Source: BofA Merrill Lynch Global Equity Strategy, Federal Reserve Board Flow of Funds, Factset, Haver
ƒ Who owns the $11.4 trillion US corporate bond market?
ƒ The financial sector is the largest owner, accounting for over 50% of the outstanding value.
ƒ The rest of the world is now the second largest owner of corporate bonds, accounting for 21%, and
up from 2% back in 1945.
Global Strategy
40%
71
2 7 Jun e 201 2
72
US equity sector weights 1899-2012
US Equity Sector Weights
1950
2000
2012
Materials
6%
15%
2%
4%
Industrials
67%
5%
1%
10%
Cons. Disc.
1%
8%
6%
12%
Staples
7%
4%
2%
11%
Financials
7%
1%
18%
14%
Telecom
4%
6%
6%
3%
Utilities
5%
8%
4%
4%
Small in 1900: Energy, Healthcare, & IT
5%
53%
62%
42%
100%
100%
100%
100%
Total
Figures may not sum to 100% due to rounding. 2012 data as of May 2012
Source: BofA Merrill Lynch Global Equity Strategy, Dimson, Marsh, and Staunton, Triumph of the Optimists, MSCI
ƒ How has the composition of the equity market changed over time?
ƒ Industrials, led by railroads, was the largest equity sector in 1899.
ƒ Note that in 1950 Financials represented just 1% of the US equity market.
ƒ Unsurprisingly in 2000, the peak of the Tech Bubble, Tech was the largest sector in the US.
Global Strategy
1899
2 7 Jun e 201 2
US equities as % of world
ƒ Despite being 22% of the world economy, the
US is still far and away the largest equity
market.
US as a % of world market capitalization
56%
46%
ƒ Since then the US equity market steadily lost
market share. But this trend has reversed in
recent years thanks to the cheap dollar, the
safe-haven status of the US & the perception
that deleveraging in the US is closer to an
end.
41%
36%
31%
26%
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
MSCI US market cap relativ e to w orld mkt cap
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
2012
ƒ The US is currently a very large 48% of the
world equity market capitalization.
Global Strategy
ƒ The US share of world market capitalization
rose steadily from a low of 29% in November
1988 to a peak of 55% in March 2003 (the US
dollar had peaked about one year earlier).
51%
73
2 7 Jun e 201 2
74
Japan equities as % of world
ƒ In 1988 Japan’s equity market was the largest
in the world, with a market cap that
represented 44% of the MSCI All-Country
World Index.
Japan as a % of world market capitalization
46%
Peak: 44%
41%
36%
31%
ƒ Japan’s share is roughly 35bps away from its
all-time low of global equity market cap of
7.45% reached in 2003.
26%
21%
16%
ƒ Japan is a secular contrarian buy (but has
been for the past decade).
11%
6%
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
MSCI Japan market cap relativ e to w orld mkt cap
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
2012
Global Strategy
ƒ Japan’s share began its epic collapse in 1990,
and its share of world market capitalization
fell to below 10% in less than ten years.
2 7 Jun e 201 2
Europe equities as % of world
ƒ Back in 1988 Europe’s share of world market
capitalization was 21%.
Europe as a % of world market capitalization
34%
32%
30%
ƒ The past 13 years have seen Europe’s share
decline to a low point of 22% in May of 2012,
the lowest since 1989.
28%
26%
24%
ƒ Europe is a secular contrarian buy.
22%
20%
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
MSCI Europe market cap relativ e to w orld mkt cap
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
2012
Global Strategy
ƒ Europe’s high water mark in terms of market
cap came in August 1998 at the height of the
Asia crisis and just months before the euro
was introduced. Back then Europe
represented 35% of world market cap.
36%
75
2 7 Jun e 201 2
76
EM & Asia Pacific equities as % world
Emerging Markets and Asia Pac ex-Japan as a
% of world market capitalization
20%
16%
14%
ƒ EM is a secular contrarian sell, assuming the
important catalyst of a sharp step-change
lower in Chinese economic growth comes to
pass.
12%
10%
8%
6%
4%
2%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
MSCI EM + Asia Pac ex -Japan market cap relativ e to w orld mkt cap
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
2012
Global Strategy
ƒ The secular rise of Emerging Markets and Asia
Pacific has been marred by two brutal bear
markets: 1997-98 and in 2008.
18%
1988
ƒ In 1988 the market cap of equities in the
Emerging Markets and Asia Pacific ex-Japan
was a mere 3%. It is now 17%.
2 7 Jun e 201 2
Financials as a % of world
Financials as a % of world market capitalization
26%
24%
23%
ƒ Financials have undergone huge swings in
capitalization, falling to 16% of the world
total as the Tech Bubble peaked in 2000, and
peaking at 26% in 2007 with the global real
estate market before the recent Global
Financial Crisis caused the sector’s share to
plunge back to 16%.
22%
21%
20%
19%
18%
17%
16%
1996
1998
2000
2002
2004
2006
2008
2010
Global Financials market cap as % of total w orld
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
ƒ Financials made a significant recovery from
their post-financial crisis low of 16%.
ƒ But in the past two years, Financials have
again experienced de-rating and the sector
would certainly be a contrarian long-term buy
in the Developed Markets.
Global Strategy
ƒ From a secular perspective, Financials might
not be as oversold as shorter-term data may
indicate.
25%
1994
ƒ Over a shorter seventeen year span, this
chart shows the global Financial sector as a
share of world equity market cap.
77
2 7 Jun e 201 2
78
Technology as a % of world
Technology as a % of world market capitalization
24%
20%
18%
ƒ After the Tech Bubble burst, market share
fell to 11%.
16%
14%
ƒ At 13%, it roughly in line with its 17-year
average, but the trend is certainly up.
12%
10%
8%
6%
1996
1998
2000
2002
2004
2006
2008
2010
Global Tech market cap as % of total w orld
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
Global Strategy
ƒ From a mere 6% in 1994, Tech rose rapidly to
a high of 24% in 2000, making it the largest
sector in the world at the time.
22%
1994
ƒ Technology over the past 17 years has
demonstrated a classic bubble pattern.
Boom…bust…sideways.
2 7 Jun e 201 2
Industrials as a % of world
Industrials as a % of world market capitalization
14%
12%
11%
10%
9%
1996
1998
2000
2002
2004
2006
2008
2010
Global Industrials market cap as % of total w orld
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
Global Strategy
ƒ Industrials fell to a low of 9% of world equity
market cap in 2003, and since then they have
moderately risen to 11% of world market cap.
13%
1994
ƒ In 1994 Industrials were 14% of world equity
market capitalization, and were the third
biggest sector.
79
2 7 Jun e 201 2
80
Energy as a % of world
Energy as a % of world market capitalization
14%
ƒ The global Energy sector’s market cap rose
from 5% in 2000 to 14% in 2008, reflecting the
boom in commodity prices and Emerging
Markets in the past decade.
10%
ƒ Energy is a long-term contrarian sell.
8%
6%
4%
1994
1996
1998
2000
2002
2004
2006
2008
2010
Global Energy market cap as % of total w orld
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
Global Strategy
ƒ Energy’s share of global market cap has
waned since the 2008 peak, but at 11% it
remains above its 17-year average of 8%.
12%
2 7 Jun e 201 2
Staples as a % of world
ƒ During the Tech Bubble, investors rapidly
moved out of defensive sectors causing the
global Consumer Staples sector to drop from
10% to 5% of world market capitalization.
Staples as a % of world market capitalization
11%
9%
ƒ Today, the share of staples (10.8%) is once
again on the rise amid sovereign debt
concerns in Europe and the US.
8%
7%
ƒ Staples are a long-term contrarian sell.
6%
5%
1994
1996
1998
2000
2002
2004
2006
2008
2010
Global Staples market cap as % of total w orld
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
2012
Global Strategy
ƒ In contrast, the Global Financial Crisis caused
Staples to rise to a high of 11% of market
capitalization in 2008-2009.
10%
81
2 7 Jun e 201 2
82
Consumer Discretionary as % of world
Consumer Discretionary as a % of world market
capitalization
14%
13%
12%
ƒ Over the past few years the share of
Consumer Discretionary has risen. The sector
continues to be the mirror-image of the
secular trend in the Energy sector.
11%
10%
9%
8%
1996
1998
2000
2002
2004
2006
2008
2010
Global Cons. Disc. market cap as % of total w orld
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
Global Strategy
ƒ Back in 1994 it was the world’s second largest
sector, accounting for 15% of total equity
market cap. Fourteen years later the share of
Consumer Discretionary stocks fell to a low of
8%, reflecting higher commodity prices and
the end of a credit boom.
15%
1994
ƒ The biggest loser in the past 17 years has
been global Consumer Discretionary.
2 7 Jun e 201 2
Materials as a % of world
Materials as a % of world market capitalization
11%
9%
ƒ Materials are a long-term contrarian sell.
8%
7%
6%
5%
4%
3%
1996
1998
2000
2002
2004
2006
2008
2010
Global Materials market cap as % of total w orld
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
Global Strategy
ƒ If the Materials sector were to reach a new
high in the next 12 months, we would know
that the resources bull market is still on.
10%
1994
ƒ The current share of global Materials stocks
(8%) is close to the recent high of almost 10%
in 2008.
83
2 7 Jun e 201 2
84
Healthcare as a % of world
Healthcare as a % of world market capitalization
14%
12%
ƒ Recently, Healthcare has seen a bounce, and
today it represents 9% of world equity market
capitalization.
11%
10%
9%
8%
7%
6%
1996
1998
2000
2002
2004
2006
2008
2010
Global Healthcare market cap as % of total w orld
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
Global Strategy
ƒ The peak was roughly 13%, reached in 2001.
The sector’s share surged during the Global
Financial Crisis
13%
1994
ƒ The market capitalization of the global
Healthcare sector has been up and down
since 1994.
2 7 Jun e 201 2
Telecom as a % of world
Telecom as a % of world market capitalization
11%
10%
9%
ƒ Contrarians should note in March 2012 the
share of Telecom stocks as a percentage of
world market cap fell to its lowest level of all
time. The share is currently under 5%.
8%
7%
6%
5%
4%
1996
1998
2000
2002
2004
2006
2008
2010
Global Telecom market cap as % of total w orld
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
Global Strategy
ƒ Telecom grew from just over 5% in 1994 to
12% in 2000. Thereafter its market
capitalization tumbled and the sector never
recovered from the bubble burst in the early
2000’s.
12%
1994
ƒ Like Technology, Telecom demonstrated a
classic bubble pattern over the past 17 years.
85
2 7 Jun e 201 2
86
Utilities as a % of world
Utilities as a % of world market capitalization
ƒ Utilities today are near their historical low in
terms of global equity market cap.
ƒ Utilities are the smallest global sector and
have traded between 3-6% of world market
cap since 1994.
7%
6%
5%
4%
3%
1994
1996
1998
2000
2002
2004
2006
2008
2010
Global Utilities market cap as % of total w orld
Monthly data
Source: BofA Merrill Lynch Global Equity Strategy, MSCI, DataStream
Global Strategy
ƒ Like telecom, the utilities sector looks to be
fertile ground for long-term contrarian
investors.
2 7 Jun e 201 2
World GDP 1900 vs 2011
Which economies have grown the most?
Biggest losses
30%
Greatest gains
25%
ƒ Turning to the world economy, this chart
shows the share regional economies
contribute to global GDP in 1900 vs today,
and highlights which regions have expanded
or contracted the most since 1900.
15%
10%
ƒ In contrast, North America, Japan, Asia and
Latin America have seen their economies
grow as a share of the world economy.
5%
0%
UK
EMEA
Europe
North
ex -UK
America
1900
EM Asia
LATAM
Japan
Asia-Pac
ex -Japan
2011
Annual data. Nominal GDP
Source: BofA Merrill Lynch Global Equity Strategy, Dimson, Marsh, and
Staunton, Triumph of the Optimists (1900 data), IMF (2011 data)
Global Strategy
ƒ Europe, the UK and the Russia-dominated
EMEA region have seen the greatest declines
in their contributions to global GDP over the
past 111 years in nominal terms.
20%
87
2 7 Jun e 201 2
88
World population
EM and DM population in millions
ƒ According to the UN, there will be 3.1bn
more people on the planet in 2099, and most
of them will be in EM.
10,000
9,000
8,000
UN forecasts
DM
6,000
5,000
ƒ From 2011-2099, EM populations are expected
to grow by 3,000,000,000, or by 53%. By
contrast DM populations will grow by just
90,000,000, or 8%.
ƒ By 2099 almost 90% of the world will live in
EM.
4,000
3,000
2,000
1,000
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090
Source: BofA Merrill Lynch Global Equity Strategy, UN Population Database,
Haver
ƒ The US is one of the only DM countries
estimated to have population growth. The US
will expand by over 150mn from 2011-2099,
while Germany’s population will contract by
12mn and Japan’s by 35mn.
Global Strategy
EM
7,000
ƒ The world’s population today is 6.9 billion.
2 7 Jun e 201 2
Working population growth to 2036
Working age population growth 2011-2036,
UN estimates
-25%
ƒ By 2036, the UN estimates that working age
population will grow by 35% in India, while
the working age population is set to shrink in
Russia, Korea, and China.
ƒ The US is one of the few developed market
countries whose working-age population is
still growing.
ƒ Note that working age population is a key
input in most models of long-term potential
growth (e.g. Solow’s).
-15%
-5%
5%
15%
25%
35%
45%
55%
Source: BofA Merrill Lynch Global Equity Strategy, UN Population Database,
Haver
Global Strategy
Philippines
Egy pt
Malay sia
Israel
India
Peru
Colombia
Mex ico
Turkey
Morocco
Indonesia
Australia
Ireland
South Africa
Brazil
New Zealand
US
Chile
Norw ay
Canada
UK
Sw eden
France
Thailand
Spain
Hong Kong
Denmark
Singapore
Belgium
China
Greece
Finland
Czech
Sw itzerland
Netherlands
Austria
Hungary
Italy
Portugal
Poland
Korea
Russia
Japan
Germany
ƒ This chart shows UN estimates for the growth
in working age population (15-64) in the 45
constituent countries of the MSCI All-Country
World Index, our global equity market
benchmark.
89
2 7 Jun e 201 2
90
Working age population
Working-age population (millions) today vs 2036
ƒ In 2025, India will overtake China with the
world’s largest working age population.
China
US
Indonesia
Brazil
Russia
Japan
Germany
UK
0
200
400
600
Working Age Population 2036
800
1,000
1,200
Working Age Population 2011
Working-age population defined as age 15-64
Source: BofA Merrill Lynch Global Equity Strategy, UN Population Database,
Haver
Global Strategy
ƒ In the next 25 years, the working age
population in India is set to grow by almost
300 million, more than the current working
age population in the US and Germany
combined.
India
2 7 Jun e 201 2
DM & EM dependency ratios
Number of elderly & children per 100 workingage
85
ƒ EM have historically had a greater proportion
of dependents to working-age citizens than
DM.
ƒ But 2016 will be an inflection point - the
dependency ratio in Developed Markets will
exceed that of Emerging Markets.
IMF Forecasts
DM
EM
65
55
45
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090
Dependency ratio=number of elderly (65+) and children (<15) per 100 working-age
(15-64)
Source: BofA Merrill Lynch Global Equity Strategy, UN Population Database, Haver
Global Strategy
75
91
2 7 Jun e 201 2
92
The world’s tallest building: a history
1899-1908
New York
1908-1909
New York
1909-1913
New York
1913-1930
New York
1930-1931
New York
1931-1970
New York
Park Row
386 feet
Singer Building
612 feet
Met Life
700 feet
Woolworth Building
792 feet
Chrysler Building
1046 feet
Empire State
Building
1250 feet
Global Strategy
1970-1974
1974-1996
1996-2003
2004-2010
2010-present
New York
Chicago
Kuala Lumpur
Taiwan
UAE
World Trade
Center
1386 feet
Sears Tower
1454 feet
Petronas Towers
1483 feet
Taipei 101
1667 feet
Burj Khalifa
2717 feet
Source: BofA Merrill Lynch Global Equity Strategy, Council on Tall Buildings and Urban Habitat, BBC
2 7 Jun e 201 2
Skyscrapers as a “bubble” indicator
The world's tallest buildings and related financial crises
Location
(Year Completed)
Height
Financial Crisis
Park Row
New York (1899)
386 ft.
Panic of 1907
Singer Building
New York (1908)
612 ft.
Panic of 1907
Met Life
New York (1909)
700 ft.
Panic of 1907
Woolworth Building
New York (1913)
792 ft.
Panic of 1907
Chrysler Building
New York (1930)
1046 ft.
Great Depression
Empire State Building
New York (1931)
1250 ft.
Great Depression
World Trade Center
New York (1970)
1386 ft.
1970s Stagflation
Chicago (1974)
1454 ft.
1970s Stagflation
Kuala Lumpur (1996)
1483 ft.
Asian Crisis
Taipei 101
Taiwan (2004)
1667 ft.
Tech Bubble
Burj Khalifa
UAE (2010)
2717 ft.
Great Recession
Sears Tower
Petronas Towers
Source: BofA Merrill Lynch Global Research, Vikram Manasharamani, Boombustology
ƒ The table above highlights the world’s tallest skyscrapers and related financial crises.
ƒ The competition to build the world’s tallest structure can be a warning sign of hubris.
ƒ Some of the tallest buildings under construction today are in India and China.
Global Strategy
Building
93
2 7 Jun e 201 2
94
US gross federal debt since 1941
20
Debt subject to statutory limit
Gross Federal Debt, ($tn)
15
Global Strategy
10
5
0
41 44 47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16
Est
Source: Office of Management and Budget, Doubleline, http://www.whitehouse.gov/omb/budget/Historicals
ƒ We are in a period of rapidly rising US Federal debt. In the nine years between 2008 and 2017, gross
Federal debt will rise by over $11 trillion, more than it did in the 63 years from 1945 to 2008.
ƒ The Curse of the Reserve Currency (the consistent demand from global reserve managers to hold
US$) means Washington won’t act to reduce debt until inflation causes the bond market to blow-up.
2 7 Jun e 201 2
US debt to GDP ratio since 1790
ƒ At 99% of GDP, gross government debt has
only been higher after WWII.
Total US gross central government debt/GDP
ƒ Historically, US debt/GDP has spiked during
times of war and major economic downturns.
125%
Great Depression
(1929-1945)
100%
(1939-1945)
Aftermath of
Reaganomics
75%
50%
ƒ After decreasing for the second half of the
1990s, US debt/GDP has been on the rise
since 2001.
World War I
Civ il War
(1914-1918)
(1861-1865)
25%
Great Recession
(2007-2009)
0%
1790
1810
1830
1850
1870
1890
1910
1930
1950
1970
1990
2010
Total (domestic plus ex ternal) gross federal gov ernment debt/GDP
Source: BofA Merrill Lynch Global Equity Strategy, Reinhart & Rogoff, “From
Financial Crash to Debt Crisis”, Haver, Office of Management and Budget
Global Strategy
ƒ The largest and longest jump was the period
surrounding the Great Depression and WWII.
World War II
95
2 7 Jun e 201 2
96
Post-financial crisis trend growth
10%
8%
Pre-crisis
Post-crisis
6%
Global Strategy
4%
2%
0%
Norw ay
Sw eden
Japan
Thailand
Malay sia
Korea
(1987)
(1991)
(1992)
(1998)
(1998)
(1998)
USA (2008)
Note: Average 5yr economic growth rates before and after crises
Source: BofA Merrill Lynch Global Research, Haver
ƒ Excess debt & financial crisis tends to cause a period of low economic growth.
ƒ Debt, Deleveraging and Deflation ailed Japan for even longer than they did Asia. What’s worrying is
that Europe shares Japan’s demographics (Germany’s working age population is projected to fall
from 54 to 43 million over the next 25 years – see pages 89-90).
ƒ The global investment backdrop of high liquidity and low growth is unlikely to end anytime soon.
2 7 Jun e 201 2
Sovereign debt defaults
External sovereign debt defaults and reschedulings, 1800-2010
Global Strategy
Greece
Mexico
Peru
Russia
Poland
Hungary
Colombia
Chile
Brazil
Spain
Turkey
Philippines
Austria
Indonesia
China
Germany
Morocco
India
Portugal
Netherlands
Japan
South Africa
France
UK
Belgium
Italy
Egypt
Sweden
Share of years in default or rescheduling since
independence or 1800
Total number of external defualts & reschedulings
0
5
10
15
20
25
30
35
40
45
50
Source: BofA Merrill Lynch Global Equity Strategy, Reinhart and Rogoff, This Time Is Different
ƒ Excess debt & financial crisis tends to increase the likelihood of sovereign debt defaults and
reschedulings, which history shows are not uncommon.
ƒ Greece has spent almost half of the past 210 years in default or rescheduling debt.
ƒ But even Germany has spent over 25 years in debt default or rescheduling.
97
2 7 Jun e 201 2
98
Debt default & inflation since 1900
Global Strategy
Source: BofA Merrill Lynch Global Equity Strategy, Reinhart and Rogoff, This Time Is Different
ƒ Excess debt & financial crisis tends to increase the likelihood of inflation, as the chart of inflation &
debt default since 1900 indicates.
Global Strategy
2 7 Jun e 201 2
Link to Definitions
Macro
Click here for definitions of commonly used terms.
99
Global Strategy
2 7 Jun e 201 2
Important Disclosures
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK
RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a
stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There
are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster;
2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least
attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a
stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better
understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation).
Investment rating
Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*
Buy
≥ 10%
≤ 70%
Neutral
≥ 0%
≤ 30%
Underperform
N/A
≥ 20%
* Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.
INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered
to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common
industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent BofA Merrill Lynch Comment referencing the stock.
Due to the nature of strategic analysis, the issuers or securities recommended or discussed in this report are not continuously followed. Accordingly, investors
must regard this report as providing stand-alone analysis and should not expect continuing analysis or additional reports relating to such issuers and/or securities.
BofA Merrill Lynch Research personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall
profitability of Bank of America Corporation, including profits derived from investment banking revenues.
Other Important Disclosures
Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related
investments.
BofA Merrill Lynch Global Research policies relating to conflicts of interest are described at http://www.ml.com/media/43347.pdf.
"BofA Merrill Lynch" includes Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") and its affiliates. Investors should contact their BofA
Merrill Lynch representative or Merrill Lynch Global Wealth Management financial advisor if they have questions concerning this report.
Information relating to Non-US affiliates of BofA Merrill Lynch and Distribution of Affiliate Research Reports:
MLPF&S distributes, or may in the future distribute, research reports of the following non-US affiliates in the US (short name: legal name): Merrill Lynch
(France): Merrill Lynch Capital Markets (France) SAS; Merrill Lynch (Frankfurt): Merrill Lynch International Bank Ltd., Frankfurt Branch; Merrill Lynch (South Africa):
Merrill Lynch South Africa (Pty) Ltd.; Merrill Lynch (Milan): Merrill Lynch International Bank Limited; MLI (UK): Merrill Lynch International; Merrill Lynch (Australia):
Merrill Lynch Equities (Australia) Limited; Merrill Lynch (Hong Kong): Merrill Lynch (Asia Pacific) Limited; Merrill Lynch (Singapore): Merrill Lynch (Singapore) Pte
Ltd.; Merrill Lynch (Canada): Merrill Lynch Canada Inc; Merrill Lynch (Mexico): Merrill Lynch Mexico, SA de CV, Casa de Bolsa; Merrill Lynch (Argentina): Merrill
Lynch Argentina SA; Merrill Lynch (Japan): Merrill Lynch Japan Securities Co., Ltd.; Merrill Lynch (Seoul): Merrill Lynch International Incorporated (Seoul Branch);
Merrill Lynch (Taiwan): Merrill Lynch Securities (Taiwan) Ltd.; DSP Merrill Lynch (India): DSP Merrill Lynch Limited; PT Merrill Lynch (Indonesia): PT Merrill Lynch
Indonesia; Merrill Lynch (Israel): Merrill Lynch Israel Limited; Merrill Lynch (Russia): Merrill Lynch CIS Limited, Moscow; Merrill Lynch (Turkey I.B.): Merrill Lynch
Yatirim Bank A.S.; Merrill Lynch (Turkey Broker): Merrill Lynch Menkul Değerler A.Ş.; Merrill Lynch (Dubai): Merrill Lynch International, Dubai Branch; MLPF&S
(Zurich rep. office): MLPF&S Incorporated Zurich representative office; Merrill Lynch (Spain): Merrill Lynch Capital Markets Espana, S.A.S.V.; Merrill Lynch (Brazil):
Bank of America Merrill Lynch Banco Multiplo S.A.
This research report has been approved for publication and is distributed in the United Kingdom to professional clients and eligible counterparties (as each is
defined in the rules of the Financial Services Authority) by Merrill Lynch International and Banc of America Securities Limited (BASL), which are authorized and
regulated by the Financial Services Authority and has been approved for publication and is distributed in the United Kingdom to retail clients (as defined in the rules
of the Financial Services Authority) by Merrill Lynch International Bank Limited, London Branch, which is authorized by the Central Bank of Ireland and is subject to
limited regulation by the Financial Services Authority – details about the extent of its regulation by the Financial Services Authority are available from it on request;
has been considered and distributed in Japan by Merrill Lynch Japan Securities Co., Ltd., a registered securities dealer under the Financial Instruments and
Exchange Act in Japan; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Limited, which is regulated by the Hong Kong SFC and the Hong Kong Monetary
Authority; is issued and distributed in Taiwan by Merrill Lynch Securities (Taiwan) Ltd.; is issued and distributed in India by DSP Merrill Lynch Limited; and is issued
and distributed in Singapore by Merrill Lynch International Bank Limited (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd. (Company Registration No.’s F
06872E and 198602883D respectively) and Bank of America Singapore Limited (Merchant Bank). Merrill Lynch International Bank Limited (Merchant Bank) and
Merrill Lynch (Singapore) Pte Ltd. are regulated by the Monetary Authority of Singapore. Merrill Lynch Equities (Australia) Limited (ABN 65 006 276 795), AFS
License 235132 provides this report in Australia in accordance with section 911B of the Corporations Act 2001 and neither it nor any of its affiliates involved in
preparing this research report is an Authorised Deposit-Taking Institution under the Banking Act 1959 nor regulated by the Australian Prudential Regulation
Authority. No approval is required for publication or distribution of this report in Brazil. Merrill Lynch (Dubai) is authorized and regulated by the Dubai Financial
Services Authority (DFSA). Research reports prepared and issued by Merrill Lynch (Dubai) are prepared and issued in accordance with the requirements of the
DFSA conduct of business rules.
Merrill Lynch (Frankfurt) distributes this report in Germany. Merrill Lynch (Frankfurt) is regulated by BaFin.
100
Global Strategy
2 7 Jun e 201 2
This research report has been prepared and issued by MLPF&S and/or one or more of its non-US affiliates. MLPF&S is the distributor of this research report in
the US and accepts full responsibility for research reports of its non-US affiliates distributed to MLPF&S clients in the US. Any US person receiving this research
report and wishing to effect any transaction in any security discussed in the report should do so through MLPF&S and not such foreign affiliates.
General Investment Related Disclosures:
This research report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer,
to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for
differences). This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation
and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and
implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.
Any decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the
prospectus or other offering document issued in connection with such offering, and not on this report.
Securities and other financial instruments discussed in this report, or recommended, offered or sold by Merrill Lynch, are not insured by the Federal Deposit
Insurance Corporation and are not deposits or other obligations of any insured depository institution (including, Bank of America, N.A.). Investments in general and,
derivatives, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk. No security, financial instrument or
derivative is suitable for all investors. In some cases, securities and other financial instruments may be difficult to value or sell and reliable information about the
value or risks related to the security or financial instrument may be difficult to obtain. Investors should note that income from such securities and other financial
instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire
principal investment. Past performance is not necessarily a guide to future performance. Levels and basis for taxation may change.
This report may contain a short-term trading idea or recommendation, which highlights a specific near-term catalyst or event impacting the company or the
market that is anticipated to have a short-term price impact on the equity securities of the company. Short-term trading ideas and recommendations are different
from and do not affect a stock's fundamental equity rating, which reflects both a longer term total return expectation and attractiveness for investment relative to
other stocks within its Coverage Cluster. Short-term trading ideas and recommendations may be more or less positive than a stock's fundamental equity rating.
BofA Merrill Lynch is aware that the implementation of the ideas expressed in this report may depend upon an investor's ability to "short" securities or other
financial instruments and that such action may be limited by regulations prohibiting or restricting "shortselling" in many jurisdictions. Investors are urged to seek
advice regarding the applicability of such regulations prior to executing any short idea contained in this report.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report. Investors in
such securities and instruments, including ADRs, effectively assume currency risk.
UK Readers: The protections provided by the U.K. regulatory regime, including the Financial Services Scheme, do not apply in general to business coordinated
by BofA Merrill Lynch entities located outside of the United Kingdom. BofA Merrill Lynch Global Research policies relating to conflicts of interest are described at
http://www.ml.com/media/43347.pdf.
Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related
investments.
MLPF&S or one of its affiliates is a regular issuer of traded financial instruments linked to securities that may have been recommended in this report. MLPF&S or
one of its affiliates may, at any time, hold a trading position (long or short) in the securities and financial instruments discussed in this report.
BofA Merrill Lynch, through business units other than BofA Merrill Lynch Global Research, may have issued and may in the future issue trading ideas or
recommendations that are inconsistent with, and reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect
the different time frames, assumptions, views and analytical methods of the persons who prepared them, and BofA Merrill Lynch is under no obligation to ensure that
such other trading ideas or recommendations are brought to the attention of any recipient of this report.
In the event that the recipient received this report pursuant to a contract between the recipient and MLPF&S for the provision of research services for a separate
fee, and in connection therewith MLPF&S may be deemed to be acting as an investment adviser, such status relates, if at all, solely to the person with whom
MLPF&S has contracted directly and does not extend beyond the delivery of this report (unless otherwise agreed specifically in writing by MLPF&S). MLPF&S is and
continues to act solely as a broker-dealer in connection with the execution of any transactions, including transactions in any securities mentioned in this report.
Copyright and General Information regarding Research Reports:
Copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated. All rights reserved. iQmethod, iQmethod 2.0, iQprofile, iQtoolkit, iQworks are service marks
of Merrill Lynch & Co., Inc. iQanalytics®, iQcustom®, iQdatabase® are registered service marks of Merrill Lynch & Co., Inc. This research report is prepared for the
use of BofA Merrill Lynch clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written
consent of BofA Merrill Lynch. BofA Merrill Lynch Global Research reports are distributed simultaneously to internal and client websites and other portals by BofA
Merrill Lynch and are not publicly-available materials. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your
agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment
recommendations, estimates or price targets) without first obtaining expressed permission from an authorized officer of BofA Merrill Lynch.
Materials prepared by BofA Merrill Lynch Global Research personnel are based on public information. Facts and views presented in this material have not been
reviewed by, and may not reflect information known to, professionals in other business areas of BofA Merrill Lynch, including investment banking personnel. BofA
Merrill Lynch has established information barriers between BofA Merrill Lynch Global Research and certain business groups. As a result, BofA Merrill Lynch does not
disclose certain client relationships with, or compensation received from, such companies in research reports. To the extent this report discusses any legal
proceeding or issues, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Investors should consult their own legal
advisers as to issues of law relating to the subject matter of this report. BofA Merrill Lynch Global Research personnel’s knowledge of legal proceedings in which any
BofA Merrill Lynch entity and/or its directors, officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies
mentioned in this report is based on public information. Facts and views presented in this material that relate to any such proceedings have not been reviewed by,
discussed with, and may not reflect information known to, professionals in other business areas of BofA Merrill Lynch in connection with the legal proceedings or
matters relevant to such proceedings.
This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as
agent of any issuer of any securities. None of MLPF&S, any of its affiliates or their research analysts has any authority whatsoever to make any representation or
warranty on behalf of the issuer(s). BofA Merrill Lynch Global Research policy prohibits research personnel from disclosing a recommendation, investment rating, or
investment thesis for review by an issuer prior to the publication of a research report containing such rating, recommendation or investment thesis.
Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax
advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional.
The information herein (other than disclosure information relating to BofA Merrill Lynch and its affiliates) was obtained from various sources and we do not
guarantee its accuracy. This report may contain links to third-party websites. BofA Merrill Lynch is not responsible for the content of any third-party website or any
linked content contained in a third-party website. Content contained on such third-party websites is not part of this report and is not incorporated by reference into
this report. The inclusion of a link in this report does not imply any endorsement by or any affiliation with BofA Merrill Lynch. Access to any third-party website is at
your own risk, and you should always review the terms and privacy policies at third-party websites before submitting any personal information to them. BofA Merrill
Lynch is not responsible for such terms and privacy policies and expressly disclaims any liability for them.
101
Global Strategy
2 7 Jun e 201 2
Certain outstanding reports may contain discussions and/or investment opinions relating to securities, financial instruments and/or issuers that are no longer
current. Always refer to the most recent research report relating to a company or issuer prior to making an investment decision.
In some cases, a company or issuer may be classified as Restricted or may be Under Review or Extended Review. In each case, investors should consider any
investment opinion relating to such company or issuer (or its security and/or financial instruments) to be suspended or withdrawn and should not rely on the analyses
and investment opinion(s) pertaining to such issuer (or its securities and/or financial instruments) nor should the analyses or opinion(s) be considered a solicitation of
any kind. Sales persons and financial advisors affiliated with MLPF&S or any of its affiliates may not solicit purchases of securities or financial instruments that are
Restricted or Under Review and may only solicit securities under Extended Review in accordance with firm policies.
Neither BofA Merrill Lynch nor any officer or employee of BofA Merrill Lynch accepts any liability whatsoever for any direct, indirect or consequential damages or
losses arising from any use of this report or its contents.
102