The RIC Report
Investment Strategy | Global 10 September 2013
The ongoing search for yield
Research Investment Committee
MLPF&S
The ongoing search for yield Martin Mauro Fixed Income Strategist We expect bond yields to rise further. The good news is that eventually bonds will MLPF&S once again provide an acceptable income stream. The bad news is that getting from here to there could bring losses on existing positions. Getting an acceptable yield Cheryl Rowan Portfolio Strategist still requires taking some price risk. MLPF&S
Investors can find yield among a variety of equities Matthew Trapp, CFA For income seeking investors in the equity market, we favor stocks that are growing Investment Strategist their dividends, high-dividend-paying stocks based outside the US that may be less MLPF&S
affected by rising US bond yields, and selected REITS. The tax-deferred income of Evan Richardson Master Limited Partnerships may also be an appropriate source of higher yield for Fixed Income Strategist investors. MLPF&S
Guest column: REITs offer dividend yield plus growth See Team Page for Full List of Contributors
Investors may benefit from seeking out those REITs most able to grow despite rising rates. In our view, the current growth environment favors REITs with well positioned development, accretive redevelopment opportunities and occupancy upside. This month’s guest column identifies those REIT opportunities favored by our fundamental analyst team.
Fuel efficiency: planes, trains and automobiles New and existing technologies for airplanes, railroads, and autos can help improve fuel efficiency, cutting costs, saving energy, and reducing the environmental impact. We explore advances in technology, and identify companies engaged in creating more fuel efficiency in transportation.
Click the image above to watch the video.
Table of Contents Financial markets recap 2 The ongoing search for yield 3 American Innovation 8 Guest Column 11 RIC asset class views 14 Fixed Income, Econ, Commodities, Currencies: 15 views & risks Global equity markets: views & risks 16 Asset allocation for individual investors 17 Portfolio of the month 23 Stock lists 24 Research portfolios and stock lists 26 Global economic, interest rate, FX forecast 27 summaries Team Page 33
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 30 to 32. Link to Definitions on page 29. 11307036
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Financial markets recap Table 1: Total returns (%) August review As of 31 August 2013 Nearly all major financial markets lost Asset class 2012 1mo 3mo 12mo YTD 3yr2 5yr2 10yr2 Equity Indices (%, US dollar terms) ground during August. Fed tapering S&P 500 16.0 -2.9 0.7 18.7 16.2 18.4 7.3 7.1 concerns and the recent events in the NASDAQ Comp 17.5 -0.8 4.2 18.7 20.0 20.7 9.9 - Middle East were the primary influences. FTSE 100 15.2 -0.5 0.5 13.7 6.7 11.4 3.2 8.1 TOPIX 8.1 -2.1 0.2 23.3 14.0 8.0 1.7 4.5 Despite the decline in August, equities Hang Seng 27.7 -0.4 -1.2 15.6 -1.4 5.6 4.1 - DJ Euro Stoxx 50 20.2 -2.2 0.4 20.7 5.9 6.1 -2.8 5.6 have fared better than almost every MSCI EAFE 17.9 -1.3 0.2 19.2 8.5 9.8 2.1 8.1 other asset class year-to-date. MSCI Emerging Markets 18.6 -1.7 -6.9 0.9 -9.9 1.4 2.2 12.5
Size & Style (%, US dollar terms) Within US markets, the S&P 500 pulled Russell 2000 16.3 -3.2 3.1 26.3 20.0 20.5 8.0 8.8 back by 2.9% last month, lagging S&P 500 Citigroup Growth 14.6 -2.2 0.9 15.2 15.1 19.1 8.4 7.1 Treasuries (-1.3%), IG corporates (-0.7%) S&P 500 Citigroup Value 17.7 -3.6 0.4 22.9 17.3 17.8 6.2 7.0 and cash. Among the size and style S&P 600 Citigroup Growth 14.6 -1.5 5.3 25.8 22.3 23.7 10.1 10.6 buckets, growth indices generally S&P 600 Citigroup Value 18.2 -3.3 2.9 27.7 20.0 21.7 8.9 9.7 outperformed value indices, while large S&P 500 Sectors (%, US dollar terms) caps generally outperformed smaller cap Consumer Discretionary 23.9 -2.8 3.1 29.0 22.5 26.3 15.6 8.7 stocks. Small cap growth (+22.3%) Consumer Staples 10.8 -4.4 -0.8 14.3 14.6 17.6 10.3 9.7 remains in the lead year-to-date. Energy 4.6 -1.7 1.3 14.0 13.4 18.1 3.6 13.7 Financials 28.8 -5.0 -1.5 31.1 19.6 14.8 0.2 -0.3 Health Care 17.9 -3.5 2.8 29.5 24.5 23.2 10.9 7.9 Among US sectors, cyclicals generally lost Industrials 15.3 -2.5 1.8 23.7 17.3 18.8 6.7 7.8 less ground than the defensive sectors, Information Technology 14.8 -0.5 -0.1 5.2 10.2 17.0 8.4 6.8 particularly among the more globally Materials 15.0 0.0 1.1 15.9 8.7 13.1 3.3 8.4 exposed cyclical areas. Materials (0.0%), Telecom Services 18.3 -4.1 -2.1 3.8 6.2 15.7 8.3 8.5 Technology (-0.5%) and Energy (-1.7%) Utilities 1.3 -5.0 0.0 7.0 8.9 11.2 4.3 10.1 outperformed, while Utilities (-5.0%), BofA Merrill Lynch Global Research Bond Indices (%, US dollar terms) Financials (-5.0%) and Staples (-4.4%) 10-Year Treasury 4.2 -1.3 -4.6 -7.5 -6.8 2.3 5.0 5.0 lagged. 2-Year Treasury 0.3 -0.1 0.0 0.1 0.0 0.6 1.8 2.7 TIPS 7.3 -1.5 -4.6 -7.6 -8.7 3.8 4.2 5.4 Within fixed income sectors, August was Municipals* 7.3 -1.6 -5.8 -4.3 -5.5 2.5 4.6 4.8 US Corporate Bonds 10.4 -0.7 -2.7 -1.4 -3.3 4.4 7.2 5.6 a bad month across the board. Since the US High Yield Bonds 15.6 -0.6 -1.4 7.6 2.8 9.6 11.2 8.9 end of April the yield on the 10-year Emerging Market Corporate Bonds 15.8 -1.4 -3.9 0.1 -4.3 5.4 7.6 7.3 Treasury has risen by 1.30 percentage Emerging Market Sovereign Bonds 17.5 -2.3 -5.3 -2.7 -7.6 5.1 7.0 8.6 points. Preferreds 13.6 -2.1 -6.1 -1.9 -3.1 5.2 4.3 2.2
Foreign exchange** (%, in local currencies) In FX markets, the pound appreciated by US dollar 1.5 0.7 -1.0 7.8 6.3 1.0 0.3 -1.9 2.9%, while the euro came down by 1.0%. British pound 3.2 2.9 1.8 -3.0 -2.6 -0.1 -1.9 -1.6 The US dollar is up 6.3% year-to-date. Euro 0.9 -1.0 0.4 8.9 4.1 1.2 -1.7 0.8 Yen -11.0 0.5 2.4 -20.8 -11.4 -5.6 2.9 0.9 Within commodities, Brent crude oil Commodities** (%, US dollar terms) (+5.9%) and Gold (+5.3%) were among the CRB Index -3.4 2.5 3.3 -6.0 -1.3 3.3 -5.8 2.8 top performers. Gold 7.1 5.3 0.5 -17.5 -16.7 3.8 10.9 14.0 WTI Crude Oil -7.1 2.5 17.0 11.6 17.2 14.4 -1.4 13.1
Brent Crude Oil 3.5 5.9 13.6 -0.5 2.6 15.2 0.0 14.5
Alternative Investments† (%, US dollar terms) Hedge Fund - CS Tremont¹ 7.7 0.9 -0.4 8.7 4.6 6.0 3.6 6.6 Hedge Fund - HFRI Fund of Funds¹ 4.8 1.0 0.2 7.5 4.4 3.1 0.1 3.5 Notes: *Not tax adjusted. **BoE calculated effective FX indices. ¹Data is lagged by one month; 23yr, 5yr, and 10yr returns are annualized; CS AUM-weighted, HFRI equal-weighted; †AI data not comparable to other asset classes because of reporting delays, lack of standardized reporting, and survivorship and self selection biases. Crude oil prices are spot USD. Source: S&P, MSCI, Bloomberg, FactSet, BofAML Bond Indices (US Treasury Current 10yr, Current 2yr, Inflation-Linked; Muni Master, US Corp Master, US HY Master II, EM Corp Plus Index; EM External Debt Sovereign Index; US Preferred Stock, Fixed Rate).
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The ongoing search for yield Cheryl Rowan Not so long ago, investors faced depressingly low yields on bonds. Payouts on Portfolio Strategist most Treasury securities did not even keep pace with inflation, and investors fell even further behind after taxes. Many yields have now risen, and we expect them to rise a good bit further. The good news is that eventually bonds should once Martin Mauro again provide an acceptable income stream. The bad news is that getting from Fixed Income Strategist here to there could bring losses on existing bond positions.
For now, generating income requires taking some form of price risk, either through positions in equities, or lower-quality and long-duration bonds. The right mix will vary by risk tolerance and time horizon, but we generally emphasize equities, and lower quality bonds, except in municipals. We would manage interest rate risk on bonds through portfolio laddering.
The bifurcated bond market Bond prices have been tumbling since early in May when the market began to sniff a tapering in Fed asset purchases. The challenge for investors is that the recipe that worked in prior bond bear markets – staying in cash – probably will not work as well this time.
Chart 1 compares Treasury yields now versus the end of April, right before the bond market selloff began. Note the stark contrast between short maturities and the rest of the market. Yields on short maturities have barely budged, while yields on maturities of five years and longer are up by a percentage point or more.
Chart 1: Long-term yields up, cash steady We expect that mix – cash rates staying near zero, while intermediate and long- 1.40 Treasury yield ppt change (today vs term rates rising – to continue. The reason is the two prongs of Fed policy: end of April) 1.20 The Fed plans will keep short term rates near zero for “as least as long as 1.00 the unemployment rate remains above 6.5%,” provided inflation stays low, as it has been. Our economists expect the federal funds rate to stay near zero 0.80 until 2015. If so, rates on money funds should stay near zero as well. In 0.60 contrast, during prior bear bond markets, cash generated positive and 0.40 increasing returns.
0.20 The Fed will probably soon taper and eventually eliminate its asset 0.00 purchases. Those purchases have helped to support asset prices across the risk spectrum. -0.20 1* 3* 6* 1 2 3 5 7 10 15 20 30 More to come Maturity (months* / years) Although yields on longer maturities have risen substantially, we do not think that Source: Bloomberg, BofA Merrill Lynch Global Research the market offers good value yet. US Rates Strategist Priya Misra expects the yield on the 10-year Treasury to rise to 4.0% by the end of next year, up from 2.9% now. That rise in yields would generate a negative 4.0% total return.
Balancing risk and return We recommend portfolio laddering as a way to balance the reward from extending maturity against the risk of price losses with rising yields. Laddering involves diversifying maturities. An example would be to begin with one-, five- and 10-year maturities. As each bond matures, it is replaced with the longest maturity in the ladder. If yields rise over time, the reinvestment will be at higher yields.
Another way to achieve better yields is to move down in quality. We recommend that strategy in the taxable market for risk tolerant investors, but in the muni
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Favor portfolio laddering, risk in the market, we generally favor higher quality. High yield taxable bonds presently have taxable market, quality in the muni a yield spread of about 465bp above Treasuries, and have shorter maturities, so market. have less interest rate risk than the overall market. If the economy improves, even modestly, as we expect, high yield will probably outperform better quality securities. For more conservative investors, we favor shorter maturity investment grade corporate bonds.
Municipal yields have risen even more than Treasury yields, in part because of the credit concerns surrounding Detroit. In our view, the Detroit experience calls for some re-assessment of the status of some general obligation bonds, and the financial health of insurers. We favor higher rated municipal bonds for most investors. Finding income in equities We see better prospects for the stock market than the bond market in the coming months and, as a result, we suggest that investors look for yield among equities.
Traditional high yielding equities vulnerable to rising rates Rising bond yields have income-oriented equity investors now questioning the impact on those same stocks that have generated rising income streams during the recent period of low interest rates. Our US Equity Strategy team has Table 2: Sector dividend yields and dividend growth rates examined the performance of stocks from various market sectors and industries Dividend Dividend Growth (Q2 under a variety of rising interest rate scenarios. Although we are in a period of Sector Yield 2013 vs. Q2 2012) likely rising long-term rates, inflation expectations are falling, making this period Consumer Disc. 1.40% 14.7% most like late 1993-1994, when the yield on the 10-year Treasury rose by 290 Consumer Staples 2.74% 8.4% basis points. Then, the sectors most adversely impacted from rate increases were Energy 2.11% 19.5% Utilities, Consumer Discretionary and Telecom Services. Financials 1.65% 19.7% Health Care 1.82% 11.6% It is no coincidence that Utilities and Telecom underperformed in 1994 and have Industrials 2.15% 11.8% Info Technology 1.66% 66.3% struggled over the last few months as well. They have the highest dividend yields Materials 2.53% 13.8% among the market sectors (see Table 2); rising bond yields lower the relative Telecom Services 4.91% -0.1% attractiveness of income streams from these dividends. US Utilities analyst Brian Utilities 4.11% 4.3% Chin points out that, historically, utility dividend yields and long-term (10-year) US S&P 500 2.05% 17.5% Treasury yields have moved closely in sync. He believes that this is likely to Source: FactSet, Haver, Standard & Poor's, BofAML Global Research continue, but with utility yields rising much more slowly than Treasury yields. Eventually, utility yields should return to their historic average of 80% of the yield on 10-year Treasury notes. Currently, that ratio is about 140%. While continued rising rates leave Utilities vulnerable to further declines, their substantial yield advantage could mitigate some of the damage.
Dividend growth stocks may be an attractive alternative A well-diversified equity portfolio Investors looking for rising income streams but seeking some insulation from designed for dividend growth may offer rising rates may want to consider equities with higher dividend growth rates. As advantages over investing in just higher Table 2 illustrates, market sectors with higher dividend yields, such as Telecom, yielding stocks. Utilities and Consumer Staples, generally have lower rates of dividend growth. This is because payout ratios are usually fairly high already; there is not much room to raise dividends in these slower-growth sectors. Conversely, the remaining market sectors all have double-digit dividend growth rates, but their dividend yields can be substantially lower than those mentioned above.
The advantage to diversifying income sources is the same that comes with any well diversified portfolio – risks that are particular to any one market segment or industry are mitigated by holding securities that are not highly correlated with each other. But investors might also be able to take advantage of rising rates. If
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rates continue to rise because the market believes that the US economy is improving, investors should benefit from owning cyclicals such as Energy, Materials, Industrials and Technology stocks, whose earnings are more closely aligned to shifts in the economy. Our Equity Strategy team found that in 1994, Technology and Health Care had the best relative performance, while over the last 40 years, rising rates were positive for Energy and Technology. An example of a diversified equity portfolio focused on dividend growth may be found on page 23 of the full RIC Report.
Look outside the US for income opportunities Investors can look to non-US stocks for higher yielding equities, where we find a number of high quality stocks with favorable yields and dividend growth potential across a wide array of market sectors. Many of these are within the Canadian and UK markets, where no taxes are withheld from the dividends of US investors. However, most other markets will withhold up to 15% of the dividend (although US investors can usually reclaim this on tax forms), and so there can be a meaningful difference between the gross dividend expected and the net dividend Many non-US stocks offer attractive received. Investors can often gain exposure to a broader sector allocation when dividend yields, but investors should be seeking yield outside the US, since some global sectors, such as Consumer mindful of dividend withholding policies. Discretionary, Financials and Health Care offer higher dividend yields than are available within the US alone. A few examples of non-US, low volatility, higher yielding securities with dividend growth potential may be found on page 25 of the full RIC Report.
REITs offer above average yields plus growth Please see this month’s guest column for Real Estate Investment Trusts (REITs) have relatively high dividend yields plus more details on investing in REITs. dividend growth potential tied to rising rental income. Rising interest rates have put significant downward pressure on REITs, as they cause debt servicing costs to go up, and adversely impact the cost and availability of capital for property developers and buyers. Like other impacted industry groups, however, REITs can benefit from rising rates if their rise indicates an improving economy. Currently, REITs look attractively priced relative to net asset values and offer yields that are favorable compared to either 10-year US Treasury notes or the S&P 500, but as the economic data remain ambiguous, investors will need to be selective. Our fundamental analysts particularly favor REITs in the industrial, office and self storage sub-sectors; for more specifics on investing in REITs, please see this month’s guest column on page 11.
The climate is not so friendly for mortgage REITs While traditional equity REITs invest in and manage properties, mortgage REITs, or mREITs, invest in mortgage-backed securities. As a result, they tend to have substantially higher dividend yields than more traditional REITs, but this business makes them particularly susceptible to changes in interest rates. The potential for 10-year US Treasury rates to move to 4.0% (our forecast for year-end 2014) in a reasonably short period of time would further undermine mortgage-backed securities (MBS) prices and sentiment for mREITs.
Fundamental analyst Ken Bruce writes that book value erosion will be more pronounced for those companies exposed to certain sectors like high premium and longer-term fixed-rate MBS. He also notes that residential MBS are generally more sensitive to rate increases than are commercial mREIT assets, and have suffered greater BV erosion. Mortgages with fixed interest rates for 30 years extend (refinance more slowly) as interest rates rise. This amplifies the impact of higher rates, which can lead to additional BV deterioration. If rising mortgage
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rates cause a slowing of house price gains, this could potentially result in lower returns for mREITs with credit sensitive securities or single family rental businesses.
Mortgage REITs are especially sensitive to Therefore, Ken favors mREITs that have taken steps to minimize their BV changes in interest rates. exposure to interest rates. These may include hybrid mREITs, which own a variety of investments, providing more flexibility to position the portfolio for a rising rate environment. Non-agency MBS are likely to perform relatively well as the economy and housing markets improve – offsetting some of the rate exposure. If interest rates continue to rise, many mREIT investment portfolios are likely to shrink, putting pressure on earnings and dividends. As with traditional REITs, investors should be selective when investing in these stocks.
Master Limited Partnerships (MLPs) offer tax-deferred yield Master Limited Partnerships (MLPs) are pass-through entities, mostly in energy- related businesses, structured as publicly traded partnerships that pay no corporate taxes, but instead taxes are paid at the individual unit-holder level. A portion of the tax distribution of an MLP is typically tax deferred at 50-100%. As such, investors receive a Schedule K-1 rather than a 1099 tax reporting form, and there may be complications to owning MLPs in tax-advantaged accounts. To retain their tax advantaged status, MLPs are required to pay out most of current income to investors, and therefore tend to have relatively high dividend yields. Currently, MLPs (based on the Alerian MLP Index) have a higher dividend yield than REITs, telecom, and utilities stocks (Chart 2). Like any higher yield investment, MLPs are impacted by rising interest rates, but may be less affected than fixed income because they generally increase payouts over time.
Chart 2:Dividend yields for MLPs, REITs, telecom, and utilities 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Alerian MLP Index S&P 500 Utilities S&P 500 Telecom FTSE NAREIT All Equity REITs Source: Bloomberg, BofA Merrill Lynch Global Research
Historically, interest rate fluctuations and the level of interest rates have been considered important drivers of MLP performance and valuation. Rising interest rates may put pressure on MLPs, as lower-risk alternatives such as Treasury bonds become more attractive. Given the higher business and equity risk of an MLP, investors generally require a higher yield to compensate for that risk. A higher yield also generally implies a higher cost of capital, and therefore could impact a particular MLP’s ability to access the capital markets and fund its capital budget. In addition, a higher interest rate environment could adversely impact
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cash flow due to higher interest expense on floating rate debt. However, we note the majority of debt for the MLP sector is fixed long-term.
Over the long term, MLPs are not that Historically, during periods of rising interest rates, MLPs initially underperform. sensitive to moderate increases in However, the relative change in the Alerian MLP Index (AMZ) has generally not interest rates. MLPs that increase their been negatively impacted in the long-term by fluctuations in the US 10-year payouts can generally withstand Treasury rate. Therefore, we do not see material long-term impacts to MLPs from pressures from higher bond yields. moderate rate increases.
One metric for examining MLP valuations is the yield spread between the AMZ and 10-year US Treasury bonds. The yield spread has been compressing recently, but we do not view this as overly meaningful, given a historically low correlation between the 10-year Treasury note and MLPs. In our view, MLP valuations are more highly correlated to BBB/BB corporate credit spreads. Recently, we have seen MLPs close the gap with higher-yielding corporate bonds. A list of MLPs currently favored by our analysts may be found in the following report: Master Limited Partnerships.
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American Innovation Matthew Trapp Fuel efficiency: Planes, Trains and Automobiles Investment Strategist The average US household spent just over $2,900 on gasoline in 2012, which was just under 4% of pre-tax income, according to the U.S. Energy Information Administration. This was the second-highest percentage of household income spent on gas, after 2008, since the early 1980s. Transportation accounts for 28% of total energy usage in the United States and it accounts for about 70% of the consumption of petroleum. In addition, transportation accounts for almost 28% of the greenhouse emissions in the US. Improving fuel efficiency in the transportation sector has been a focus of the government and manufacturers due to its large impact on overall energy demand. New and existing technologies for airplanes, railroads, and autos can help improve fuel efficiency, cutting costs, A few months ago we introduced saving energy, and reducing the environmental impact. evidence, initially published by our US Equity Strategy team, that American Fuel cost is 29% of air carrier operating expense companies across a wide variety of Fuel costs are a large expense for US airlines, and increasing fuel efficiency can industries are opening paths toward make a big difference in their bottom line. US commercial carriers burned over 15 higher levels of efficiency and solving billion gallons of fuel in 2012 at a cost of $43 billion, which represented over 29% problems with their skill in innovation. of their operating expense. There are several different ways to make airplanes more fuel efficient, including changing aircraft design by using lightweight This month, we continue an ongoing composite structures, like on the Boeing 787, or by reducing drag by using a series focusing on industries that are blended wind and body design, like the NASA-Boeing X-48 prototype. Another is particularly innovative – and highlighting changing the jet engine design. United Technologies’ Pratt & Whitney division stocks that play leading roles within and CFM International (CFM), which is a joint venture between General Electric those industries. and Snecma, each have developed different technologies that represent the next generation of commercial jet engines.
Pratt & Whitney has developed the PurePower1000G geared turbofan (GTF). In a traditional engine, the engine fan is connected directly to the rest of the engine, so everything turns at the same speed. However, a fan’s optimal speed is slower than that of the compressor and turbine, causing inefficiencies. The GTF operates the fan independent of the compressor and turbine using a gearbox, which allows the fan, compressor, and turbine to each operate at the most efficient speed individually. The result is a 15% reduction in fuel burn, a 50-75% cut in noise levels, and it cuts carbon emissions by 3,000 tons per aircraft per year.
CFM uses advanced materials in its new LEAP engine, which allows for higher internal temperatures and lower weight, making the engine more fuel efficient. The LEAP engines use next-generation carbon fiber fan blades that are woven in three dimensions rather than the traditional method using multiple layers of composites. The result is a fan blade with better strength, durability and aero efficiency at a lighter weight than conventional metal blades. In addition, the engine uses ceramic matrix composites developed by GE that can withstand temperatures that are several hundred degrees hotter than current metal alloys at one-third of the weight. These advances should deliver a 15% fuel efficiency improvement compared to the prior generation engine.
Railroads improved their fuel efficiency by 99% since 1980 Railroads have been improving their fuel efficiency over the last few decades, and in 2012 alone, US freight railroads consumed 3.6 billion fewer gallons than if their fuel efficiency had remained constant since 1980. In fact, US freight trains are now able to move one ton of freight 469 miles on one gallon of fuel compared to 235 miles in 1980, a 99% improvement. There are a number of reasons for the
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improvement, including improved freight car design, computer software systems that calculate the most fuel efficient speed over a given route, and more fuel efficient locomotive engines.
GE’s current Evolution Series locomotive is the most fuel efficient engine in North America and uses 11% less fuel than the existing fleet. In 2015, the EPA’s Tier 4 locomotive emission standard goes into effect and will require new engines to reduce nitrogen oxides (NOx) by 76% and lower particulate emissions by 70% compared to engines introduced in 2005. One solution to meet this standard involves the use of an exhaust additive that would require railroads to build a network of fueling stations. GE has introduced a prototype that does not require the additives, but still meets the Tier 4 emission reductions. This approach manages the internal temperature of the engine to allow it to get hot enough to burn off the NOx, but not too hot to significantly increase the amount of carbon dioxide produced.
The car’s road to fuel efficiency Please see the Global Auto team’s report In the US, cars and light trucks account for 59% of energy used by the Who Makes the Car for an in-depth look transportation sector and as noted at the beginning of the report, fuel expense is at fuel efficiency. a meaningful item in a typical household budget.
The road to more fuel efficient and environmentally friendly cars may involve a long transition because the preservation of the environment will likely remain a secondary concern for consumers. Instead, individuals are more likely to alter their consumption patterns based on gas prices and threats to energy security.
The first stage of the transition will include leveraging technology to improve the efficiency of internal combustion engines and making vehicles lighter. Gasoline direct injection (GDI) and turbocharging are two technologies that allow for more efficient use of fuel, reducing the need for large engines to provide vehicle performance. Gasoline direct injection and GDI directly inserts highly pressurized fuel into the combustion chamber of each turbochargers are two technologies that cylinder. This allows for a leaner and more powerful usage of the fuel, reducing can improve fuel efficiency in cars. the need for larger engines, which makes the car more fuel efficient. Auto parts manufacturer Delphi Automotive expects the global market to grow at a 20% CAGR from just under $1 billion in 2010 to approximately $5.5 billion in 2020. Turbochargers use a vehicle’s exhaust to drive an internal turbine, which forces compressed air into the engine, providing enhanced engine combustion and power. This allows for smaller engines without compromising on power and improving fuel economy. Turbochargers offer fuel savings of 15-20% and up to a 20% reduction in CO2. BorgWarner, a manufacturer of turbochargers, predicts a 6% CAGR globally from 2012-2017 for diesel turbochargers and an 18% CAGR for gasoline turbochargers. Making a vehicle lighter can also improve its fuel efficiency. A study by engine and vehicle engineering expert Ricardo Inc. showed that a 100 pound reduction in the weight of a car would improve the fuel efficiency by about 1.5%. The best opportunity to make a vehicle lighter is in the body and structural system. One technology to make lighter and stronger cars is called hydroforming, which was developed by Magna International, a diversified automotive supplier. Hydroforming is a process by which metal tubes are extruded into a desired shape by injecting water at very high pressure (typically 30,000-60,000 PSI) into both ends. This process can be used to create auto frames, subframes, or front- end structures. The benefits of this process include up to 20% lighter weight,
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increased strength and stiffness, up to 40% reduced parts because the process can form complex shapes in a single piece, and reduced tooling investment because the process eliminates welding. Long transition to electric cars The next stage of the transition to better fuel-efficiency includes hybrid-electric (HEV) and electric vehicles (EV). However, our Global Auto Team believes it will be at least another five years before advanced battery technology has improved to make it affordable for mainstream use in automobiles. Our Global Auto Team believes it will be Lithium-ion batteries are becoming the preferred technology to power electric at least another five years before vehicles because they have longer life, greater reliability, and higher energy advanced battery technology has density, which allows the battery pack to be lighter and smaller. However, OEMs improved to make it affordable for have indicated that battery costs will need to decline by 33-50% before mainstream use in automobiles. meaningful penetration rates begin, which could take five years. One way to reduce battery costs is to increase the manufacturing yield, as sub-par yields can significantly increase the costs to manufacturers. Increasing the level of automation in the battery manufacturing process is one step that could help improve yields.
Semiconductors will play an increased role as the auto industry moves more toward hybrid and full electric vehicles. The semiconductor chips are the brains that allow the advanced electronic components, like the batteries and the electric motor, to communicate effectively. These chips will account for a significant amount of the incremental cost of an HEV or EV. In addition, semiconductors are gaining increasing content in conventional vehicles, which should add to the growth opportunities in this space. Companies involved Below we identify companies followed by BofA Merrill Lynch Global Research that play a role in fuel efficient technology in aircraft and locomotive engines, and automobiles. United Technologies and General Electric are leading manufacturers of jet engines, with GE also active in building locomotive engines. BorgWarner and Honeywell are industry leaders in turbochargers, while Delphi is a provider of GDI technology. Magna, American Axle, and Dana are providers of light-weight auto parts and components. NXP Semiconductors, ST Microelectronics, and TE Connectivity are leading companies that provide semiconductors and connectors to the auto industry. Tesla is a manufacturer of electronic vehicles.
Table 3: Fuel efficiency related stocks in the BofA Merrill Lynch universe Ticker Company Industry BofAML Rating Price as of 6 Sept. Market Cap ($Mil) R&D as % of Sales AXL American Axle Auto Parts C-1-9 19.90 1,492 4.2 BWA BorgWarner Inc. Auto Parts C-1-7 97.77 11,192 3.7 DAN Dana Holding Corporation Auto Parts C-1-7 21.87 3,211 0.8 DLPH Delphi Automotive PLC Auto Parts C-1-7 56.50 17,526 7.7 GE General Electric Company Industrials/Multi-Industry B-1-7 23.16 235,856 3.1 HON Honeywell International Inc. Industrials/Multi-Industry B-1-7 81.66 64,090 4.9 MGA Magna International Inc. Auto Parts C-1-7 80.68 18,404 -- NXPI NXP Semiconductors NV Semiconductors C-1-9 38.08 9,587 14.4 STM STMicroelectronics NV Semiconductors B-3-7 8.46 7,704 28.4 TEL TE Connectivity Ltd. Connectors, Passive Components & Distribution C-2-7 50.22 20,768 4.5 TSLA Tesla Motors Autos/Car Manufacturers C-3-9 166.97 20,278 66.3 UTX United Technologies Corp Aerospace B-1-7 103.23 94,714 4.1 This list is not a recommended list either individually or as a group of stocks. Investors should consider the fundamentals of the companies and their own individual circumstances / objectives before making any investment decisions. Source: BofA Merrill Lynch Global Research
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The RIC Report 10 September 2013
Guest Column REITs - yield plus growth Jeffrey Spector The impact on REITs of rising interest rates REITs analyst Real Estate Investment Trusts (REITs) have been popular investment choices among income-seeking investors because of their high relative dividend yields and dividend growth potential tied to rising rental income. This has been even more apparent during the past few years when returns on cash and traditional fixed income investments have been below normalized levels. However, rising interest rates, spurred by talk of the Fed tapering its monthly bond purchases, have put significant downward pressure on REITs (Chart 3) – leaving many investors to question whether this is a buying opportunity or a signal to head for the sidelines. Cap rate = NOI / Purchase price or Value When interest rates rise, real estate capitalization rates (“cap” rates) usually rise too. The cap rate is a gauge of real estate investment conditions and can be thought of as the investor’s required return. Cap rates are equal to the investment’s net operating income (NOI) divided by its value. The inverse relationship between cap rates and asset values implies that as cap rates rise, property values will generally fall, if the NOI cannot increase enough to offset the raise in cap rates. If rates are rising because the economy is improving, then in most cases the NOI of the property increases as demand for space increases. With improving market conditions, REITs are able to increase occupancy and push rents and, as a result, increase NOI.
Chart 3: REIT total returns and the 10 year Treasury have an inverse relationship 14.0 10.0 9.0 12.0 8.0 10.0 7.0 8.0 6.0 5.0 6.0 4.0 4.0 3.0 2.0 2.0 1.0 0.0 0.0
FTSE US NAREIT All Equity REITs Total Return Index (lhs) 10yr Treasury yield (rhs)
Source: Bloomberg, FTSE, BofA Merrill Lynch Global Research
REITs offer above average yields plus growth opportunities The fear of continued rising debt servicing costs and rising bond yields that would make REIT dividend yields less attractive have caused 10+% declines in many REIT stocks and ETFs. REITs are not the lone target of investor wrath; there has been almost indiscriminate selling of yield-oriented securities. But in our view, investors should not be so short-sighted when it comes to REITs. REITs offer not just above average dividend yields (currently averaging 3.9%), but also growth opportunities. If rising interest rates signal an improving economy, REITs may
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The RIC Report 10 September 2013
underperform the broader market but could still deliver positive returns on better than expected earnings. We expect global capital to continue to invest in assets in major US cities, not only for the currency exposure, but also given these assets offer higher NOI growth prospects in an improving economy and longer-term retention of asset value vs. those in secondary markets.
The current growth environment favors Just as with any industry group, not all REITs are alike, and investors may benefit REITs with well positioned development, from seeking out those REITs most able to grow despite rising rates. We maintain accretive redevelopment opportunities that the current growth environment favors REITs with well positioned and occupancy upside. development, accretive redevelopment opportunities and occupancy upside. We continue to see Class A property assets better insulated from higher rates with stronger rent growth prospects. We also believe that cap rates will stay steadiest in short-lease sectors, such as lodging, apartments and self storage. During periods of rising rates and economic growth, rents can be reset more quickly, and higher moving velocity is a source of demand. Cap rates should also remain well behaved in selected longer lease sectors of malls, outlets, well located Table 4: REIT sector weightings warehouses and central business district office space. Sector weightings within the REIT sector: Overweight: Industrial, Office, Self Storage We favor industrial, office and self storage sub-sectors Equalweight: Retail, Multi / Single family, Specialty Underweight: Health Care Economic data are key to forecasting the trends in various real estate markets Source: BofA Merrill Lynch Global Research and influence our decisions related to sub-sectors within REITs. Our current view is expressed in Table 4. For a list of individual REIT recommendations, please see the most recent report: U.S. REITs Weekly.
A slow and steady economic recovery favors the office and industrial REITs segment. Within office, we expect occupancy growth, accelerating leasing spreads, and same store NOI and earnings growth as catalysts for the stocks. A slow and steady economic recovery Fundamentals will likely be differentiated across markets; here we favor higher favors the office and industrial REITs quality asset portfolios within the strongest markets of California, Texas, the segment. Southeast and New York City. Industrial REITs leasing demand is likely to benefit from a gradually improving housing market, supply chain redesign, growth of e- commerce and generally improving economic conditions. We view improving rent growth and accelerating positive leasing spreads as catalysts for the stocks, especially since nearly 20% of rents expire each year. Development pipelines have become even more important drivers of growth, while new supply remains the key risk here.
Self storage remains an attractive sector based on our expectation for further market share gains, accretive acquisitions and increased demand from a stronger housing market in 2H 2013. Occupancy is improving; we expect to see fewer concessions and, in some markets, rental rate pricing power despite the seasonal slowdown in demand in the second half of the year.
We favor apartment REITs in the multi/single family sector because the recent We believe that cap rates will stay sharp rise in home prices has created affordability issues, particularly for younger steadiest in short-lease sectors, such as adults, and is one reason that we expect a reacceleration in rents next year if job lodging, apartments and self storage. creation improves. We prefer the lower quality properties, as rent growth is likely to exceed that of the class A properties, which are directly competing with new supply deliveries. Rent growth appears to be strongest in Seattle, San Francisco, and Texas.
We are building in a degree of caution in our view of retail REITs. In the face of rising rates, we expect transaction volume to slow. Management teams have expressed concerns of either tenant sales moderating for back-to-school and holiday or slowing same store NOI growth through year end 2013. We anticipate
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The RIC Report 10 September 2013
that consumer spending will moderate, with the most pressure at the lower end of spending. Within this sub-sector, we believe that high quality shopping mall metrics will remain robust even in a slowing sales environment, given the lower than usual occupancy costs to sales. Strip centers have experienced better than expected occupancy gains, most likely due to historically low levels of new development. Redevelopment projects have emerged as one of the more important growth levers for retail REITs.
REITs are trading at valuations below Although the investment climate is likely to remain volatile, we continue to believe NAVs and at attractive dividend yields that pullbacks in REITs present buying opportunities. REITs are trading at relative to the S&P 500 or 10-year US valuations below net asset values (see Chart 4) and at attractive dividend yields Treasury bonds. relative to the S&P 500 or 10-year US Treasury bonds. But with the latest economic data ambiguous on housing and employment, and higher interest rates on the horizon, investors will need to be selective.
Chart 4: Total REITs – historical price to NAV
140%
130% 130%
120% 120%
110% 110%
100% 100%
90% 90%
80% 80%
70% 70% Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Source: FactSet, BofA Merrill Lynch Global Research
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The RIC Report 10 September 2013
RIC asset class views Table 5: Research Investment Committee asset class views RIC view Asset Class Comments (+ / = / –) Equity Markets US Equities + Market has pulled back, cash levels are high, and we expect revenues to improve. Expect leadership from growth cyclicals Consumer Discretionary - Lowered to underweight by Equity Strategy. Valuations stretched, sector over-owned, consumers likely to save vs. spend Consumer Staples = Defensive with good dividend yields and global reach but many valuations are stretched; look for unexploited stocks Energy + Underweighted and unloved by PMs; should benefit from higher oil prices as long as they do not spike too high Financials = Benefits from US housing recovery, but hurt by higher bond yields; no help from yield curve spread; buy higher quality Healthcare = Obamacare, looming govt. cutbacks keep us neutral; pharmaceuticals good income source, biotechs have M&A appeal Industrials + Benefits from cyclical recovery with many high quality stocks. US manufacturing well positioned Info Technology + Has lagged but gaining ground in Q3; operating margins and balance sheets are strong; expect more cash return strategies Materials = Helped by gold/oil price increases, but still cautious as inflation expected to remain benign and China still a concern Telecom - Good dividend yields but not much room for div. growth; rising rates starting to weigh on performance Utilities - Dividend yields still well above Treasuries, but rising rates narrows that gap; rising rates starting to weigh on performance
Growth + Slow earnings growth recovery, low inflation favor growth stocks; has lower valuation and better div. growth than value Value = Indices exposed to Financials and other interest-sensitive sectors; focus on opportunities in Energy, Industrials, Tech
Small cap = Valuations no longer attractive; see balanced upside/downside potential; prefer larger cap, higher quality, global cyclicals Large cap + Beneficiaries of fund flows into US equities/ETFs; look for cyclical growth and div. growers to outperform
Europe (ex. UK) = Recovery continuing but fragile; ECB likely to still provide liquidity as needed; favor banks, pharma, energy United Kingdom = PMI highest in 15 years while unemployment rate falling, so rate expectations rising Japan + BoJ focus on stimulating growth, ending deflation, fiscal discipline; like autos, trading, telecoms, non-bank financials Asia Pac (ex. Japan) - Improving US current account deficit and strong dollar bode poorly for Asian markets; remain cautious on Australia Emerging Markets = Rising US bond yields, weak currencies are negs; subject to trading rallies though – favor Korea and Russia over LatAm
Fixed income markets Treasuries - Income is low, and yields are likely to rise. Agencies / MBS - Vulnerable to a tapering in Fed purchases, benefiting from improved GSE profitability, but yields are too low. TIPS = Inflation protection desirable, even though yields are low. US IG Corporates + Preferable to Treasuries for conservative investors. We favor lower quality, and intermediate maturities. US HY Corporates + Yield spreads have widened, duration is lower than in other sectors. Preferred securities - Duration risk too high for sector as a whole. Non-US DM Sovereigns - Yields are low and currency translation should work against $ based investors. EM $ Sovereigns = Risks from rising US Treasury yields and slowing growth in EM nations. EM local crncy Sovereigns - Same risks as for $ denominated, plus near-term risk of weaker currencies.
Gold = Near-term range of $1,000/oz and $1,500/oz. Year-end price target of $103/bbl for Brent crude, although supply disruptions could send price to $120/bbl. But downward Oil - pressures longer term due to increased supply. US dollar + Greenback should strengthen against most developed and EM countries. Source: BofA Merrill Lynch Research Investment Committee
Notes to RIC views Ratings designations are as follows: (+) favorable view; (=) neutral view; (-) unfavorable view. Ratings reflect the Research Investment Committee’s view for an investment time horizon of 12-18 months. Typically, the RIC view will agree with regional/product strategists, but at times there may a difference of opinion based on investor suitability or time frame.
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The RIC Report 10 September 2013
Fixed Income, Econ, Commodities, Currencies: views & risks Table 6: Regional Equity Strategist views & associated risks Views Risks
Global Economics (Ethan Harris, Alberto Ades) The Euro area is expanding again, but growth will likely remain tepid. Downside risks: US fiscal tightening, slow progress on structural and fiscal reforms in Europe, and a soft recovery in China. The ECB stands ready to back Euro area countries with its OMT program if any countries Upside risks: US housing market rebound, stronger US labor market recovery. request help and sign an MoU. US growth will likely strengthen in the fourth quarter. We expect the Federal Reserve to announce QE tapering in December. Global Rates (Priya Misra, Ralf Preusser, John Wraith) US: We maintain our sell on rallies bias. Improving data, a changing Fed reaction function and US: US: Continued selling by emerging market central banks and a further concerns about a slowdown in demand for USTs from the traditional investor base is likely to widening in mortgages could add to the technical factors pushing rates higher. On keep rates at the higher end of the range. other hand, an unexpected debt ceiling debacle in the fall could be a risk off catalyst, moving Treasury yields lower. Europe: There is a growing contradiction in the EUR rates market - it prices a firming rate Europe: Liquidity drainage at a rapid pace without action from the ECB might profile that seems inconsistent with the inflation swaps market, which "expects" inflation to remain maintain upward pressure on front-end rates. Alternatively, an ECB rate cut, coupled below the ECB's desired range for some years. This suggests that bunds in the 3-5y area have with a new LTRO operation might deliver an aggressive rally. sold off too far. UK: Front-end rates look similarly oversold, with the market defying the BoE's forward UK: Forward guidance might be further undermined if the unemployment numbers guidance. Improved pension fund solvency should also reinforce a tendency for longer-term UK prove more sensitive to the encouraging survey evidence than we expect. rates to rally into year-end due to seasonal pension fund "de-risking". Global Commodities (Francisco Blanch) Commodity demand should find support on a modest improvement in global economic growth An escalation of tensions in Syria is intensifying concerns over security of oil through 2H, but we remain concerned by the lack of growth momentum in EMs. supply, and could lead to a short-lived Brent crude oil price swing of as much as $50/bbl. Brent crude oil markets have tightened rapidly on widespread oil supply disruptions across the A further slowdown in EM growth is the biggest risk to commodity markets. MENA region. Should disruptions persist, we see prices rising to $120/bbl. Gold prices have rebounded on an apparent cooling of US economic activity. Yet, with rising rates and a stronger dollar, gold will likely underperform while platinum outperforms. Global Credit (Hans Mikkelsen) The macro backdrop for corporate credit in 2013 remains positive. We remain overweight high The biggest risk to US IG is the possibility of wider credit spreads following grade and high yield corporate bond spreads and favor US HY and European IG over US IG. massive fund outflows, should interest rates again rise rapidly. Some short term macro risks – including the US fiscal tightening and Europe - have faded, HY has capacity to offset most initial interest rate increases now, but that would while others – such as China – have increased. Rising interest rates, and the circumstances change if rates were to rise by more than a nominal amount. leading to that, are typically positive for credit spreads. Thus, unless interest rates increase too rapidly, credit spreads should tighten. High beta sectors (ie, Financials and Cyclicals) should outperform as they have more spread We look for companies to add leverage to the detriment of bondholders – cushion to offset higher interest rates. We prefer lower quality positioning in HY. especially in the higher quality industrial segment. Municipals (Municipal Strategy Group) Tax revenues are improving. Housing recovery will be meaningful to local govts that have been Puerto Rico has a $2bn budget gap expected for FY2013, which ended 30 June. stressed Gov. Padilla signed a FY2014 budget that includes several tax measures. Recovery in the Commonwealth’s economy remains a focus. Outflows from muni mutual funds continue to persist which has resulted in a dramatic The City of Detroit, with $8.4bn total muni debt outstanding, filed for bankruptcy steepening on the long end of the muni curve and kept muni ratios to Treasuries elevated. protection under Chapter 9, which has added stress to the muni market but is largely contained and viewed as idiosyncratic. YT2013, muni bonds in monetary default represent 0.061% of total munis outstanding. YTD, Possible changes to the tax exempt status of muni bonds. there have been 7 Chapter 9 bankruptcy filings. Global FX (David Woo, Alberto Ades) Look for the USD to strengthen against G10 on worries around China, Europe and Fed A surprise resolution to the European crisis provides further upside risk to our view, tapering, with further downside to risky and commodity currencies. while a country exit would cause the euro to fall further. Continue to expect EUR-USD lower, with an end-13 1.25 target; and we maintain our USD- USD-JPY has upside risk from participation in yen selling from domestic investors JPY target to 105 for 2013 YE. in Japan or positive macro shocks in the US that would push up growth and yields. EMFX appreciation could pick up after the payrolls number as the market reduces its tapering Better US data could increase expectations of Fed tapering, sending EMFX lower. expectations. Recommend buying MXN and BRL and look to sell INR, TRY, and SGD. Source: : BofA Merrill Lynch Research Investment Committee
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The RIC Report 10 September 2013
Global equity markets: views & risks Table 7: Regional Equity Strategist views & associated risks Views Risks
Global Equities (Michael Hartnett) The MSCI All-Country World Index year-end target for 2013 is 400. Downside risks: crash in bonds, relapse in US real estate, or EM/Asia contagion into China and/or Developed Markets. The breakout of equities from their long-run trading range, the rise in Treasury yields and the Upside risks: policy stimulus works to create much stronger than expected significant decline in gold prices suggest investors are discounting the beginning of a stronger growth in 2013. economic recovery. Bank stocks, Europe and Japan remain our favored picks to play the ongoing Great Rotation. United States (Savita Subramanian) 2013 year-end S&P 500 target is 1750, which is 16x our 2013 EPS of $109 and 15x our 2014 No bottom in China growth, re-emergence of tail risks from Europe, global EPS of $115 recession. We recommend taking advantage of attractive valuations and the beginnings of a rising rate cycle via four rotations: 1) dividend growth over high dividend yield; 2) cyclical over secular growth; 3) global diversification over US/domestic plays; and 4) stable earnings over low beta. Sector preferences: OW Tech, Industrials & Energy, UW Utilities, Telecommunication Services & Consumer Discretionary. Europe (John Bilton) Europe is transitioning from being a passenger in the global recovery, to early signs of a self- ECB’s Asset Quality Review is a headwind for Eurozone Banks and holding sustaining bull market. Healing consumer and improving manufacturing sentiment in Europe investors to form a positive outlook for EU equities. combined with improving credit sentiment confirms a recovery in the economic growth in 2H13. A modest earnings growth and a nominal re-rating will allow Eurostoxx 50 to reach 3100 on 12m EU austerity measures begin to dominate ECB’s reflationary bias. view, DAX to 9200 and FTSE 100 to 7100. Offering 10-15% total return. Themes: 1) Prefer stocks exposed to domestic EU economies as they offer value and improving earnings trends 2) We are mindful that a tactical rally in GEM equities is likely this year and our tactical model has signaled 'buy on EU miners'. We continue to avoid expensive consumer oriented GEM exposed stocks. Japan (Naoki Kamiyama) Target level of TOPIX is 1,350 (next 12 months), which is 15.5x our FY03/15 EPS of ¥87. Our US employment trend and Fed's communication to the market. target and EPS estimate are based on currency forecast of 105. The tax reform including consumption tax rate hike and other related changes is likely to be the Further slowdown in China. next catalyst. Positive for autos, trading house, telecom, and financials (ex. Banks); negative for bank, materials, and real estate under the current slow momentum. Asia-Pac ex-Japan (Ajay Kapur) Tactically, we are positive due to attractive valuations and negative sentiment. However, the Downside risks: 1) two-thirds of major Asian markets seem to have high longer term outlook is more uncertain given substantial cumulative fixed-asset capital investments, financial vulnerability, 2) an earlier than expected Fed tightening, 3) sharp rising leverage, lower margins, improving US CA deficit and a strong USD. appreciation in the USD, and 4) Stronger than expected Chinese currency. Singapore, India and Malaysia score poorly on our measure of financial vulnerability. China, Upside risks: 1) US inflation subdued, favoring easy monetary policy in the Hong Kong and Indonesia are also concerning. Korea and Taiwan look less vulnerable, while US and Europe. 2) The Great Rotation from bonds to stocks goes parabolic, Thailand is in the middle benefiting Asian equities. Overweight Korea, China, and Taiwan; underweight Indonesia, the Philippines, Malaysia and Thailand. Overweight semiconductors, banks, food/beverage and household products; underweight utilities, diversified financials, software and tech hardware. Emerging Markets (Michael Hartnett) We continue to view cheap and unloved Emerging Market equities as one of the best near-term EM debt crash, social unrest, signs of rising inflation. contrarian trading opportunities. EM continues to trade at a steep discount to DM. The relative 12 month forward P/E is 2.5 A further unwind in EM debt positions could force EM equity investors to sell standard deviations below its 5 year average. their beloved consumer stocks, which have been big winners in recent years. Our longer-term outlook on EM remains skewed to the bear case. The combination of weaker China growth and a stronger dollar are not the best combination for EM strength. Source: BofA Merrill Lynch Research Investment Committee
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The RIC Report 10 September 2013
Asset allocation for individual investors The tables below represent asset allocation recommendations by investor profile (Conservative – Aggressive). Strategic allocations are long-term, 20-30 year benchmarks developed by Merrill Lynch Global Wealth Management. Core allocations have a 12-18 month horizon, and are provided by the BofA Merrill Lynch Global Research Investment Committee. Asset allocation for US clients Tier 0 (highest liquidity): Table 8: Strategic and core allocations without alternative assets (Tier 0 liquidity) Highest liquidity needs with none of the Moderately Moderately portfolio invested in less liquid Conservative conservative Moderate aggressive Aggressive alternative asset categories. Tier 0 Strat. Core Strat. Core Strat. Core Strat. Core Strat. Core clients can also reference the Tier 1 Traditional Assets strategic allocations if fulfilling the Stocks 20% 24% 40% 45% 60% 68% 70% 80% 80% 88% Bonds 55% 53% 50% 46% 35% 30% 25% 19% 15% 11% Alternative Assets allocation with liquid Cash 25% 23% 10% 9% 5% 2% 5% 1% 5% 1% forms of alternative investments Alternative Assets 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% (including non-traditional funds).
Table 9: Strategic allocations with alternative assets (Tier 1 liquidity) Moderately Moderately Tier 1 (higher liquidity): Conservative conservative Moderate aggressive Aggressive Up to 10% of the portfolio may be Traditional Assets unavailable for 3–5 years. Stocks 20% 40% 55% 65% 70% Bonds 50% 45% 30% 20% 10%
Cash 25% 10% 5% 5% 5% Alternative Assets Real Assets* 1% 1% 2% 2% 6% Hedge Fund Strategies 4% 4% 8% 8% 9% Private Equity 0% 0% 0% 0% 0% * “Real Assets” defined to include commodities, TIPs and Real estate, including REITS.; Figures may not sum to 100 because of rounding.
Table 10: Strategic allocations with alternative assets (Tier 2 liquidity) Moderately Moderately
Tier 2 (moderate liquidity): Conservative conservative Moderate aggressive Aggressive Up to 20% of the portfolio may be Traditional Assets unavailable for 3–5 years. Stocks 15% 35% 50% 55% 55% Bonds 50% 45% 25% 20% 10% Cash 25% 10% 5% 5% 5% Alternative Assets Real Assets* 3% 3% 7% 7% 10% Hedge Fund Strategies 6% 6% 8% 8% 8% Private Equity 1% 1% 5% 5% 12% * “Real Assets” defined to include commodities, TIPs and Real estate, including REITS.; Figures may not sum to 100 because of rounding.
Table 11: Strategic allocations with alternative assets (Tier 3 liquidity) Moderately Moderately
Conservative conservative Moderate aggressive Aggressive Tier 3 (lower liquidity) Traditional Assets Up to 30% of the portfolio may be Stocks 15% 35% 40% 50% 40% unavailable for 3–5 years. Bonds 45% 40% 25% 15% 10% Cash 25% 10% 5% 5% 5% Alternative Assets Real Assets* 3% 3% 9% 9% 11% Hedge Fund Strategies 10% 10% 14% 14% 14% Private Equity 2% 2% 7% 7% 20% * “Real Assets” defined to include commodities, TIPs and Real estate, including REITS.; Figures may not sum to 100 because of rounding. Notes: The Strategic Profile Asset Allocation Models with Alternative Assets were developed by Merrill Lynch Global Wealth Management for private clients. The Strategic allocations are identified by Merrill Lynch Global Wealth Management and are designed to serve as guidelines for a 20-30 year investment horizon. The Core allocations are provided by the BofA Merrill Lynch Global Research Investment Committee. The Merrill Lynch Global Wealth Management models allocate assets among specified asset classes and, within each class, reflect broad investment diversification. The models offer benchmarks for traditional asset class allocation (stocks, bonds and cash), as well as models for allocations among traditional and alternative asset classes reflecting portfolios targeting varying liquidity levels. The models are designed to provide allocation benchmarks based on risk/return profiles. Merrill Lynch Global Wealth Management defines liquidity as the percentage of assets, by invested value, within a portfolio that can be reasonably expected to be liquidated within a given time duration under typical market conditions. Given the less-liquid nature of certain alternative assets, BofA Merrill Lynch Global Research does not make Core allocation recommendations for portfolios that include these asset classes. Merrill Lynch Global Wealth Management clients should consult with their financial advisor about these allocations.
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The RIC Report 10 September 2013
Fixed-income allocation for US clients Table 12: Combined municipal and taxable recommended sector allocations by Investor Profile Conservative Moderate** Aggressive Federal tax bracket Sector <25%* 28% 43.4% <25%* 28% 43.4% <25%* 28% 43.4% Munis 0% 45% 50% 0% 58% 63% 0% 75% 80% Treasuries & CDs 40% 22% 20% 32% 13% 12% 31% 7% 6% TIPS 3% 2% 2% 4% 2% 2% 4% 1% 1% Agencies (GSEs) 35% 19% 17% 0% 0% 0% 0% 0% 0% Mortgages 2% 1% 1% 23% 10% 8% 19% 5% 4% Corporates 20% 11% 10% 24% 10% 9% 22% 6% 4% Preferreds 0% 0% 0% 1% 0% 0% 1% 0% 0% High Yield* 0% 0% 0% 9% 4% 3% 12% 3% 2% International: Developed Markets 0% 0% 0% 3% 1% 1% 3% 1% 1% International: Emerging Markets USD 0% 0% 0% 2% 1% 1% 4% 1% 1% International: Emerging Markets Local 0% 0% 0% 2% 1% 1% 4% 1% 1% TOTALS 100% 100% 100% 100% 100% 100% 100% 100% 100% TAXABLE -Maturity 1-4.99 years 100% 100% 100% 56% 56% 56% 56% 56% 56% 5-14.99 years 0% 0% 0% 40% 40% 40% 37% 37% 37% 15+ years 0% 0% 0% 4% 4% 4% 7% 7% 7% TOTALS 100% 100% 100% 100% 100% 100% 100% 100% 100% TAX EXEMPT-Maturity 1-4.99 years 100% 100% 100% 10% 10% 10% 10% 5-9.99 years 50% 50% 30% 30% 10-14.99 years 20% 20% 30% 30% 15+ years 20% 20% 30% 30% TOTALS 100% 100% 100% 100% 100% 100% 100% * Including tax-deferred accounts like IRAs and 401(k)s. ** The Moderate Category applies to the "Moderately Conservative", "Moderate", and "Moderately Aggressive" Profiles. Changes from last month are highlighted in bold. Source: BofA Merrill Lynch Global Research
US Equity sector allocation models Table 13: Portfolio Strategy team's US equity sector weightings by investor profile Weight in Moderately Moderately S&P 500 Conservative conservative Moderate aggressive Aggressive Consumer Discretionary 12.30% 10.00% 6.00% 11.00% 12.00% 13.00% Consumer Staples 10.20% 22.00% 15.00% 12.00% 8.00% 4.00% Energy 10.70% 12.00% 12.00% 10.00% 12.00% 13.00% Financials 16.40% 12.00% 14.00% 15.00% 7.00% 7.00% Health Care 12.90% 15.00% 11.00% 11.00% 17.00% 18.00% Industrials 10.30% 11.00% 12.00% 14.00% 18.00% 14.00% Info Technology 18.10% 6.00% 8.00% 16.00% 23.00% 25.00% Materials 3.40% 0.00% 2.00% 2.00% 3.00% 3.00% Telecom Services 2.50% 3.00% 10.00% 3.00% 0.00% 3.00% Utilities 3.20% 9.00% 10.00% 6.00% 0.00% 0.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Source: BofA Merrill Lynch Research Portfolios, S&P; S&P 500 Sector Weights are as of 30 August 2013; weights may not add up to 100% due to rounding.
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The RIC Report 10 September 2013
A closer look at asset allocation for US clients: sixe, style and international The tables below present in-depth size and style recommendations for US clients using the stocks, bonds and cash weights from the most liquid (Tier 0) liquidity profile on the previous page.
Table 14: Strategic and core allocations without alternatives Conservative Moderately conservative Moderate Moderately aggressive Aggressive Strategic Core Strategic Core Strategic Core Strategic Core Strategic Core Stocks 20% 24% 40% 45% 60% 68% 70% 80% 80% 88% Lg. Cap Growth 8% 11% 16% 21% 23% 30% 25% 33% 27% 34% Lg. Cap Value 12% 12% 16% 16% 23% 23% 25% 25% 21% 21% Small Growth 0% 0% 2% 2% 2% 2% 3% 3% 6% 6% Small Value 0% 0% 2% 1% 2% 1% 3% 2% 6% 5% Intl: Developed 0% 0% 3% 3% 8% 8% 11% 11% 16% 16% Intl: Emerging 0% 1% 1% 2% 2% 4% 3% 6% 4% 6% Bonds 55% 53% 50% 46% 35% 30% 25% 19% 15% 11% Tsys, CDs & GSEs 35% 41% 27% 16% 13% 11% 6% 7% 2% 4% Mortgage Backed 14% 1% 13% 11% 9% 7% 6% 4% 4% 2% IG Corp & Preferred 6% 11% 10% 12% 9% 7% 9% 5% 5% 3% High Yield 0% 0% 0% 4% 2% 3% 1% 2% 2% 1% International 0% 0% 0% 3% 2% 2% 3% 1% 2% 1% Cash 25% 23% 10% 9% 5% 2% 5% 1% 5% 1%
Source: BofA Merrill Lynch Global Research
Table 15: Stocks – by size and style Conservative Moderately conservative Moderate Moderately aggressive Aggressive Strategic Core Strategic Core Strategic Core Strategic Core Strategic Core Large cap growth 40% 46% 40% 47% 38% 44% 35% 41% 33% 39% Large cap value 60% 50% 40% 36% 38% 34% 35% 31% 26% 23% Small growth 0% 0% 4% 4% 4% 3% 4% 4% 8% 7% Small value 0% 0% 4% 2% 4% 1% 4% 3% 8% 6% International: Developed 0% 0% 10% 7% 13% 12% 18% 14% 20% 18% International: Emerging 0% 4% 2% 4% 3% 6% 4% 7% 5% 7% Source: BofA Merrill Lynch Global Research
Table 16: Bonds – by sector Conservative Moderately conservative Moderate Moderately aggressive Aggressive Strategic Core Strategic Core Strategic Core Strategic Core Strategic Core Tsys, CDs & GSEs 65% 78% 55% 36% 40% 36% 25% 36% 15% 35% Mortgage Backed 25% 2% 25% 23% 25% 23% 25% 23% 25% 19% IG Corp & Preferred 10% 20% 20% 25% 25% 25% 35% 25% 40% 23% High yield 0% 0% 0% 9% 5% 9% 5% 9% 10% 12% International 0% 0% 0% 7% 5% 7% 10% 7% 10% 11% Source: BofA Merrill Lynch Global Research
Notes: Figures may not sum to 100 because of rounding The Investor Profile Asset Allocation Model was developed by Merrill Lynch Global Wealth Management for private clients. The Strategic allocations are identified by Merrill Lynch Global Wealth Management and are designed to serve as guidelines for a 20-30-year investment horizon. The Core allocations are provided by the BofA Merrill Lynch Global Research Investment Committee and reflect the group’s outlook over the next 12-18 months.
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The RIC Report 10 September 2013
Asset allocation for global investors The Asset Allocation for Global Clients is designed to reduce “home country bias” and introduce a currency perspective. Core recommendations are based on qualitative views from our BofAML Global Research strategists, translated into recommendations with a quantitative optimization model. Strategic allocations are based on market cap weights for the MSCI All-Country World and BofAML Global Fixed Income Markets Indices (12/31/2010). Both allocations are for individual investors.** Table 17: Strategic and core allocations without alternatives (Tier 0 liquidity) Tier 0 (highest liquidity): Moderately Moderately Highest liquidity needs with none of the Conservative conservative Moderate Aggressive Aggressive portfolio invested in less liquid Strat. Core Strat. Core Strat. Core Strat. Core Strat. Core alternative asset categories. Tier 0 Global Equities 20% 24% 40% 45% 60% 66% 70% 78% 80% 90% clients can also reference the Tier 1 North America 8% 10% 19% 22% 28% 32% 32% 37% 37% 43% Europe (ex UK) 4% 5% 7% 8% 11% 12% 13% 15% 15% 17% strategic allocations if fulfilling the UK 2% 2% 4% 4% 5% 5% 6% 6% 7% 7% Alternative Assets allocation with liquid Japan 2% 2% 3% 4% 5% 7% 6% 7% 7% 8% forms of alternative investments Pac Rim (ex Japan) 1% 1% 2% 1% 3% 2% 4% 3% 4% 3% (including non-traditional funds). Emerging Markets 3% 4% 5% 6% 8% 8% 9% 10% 10% 12% Global Fixed Income 55% 56% 50% 47% 38% 32% 28% 20% 18% 8% Govt Bonds 34% 34% 30% 26% 24% 18% 18% 11% 10% 1% Inv. Grade Credit 8% 8% 8% 9% 6% 6% 4% 4% 3% 3% High Yield Credit 2% 2% 2% 2% 1% 1% 1% 1% 1% 1% Collateralized Debt 11% 12% 10% 10% 7% 7% 5% 4% 4% 3% Cash (USD) 25% 20% 10% 8% 2% 2% 2% 2% 2% 2% Global Real Assets* 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Global Hedge Fund Strat 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Global Private Equity 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% *Real Assets include commodities, TIPs, Real estate, incl. REITS; Figures may not sum to 100 because of rounding; collateralized debt includes MBS
Table 18: Strategic and core allocations without alternatives (Tier 1 liquidity) Tier 1 (higher liquidity): Moderately Moderately Up to 10% of the portfolio may be Conservative conservative Moderate Aggressive Aggressive Strat. Core Strat. Core Strat. Core Strat. Core Strat. Core unavailable for 3–5 years. Global Equities 18% 22% 38% 43% 56% 62% 66% 74% 73% 80% North America 8% 10% 18% 21% 26% 30% 30% 35% 34% 39% Note: The RIC does not provide core Europe (ex UK) 3% 4% 7% 8% 10% 12% 12% 14% 14% 16% allocations to Alternative Investments UK 2% 2% 3% 3% 5% 5% 6% 6% 6% 5% due to their less liquid nature. Japan 2% 2% 3% 4% 5% 6% 6% 7% 6% 7% Pac Rim (ex Japan) 1% 1% 2% 1% 3% 2% 3% 2% 4% 3% Recommended allocations in these Emerging Markets 2% 3% 5% 6% 7% 7% 9% 10% 9% 10% categories reflect strategic allocations. Global Fixed Income 52% 53% 50% 47% 32% 26% 22% 14% 10% 3% Govt Bonds 32% 32% 30% 26% 20% 14% 14% 7% 6% 0% Inv. Grade Credit 8% 8% 8% 9% 5% 5% 3% 3% 2% 2% High Yield Credit 2% 2% 2% 2% 1% 1% 1% 1% 0% 0% Collateralized Debt 10% 11% 10% 10% 6% 6% 4% 3% 2% 1% Cash (USD) 25% 20% 7% 5% 2% 2% 2% 2% 2% 2% Global Real Assets* 1% 1% 1% 1% 2% 2% 6% 6% 12% 12% Global Hedge Fund Strat 4% 4% 4% 4% 8% 8% 4% 4% 3% 3% Global Private Equity 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% ^The RIC does not make core allocations to these categories due to their long term, less liquid nature Strategic benchmark weights are reflected in both columns *Real Assets include commodities, TIPs, Real estate, incl. REITS; Figures may not sum to 100 because of rounding; collateralized debt includes MBS Notes: Merrill Lynch Global Wealth Management’s Strategic Profile Asset Allocation Models were developed for private Merrill Lynch Global Wealth Management Clients. The Strategic allocations are identified by Merrill Lynch Global Wealth Management are designed to serve as guidelines for a 20-30 year investment horizon. The Core allocations are provided by the BofA Merrill Lynch Global Research Investment Committee. The Merrill Lynch Global Wealth Management models allocate assets among specified asset classes and, within each class, reflect broad investment diversification. The models offer benchmarks for traditional asset class allocation (stocks, bonds and cash), as well as models for allocations among traditional and alternative asset classes reflecting portfolios targeting varying liquidity levels. The models are designed to provide allocation benchmarks based on risk/return profiles. Merrill Lynch Global Wealth Management defines liquidity as the percentage of assets, by invested value, within a portfolio that can be reasonably expected to be liquidated within a given time duration under typical market conditions. Given the less-liquid nature of certain alternative assets, BofA Merrill Lynch does not make Core allocation recommendations for portfolios that include these asset classes. Merrill Lynch Global Wealth Management clients should consult with their financial advisor about these allocations. **BofAML Global Research also publishes a tactical Global Asset Allocation for institutional investors, distinct from the RIC’s Core Asset Allocation for Global Clients, published herein. The institutional Core Global Asset Allocation, published weekly, is based on the same views and framework, but is designed for institutional investors with a 3-6 month time horizon.
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The RIC Report 10 September 2013
Asset allocation for global clients (continued)
Table 19: Strategic and core allocations with alternatives (Tier 2 liquidity) Tier 2 (moderate liquidity): Moderately Moderately Up to 20% of the portfolio may be Conservative conservative Moderate Aggressive Aggressive Strat. Core Strat. Core Strat. Core Strat. Core Strat. Core unavailable for 3–5 years. Global Equities 14% 18% 35% 40% 45% 51% 51% 59% 53% 63% North America 6% 8% 16% 19% 21% 25% 24% 29% 24% 30% Note: The RIC does not provide core Europe (ex UK) 3% 4% 6% 7% 8% 10% 9% 11% 10% 12% allocations to Alternative Investments UK 1% 1% 3% 3% 4% 4% 4% 4% 5% 5% due to their less liquid nature. Japan 1% 1% 3% 4% 4% 5% 4% 5% 4% 5% Pac Rim (ex Japan) 1% 1% 2% 1% 2% 1% 3% 2% 3% 2% Recommended allocations in these Emerging Markets 2% 3% 5% 6% 6% 6% 7% 8% 7% 9% categories reflect strategic allocations. Global Fixed Income 51% 52% 48% 45% 33% 27% 27% 19% 15% 5% Govt Bonds 31% 31% 30% 26% 21% 15% 17% 10% 9% 0% Inv. Grade Credit 8% 8% 7% 8% 5% 5% 4% 4% 2% 2% High Yield Credit 2% 2% 2% 2% 1% 1% 1% 1% 1% 1% Collateralized Debt 10% 11% 9% 9% 6% 6% 5% 4% 3% 2% Cash (USD) 25% 20% 7% 5% 2% 2% 2% 2% 2% 2% Global Real Assets* 2% 2% 2% 2% 4% 4% 4% 4% 8% 8% Global Hedge Fund Strat 6% 6% 6% 6% 9% 9% 4% 4% 6% 6% Global Private Equity 2% 2% 2% 2% 7% 7% 12% 12% 16% 16% ^The RIC does not make core allocations to these categories due to their long term, less liquid nature Strategic benchmark weights are reflected in both columns. *Real Assets include commodities, TIPs, Real estate, incl. REITS; Figures may not sum to 100 because of rounding; collateralized debt includes MBS
Table 20: Strategic and core allocations with alternatives (Tier 3 liquidity) Tier 3 (lower liquidity): Moderately Moderately Up to 30% of the portfolio may be Conservative conservative Moderate Aggressive Aggressive Strat. Core Strat. Core Strat. Core Strat. Core Strat. Core unavailable for 3–5 years. Global Equities 12% 16% 32% 37% 41% 47% 47% 55% 46% 52% North America 5% 7% 14% 17% 19% 23% 22% 27% 21% 25% Note: The RIC does not provide core Europe (ex UK) 2% 3% 6% 7% 8% 10% 9% 11% 9% 11% allocations to Alternative Investments UK 1% 1% 3% 3% 4% 4% 4% 4% 4% 3% due to their less liquid nature. Japan 1% 1% 3% 4% 3% 4% 4% 5% 4% 5% Pac Rim (ex Japan) 1% 1% 2% 1% 2% 1% 2% 1% 2% 1% Recommended allocations in these Emerging Markets 2% 3% 4% 5% 5% 5% 6% 7% 6% 7% categories reflect strategic allocations. Global Fixed Income 48% 49% 48% 45% 27% 21% 21% 13% 7% 1% Govt Bonds 30% 30% 30% 26% 17% 11% 13% 6% 5% 0% Inv. Grade Credit 7% 7% 7% 8% 4% 4% 3% 3% 1% 1% High Yield Credit 2% 2% 2% 2% 1% 1% 1% 1% 0% 0% Collateralized Debt 9% 10% 9% 9% 5% 5% 4% 3% 1% 0% Cash (USD) 25% 20% 5% 3% 2% 2% 2% 2% 2% 2% Global Real Assets* 3% 3% 3% 3% 6% 6% 7% 7% 15% 15% Global Hedge Fund Strat 9% 9% 9% 9% 16% 16% 11% 11% 14% 14% Global Private Equity 3% 3% 3% 3% 8% 8% 12% 12% 16% 16% ^The RIC does not make core allocations to these categories due to their long term, less liquid nature Strategic benchmark weights are reflected in both columns. *Real Assets include commodities, TIPs, Real estate, incl. REITS; Figures may not sum to 100 because of rounding; collateralized debt includes MBS
Notes: The Strategic Asset Allocation Model was developed by Merrill Lynch Global Wealth Management. The Strategic allocations are identified by Merrill Lynch Global Wealth Management and are designed to serve as guidelines for a 20-30 year investment horizon for Merrill Lynch Global Wealth Management clients The Core allocations are provided by the BofA Merrill Lynch Global Research Investment Committee and reflect their outlook over the next 12-18 months.
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The RIC Report 10 September 2013
Table 21: Sector Weightings (Sectors listed in order of preference) Weight in BofAML Weight Sector Comments Industry Preferences/Themes S&P 500 (+ / = / -) Cash rich - dividend, buyback, capex play Mega-cap Tech Attractive valuation - greatest implied upside on forward P/E of any sector Information 18.1% + Highest foreign exposure, secular and cyclical growth, lower EPS volatility vs. history Technology Stock pickers' industries: Tech Hardware and Software Risks: Consensus overweight, govt. spending cuts (Comm. Eqpt.) Highest percentage of high quality stocks Industrial Conglomerates Industrials 10.3% + GDP-sensitive, capex exposure, global exposure Machinery Risks: Defense stocks at risk from govt. spending cuts, high European exposure Avoid Defense stocks Attractive valuation: only sector besides Health Care with implied upside on relative P/B, P/OCF and Domestic Refiners fwd. P/E Energy 10.6% + Benefits from US domestic energy advantage Energy Equipment & Services Cyclical recovery play, foreign exposure Risks: oil price volatility Large cap pharmaceuticals are our preferred yield play (cheap, underowned) Pharmaceuticals Attractive valuation: only sector besides Energy with implied upside on relative P/B, P/OCF and fwd. Health Care 12.9% = P/E Health Care Reform benefits hospitals, Medicaid managed care, labs, and PBMs Risks: Most government spending exposure of any sector Contrarian - underowned by fund managers Avoid Tobacco on valuation High quality, dividend yield, and dividend growth potential (lower payout ratio than Utilities/Telecom) Consumer Staples 10.2% = Higher foreign exposure and less government risk than the other defensive sectors Risks: inflation, upside surprise to profits growth Benefits from US cyclical recovery / housing recovery Mega-cap Financials Old leadership rarely becomes new leadership, high beta Financials 16.4% = Attractively valued on relative P/B, but remains expensive vs. history on relative fwd. P/E Risks: regulatory reform, litigation, stress in European financial system, US recession Poor risk-reward vs. other non-financial cyclicals (high beta but lower LTG) Chemicals Materials 3.4% = Risk: no bottoming in China growth (more leveraged to improvement in China than Industrials, which Avoid Metals & Mining until more signs of is also highly exposed to improvement in Europe as well as EM). improvement in China Overweight by active managers, expensive across various valuation metrics, and deteriorating EPS Media (business spending exposure) revisions Select Specialty Retail & Household Rising rates may drive shift from spending to saving and may slow housing recovery Durables (home renovation theme) Consumer 12.2% – Less room for improvement in jobless claims, and sector performance has well outpaced the Globally diversified stocks Discretionary improvement Operating margins are at peak levels Business spending forecast to grow 3x faster than consumer spending by early next year Most expensive sector vs. history on relative fwd. P/E, no growth, high payout ratios (little room to raise dividends) Utilities 3.2% – High dividend yield, underowned by fund managers, hedge against macro uncertainty, purely domestic Expensive (trading near all-time-highs on relative fwd. P/E), high payout ratios (little room to raise Telecom 2.5% – dividends) Highest dividend yield, hedge against macro uncertainty, low intra-stock correlations *Weights in S&P 500 as of previous month-end. May not add to 100% due to rounding. Source: BofA Merrill Lynch US Equity & US Quant Strategy
Core Portfolio The Equity Core Portfolio attempts to achieve capital gains over a 1-2 year time horizon by combining tactical sector weighting decisions from our US Equity Strategy team with stock selections that offer attractively valued growth potential. For recent changes and current holdings, please see the following; Equity Core Portfolio Snapshot.
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The RIC Report 10 September 2013
Portfolio of the month Equity Income & Growth Portfolio The Equity Income & Growth Portfolio uses a total return approach, with a cross section of stocks that combine income and dividend growth for inflation protection and earnings growth for wealth accumulation. Stocks should have less volatility than those in a pure growth portfolio and may have lower dividend yields than those in pure income portfolios.
Table 22: Equity Income & Growth Portfolio Price Sectors/Target Weights Symbol Proposed Weight Close 9/6/2013 Average Cost Yield † QRQ Rating Footnote Information Technology (16%) Visa V 3% 176.67 $99.90 0.75% B-1-7 Bbijopsvw IBM IBM 3% 183.03 $207.11 2.08% B-2-7 BObgijopsvw Accenture ACN 3% 73.21 $75.24 2.21% A-2-7 Bbijopsvw Oracle ORCL 4% 32.20 $29.63 0.93% B-1-7 BObgijopsv ADP ADP 3% 73.13 $68.56 2.38% B-1-7 Bbijopsvw Financials (15%) Wells Fargo WFC 3% 41.43 $29.90 2.90% B-1-7 BObgijopsvw ACE Limited ACE 2% 88.19 $48.69 2.31% B-1-7 Bbijopsvw T. Rowe Price TROW 3% 70.72 $72.22 2.15% B-1-7 Bbjopw Amer Express AXP 4% 73.35 $43.85 1.25% B-1-7 Bbijopsvw Citigroup C 3% 49.22 $38.42 0.08% B-1-7 ABObgijopsvw Industrials (14%) Caterpillar Inc CAT 3% 83.39 $75.93 2.88% B-2-7 BObijopsvw Honeywell HON 4% 81.66 $46.16 2.01% B-1-7 Bbijopsvw FedEx Corp. FDX 3% 108.16 $104.90 0.55% B-1-7 Bbgijopsvw United Tech UTX 4% 103.23 $69.10 2.07% B-1-7 BObijopsvw Consumer Staples (12%) Diageo DEO 4% 123.60 $90.59 2.90% A-1-7 Bbijopsv Costco COST 4% 114.35 $59.47 1.08% B-1-7 Bbgijopsw CVS/Caremark CVS 4% 58.63 $35.78 1.54% B-1-7 Bbgijoprsvw Consumer Discretionary (11%) The Home Depot HD 3% 72.70 $50.97 2.15% A-1-7 BObgijopsvw Comcast Corp CMCSA 3% 42.48 $32.33 1.84% A-1-7 #Bbgijopsv McDonald's Corp MCD 3% 96.26 $59.88 3.20% B-1-7 Bbgijopsvw Nike NKE 2% 64.98 $40.83 1.29% B-1-7 Bbgijopsvw Health Care (11%) Covidien COV 4% 60.75 $48.71 1.71% B-1-7 Bbijopsvw McKesson Corp. MCK 3% 123.57 $90.65 0.78% B-1-7 Bbgijopsvw Thermo Fisher TMO 4% 90.51 $71.60 0.66% A-1-7 BObgijopsvw Energy (10%) Valero VLO 3% 36.76 $36.73 2.45% B-1-7 Bbijopsvw Hess HES 4% 77.30 $74.36 1.29% B-1-7 BObijopsvw Schlumberger SLB 3% 85.14 $61.73 1.47% B-1-7 Bbijopvw Utilities (6%) American Water Works AWK 3% 39.28 $22.70 2.85% A-1-7 Bbgijopsvw Dominion D 3% 57.53 $56.48 3.91% A-1-7 BObgijopsvw Telecomm. Services (3%) America Movil AMX 3% 19.33 $22.98 1.81% B-1-7 BObijopsv Materials (2%) Monsanto MON 2% 99.89 $86.90 1.72% B-1-7 Bbijopsvw Cash (0%) 0% 100% 1.82%
Source: Bloomberg, BofA Merrill Lynch Global Research †: Yields are estimated based on historical information. There is no assurance that the yield will remain the same or increase. Yields may decrease. Yields do not reflect transaction costs/fees or taxes and may be affected by currency fluctuations. One or more analysts responsible for selecting the securities held in the Research Portfolios own such securities:, Costco, Honeywell
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The RIC Report 10 September 2013
Stock lists US 1 List (link to latest report) Table 23: US 1 list (6 September 2013) Ticker Company Rating Date added Price when added Price as of 6 Sept Footnotes AGN Allergan B-1-7 05/28/13 99.71 89.21 Bbgijopsvw APC Anadarko Petro C-1-7 07/30/13 88.80 93.01 BObijopsvw CHKP Check Point C-1-9 11/12/12 44.59 56.30 Bbijosw CMCSA Comcast Corp A-1-7 08/27/13 41.78 42.48 #Bbgijopsv EMN Eastman Chemical B-1-7 04/15/13 65.59 76.88 Bbijopsvw EQIX Equinix B-1-9 06/04/13 198.03 172.77 Bbgijopsvw ESRX Express Scripts B-1-9 09/17/12 62.60 65.52 BObijpsvw F Ford Motor C-1-7 08/28/12 9.34 17.00 BObgijopsvw FDX FedEx Corp. B-1-7 02/04/13 103.39 108.16 Bbgijopsvw FOXA 21st Century Fox B-1-7 06/28/13 28.79 32.10 #Bbijopsvw GILD Gilead B-1-9 02/25/13 42.09 61.12 BObijopsvw KLAC KLA-Tencor C-1-7 10/01/12 47.30 58.76 Bbijopsvw KRFT Kraft Foods Group B-1-7 10/01/12 44.10 53.21 Bbijopvw MMM 3M B-1-7 02/19/13 104.18 115.04 Bbijopsvw NWL Newell C-1-7 10/15/12 20.21 26.04 Bbijopsvw OZM Och-Ziff C-1-7 08/07/12 8.40 10.63 Bbijopvw PETM PetSmart B-1-7 02/04/13 63.58 69.65 Bbijopvw PXD Pioneer C-1-7 06/18/13 154.65 180.86 Bbgijopsv QCOM QUALCOMM C-1-7 11/12/12 61.63 68.02 Bbijopsvw SWKS Skyworks C-1-9 11/19/12 20.66 25.72 Bbijopsw UA Under Armour C-1-9 06/25/13 57.50 77.20 Bbijopsvw URBN Urban Outfitter C-1-9 09/10/12 39.48 42.56 Bbjop WMT Wal*Mart Stores A-1-7 09/17/12 73.99 72.59 Bbgijopsv Note: We last modified this portfolio on 27 August 2013. Please see the original report for details, including price objectives and investment rationale. Please see Footnote Key at the back of this report. One or more members of the US 1 Committee (or a household member) owns stock of one or more companies on the US 1 list. Source: BofA Merrill Lynch Global Research.
Endeavor, the Small Cap US Buy List (link to latest report) Table 24: Endeavor Stocks (the US Small Cap Buy List) as of 9/06/13 MLSCR Model Scores (100=best; 1=worst) BofA -ML Price Mkt Value Enhanced Px on GICS Sector Company Symbol Opinion 9/6/13 ($ mn) Aurora Contrarian Add Date Add date Footnote Consumer Disc. AMERICAN AXLE & MFG AXL C-1-9 19.90 1,504 98 100 8/9/2010 10.37 BObgijopsvw Consumer Disc. JACK IN THE BOX JACK C-1-9 39.00 1,683 95 87 7/9/2012 27.62 Bbijpsvw Consumer Disc. SONIC AUTOMOTIVE -CL A SAH C-1-7 22.96 1,232 62 79 10/11/2011 13.23 BObgijopsw Consumer Disc. STANDARD PACIFIC SPF B-1-9 7.35 1,987 90 97 6/14/2013 8.96 Bbijopsv Cons. Staples SUSSER HOLDINGS SUSS C-1-9 49.09 1,043 25 40 7/5/2011 16.04 Bbijopsvw Energy ROSETTA RESOURCES ROSE C-1-9 48.21 2,935 32 72 6/14/2013 45.46 Bbgijopsv Financials CORESITE REALTY COR C-1-7 32.26 680 92 97 5/14/2012 24.65 Bbgijpsvw Health Care MEDASSETS MDAS C-1-9 23.24 1,408 72 63 1/11/2013 18.60 Bbijopsvw Health Care WELLCARE HEALTH PLANS WCG C-1-9 67.25 2,929 58 60 3/9/2012 67.81 Bbijpvw Health Care MOLINA HEALTHCARE MOH B-1-9 35.20 1,609 89 91 8/15/2013 34.48 Bbgijopsvw Health Care PHARMERICA PMC C-1-9 12.47 369 87 97 1/19/2009 16.21 Bbijpvw Industrials TAL INTERNATIONAL GROUP TAL B-2-7 42.95 1,454 60 82 9/19/2011 27.84 Bbgijopsvw Industrials ALASKA AIR GROUP ALK C-1-9 57.38 4,058 67 91 10/11/2011 30.89 Bbijopsw Industrials SWIFT TRANSPORTATION SWFT C-1-9 18.96 2,661 93 68 8/15/2013 17.50 Bbijpsvw Industrials TRIUMPH GROUP TGI C-1-7 73.83 3,867 72 93 10/16/2007 40.08 Bbijopsw Info Tech FEI CO FEIC C-1-7 80.59 3,358 52 57 5/14/2012 45.56 Bbijopsvw Info Tech MENTOR GRAPHICS MENT C-1-7 22.46 2,547 83 88 5/14/2012 14.05 Bbijopsv Info Tech CADENCE DESIGN SYSTEMS CDNS C-1-9 13.27 3,822 52 91 7/5/2011 10.60 Bbijopsvw Materials BERRY PLASTICS GROUP BERY C-1-9 23.21 2,658 48 72 6/14/2013 23.44 Bbgijopsv Materials GRAPHIC PACKAGING HOLDING GPK C-1-9 8.37 2,950 65 72 5/18/2011 5.30 Bbgijopsvw Source: BofA Merrill Lynch Small Cap Research
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The RIC Report 10 September 2013
US High Quality & Dividend Yield Screen (methodology) Table 25: High Quality and Dividend Yield Screen (September 2013) Date Added Ticker Name Sector ROE (%) DEBT / EQUITY YIELD (%) Quality Mkt Val ($mn) Cost Price Price QRQ FCF/ DIV Footnotes 4/1/2012 ADP ADP Information Tech 22.2 0.0 2.4 A 34,528 55.19 71.16 B-1-7 1.9 Bbijopsvw 8/1/2013 CSX CSX Corporation Industrials 20.4 1.0 2.3 A 25,150 26.05 24.61 B-1-7 1.3 Bbijopv 8/1/2013 DD DuPont Materials 20.0 1.1 3.1 A- 52,117 59.92 56.62 B-2-7 2.7 Bbgijopsvw 1/2/2013 EMR Emerson Industrials 14.5 0.5 2.7 A+ 43,398 54.86 60.37 B-2-7 1.4 Bbgijopsvw 7/1/2013 GPC Genuine Parts Consumer Disc. 23.1 0.3 2.7 A 11,934 83.23 77.01 A-2-7 2.2 Bbijopsvw 3/1/2013 JNJ Johnson & Johnson Health Care 19.8 0.2 2.9 A+ 242,716 76.70 86.41 A-2-7 2.0 Bbijopsvw 10/1/2012 LLTC Linear Technology Information Tech 47.4 0.8 2.7 A- 8,941 31.82 38.33 B-1-7 1.9 Bbijpsw 2/2/2009 MCD McDonald's Corp Consumer Disc. 37.8 0.9 3.2 A 94,601 58.02 94.36 B-1-7 1.3 Bbgijopsvw 9/1/2013 MDT Medtronic Health Care 19.9 0.6 2.0 A 52,338 51.75 A-1-7 3.7 Bbgijopsvw 10/1/2012 MMM 3M Industrials 26.1 0.3 2.2 A+ 78,392 92.42 113.58 B-1-7 2.5 Bbijopsvw 8/1/2011 MSFT Microsoft Corp Information Tech 30.1 0.2 2.7 A- 278,927 27.40 33.4 B-2-7 2.9 Bbgijopsvw 8/1/2013 NOC Northrop Grumman Industrials 19.4 0.6 2.4 A 21,699 94.89 92.27 B-2-7 4.0 BObgijopsvw 2/1/2013 PG Procter & Gamble Consumer Staples 17.2 0.5 2.9 A+ 213,479 75.92 77.89 A-1-7 1.6 Bbgijopsvw 4/1/2012 PAYX PAYX Information Tech 33.7 0.0 3.4 A 14,076 30.99 38.68 A-2-7 1.3 Bbijopvw 8/1/2013 RTN Raytheon Co. Industrials 22.6 0.6 2.8 A 24,479 75.65 75.41 A-2-7 3.0 Bbgijopsvw 6/3/2013 TGT Target Corp. Consumer Disc. 17.0 0.9 2.4 A+ 40,626 71.51 63.31 B-2-7 1.3 Bbijopsvw 2/1/2013 UTX United Tech Industrials 20.2 0.8 2.1 A+ 92,022 89.84 100.1 B-1-7 3.3 BObijopsvw 12/3/2012 WMT Wal*Mart Stores Consumer Staples 24.1 0.8 2.4 A+ 239,132 72.02 72.98 A-1-7 2.1 Bbgijopsv 2/1/2012 XOM ExxonMobil Energy 21.8 0.1 2.7 A+ 387,546 83.74 87.16 A-1-7 1.7 Bbijopsvw Average 24.1 0.5 2.6 102,953 2.2 S&P 500 benchmarks: 14.4 1.1 2.0 Source: BofA Merrill Lynch Global Research, BofA Merrill Lynch US Quantitative Strategy, FactSet, S&P Note: Calculations are based on data from the last 12 months. Financials stocks are excluded because they typically have very high Debt/Equity ratios that have nothing to do with their capital structure. We calculate the benchmark S&P 500 ROE by taking the average of the aggregate ROE (S&P 500 EPS ÷ by book value per share) and the median ROE. Disclaimer: These stocks have been selected according to the specified screening criteria and do not constitute a recommended list. Investors looking for a high quality dividend yield oriented investment can consider this analysis as one part of their decision making process, but should also consider other factors including fundamental opinions, financial risk, investment risk, management strategies and operating and financial outlooks.
International Low Volatility & Dividend Yield Screen (methodology) Table 26: International Low Volatility & Dividend Yield Screen (September 2013) 5 Year Annualized Market Price as LT Debt / Gross Div. Dividend Ticker Company Country Sector Value of 6 Sep Equity Yield1 Growth QRQ Footnote ABB ABB Switzerland Industrials 51,457 22.23 43.2 3.2 9.4 B-1-7 Bbijopsv AEM Agnico Eagle Mines Ltd. Canada Materials 5,160 29.77 24.3 3.0 36.7 B-1-7 Bbijopsv BHP BHP Billiton Ltd-Spon ADR Australia Materials 167,687 64.93 41.5 3.6 10.6 A-1-7 BObijopsv CM Canadian Imperial Bank of Commerce Canada Financials 31,688 79.22 38.2 4.7 1.6 B-2-7 Bbgijopsv CAJ Canon Japan Info Tech 41,600 31.19 0.1 4.2 5.1 A-1-7 Bbijopsv NVS Novartis Switzerland Health Care 205,454 75.92 19.9 3.2 9.6 A-2-7 Bbijopsv NTT NTT Japan Telecom 69,071 26.10 30.8 3.1 16.8 A-1-7 Bbgijopsv DCM NTT DoCoMo Japan Telecom 70,538 16.16 6.3 3.8 9.0 A-2-7 Bbijopsv PSO Pearson United Kingdom Consumer Disc. 16,442 20.09 35.2 3.5 3.0 A-2-7 Bbijopsv RIO Rio Tinto United Kingdom Materials 92,514 48.11 42.4 3.4 3.0 B-1-7 BObijopsv RY Royal Bank of Canada Canada Financials 92,085 63.94 18.5 4.0 4.0 B-1-7 BObgijopsv SNY Sanofi France Health Care 129,386 48.76 18.7 3.7 2.0 A-1-7 Bbgijopsv BNS Scotiabank Canada Financials 69,393 57.67 27.8 4.1 4.3 B-1-7 BObgijopsv SI Siemens AG Germany Industrials 100,628 114.22 53.9 3.5 24.6 A-1-7 Bbijopsv SMFG Sumitomo Mitsui Financial Group, Inc. Japan Financials 65,471 9.26 76.4 3.0 3.6 B-1-7 BObijopsv SLF Sun Life Financial Inc. Canada Financials 19,185 31.66 29.2 4.3 0.0 B-2-7 Bbijopsv TU TELUS Corporation Canada Telecom 20,437 32.05 74.3 4.1 8.0 B-1-7 Bbijov TD The Toronto-Dominion Bank Canada Financials 80,698 87.55 27.6 3.7 6.3 B-1-7 BObijopsv TRI Thomson Reuters Canada Consumer Disc. 28,158 33.94 35.6 3.8 4.2 B-1-7 Bbgijopsv VOD Vodafone Group Plc United Kingdom Telecom 159,353 32.89 40.3 6.4 1.2 A-1-7 BObijopsvw This is a screen and not a recommended list either individually or as a group of stocks. Investors should consider the fundamentals of the companies and their own individual circumstances / objectives before making any investment decisions. 1Investors should be aware that foreign governments sometimes withhold a percentage of dividends paid to US shareholders, which may adversely impact an investor who is following the list and may affect the yield received when compared to the stated yield for a security. Source: BofA Merrill Lynch Global Research
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The RIC Report 10 September 2013
Research portfolios and stock lists
Stock lists Note: Please be aware that links on this Regional Focus or 1 Lists are best investment ideas chosen among our Buy-rated page are directed to lists that are stocks. updated as of the date of this publication. There may have been US Japan updates to one or more lists. Financial Europe Asia-Pacific Advisors should check for the latest available constituents. Technical Titans List Designed to identify common stocks that are attractive based on technical analysis, the objective of this list is to capture short to intermediate-term (3-6 month) price appreciation, but positions can be held longer term.
Growth 10 & Value 10 Consist of 10 stocks each, chosen by the highest five-year EPS growth rate (Growth 10) or lowest trailing 12-month P/E ratio (Value 10) after quantitative screening criteria. Stock portfolios US Large Cap Equity Five portfolios offerings are available to match each of the client profiles of Capital Preservation, Income, Income & Growth, Growth and Aggressive Growth. These match the risk profiles of conservative, moderately conservative, moderate, moderately aggressive and aggressive, respectively. A sixth portfolio called the Core Portfolio is designed to reflect weighting decisions of our US equity strategy team. Each of these portfolios employs a combination of top-down sector weightings and bottom-up stock selection focusing on the 10 GICS sectors.
Holdings Primer
US Mid Cap Equity Launched in April 2010, this portfolio invests in stocks between $2-12 billion that are selected using a combination of fundamental, quantitative and portfolio management tools, and is built on the GICS sector framework.
Holdings Primer
International Equity This portfolio consists of ADRs and US-listed shares of non-US companies representing all major regions outside the US: Europe/Middle East/Africa, Asia, Latin America and Canada, and is built on the GICS sector framework.
Holdings Primer
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The RIC Report 10 September 2013
Global economic, interest rate, FX forecast summaries Table 27: Global economic forecasts (as of 6 September 2013) GDP growth, % CPI inflation*, % ST interest rates**, % Exchange rate*** 2011 2012 2013F 2014F 2011 2012 2013F 2014F Current 2012 2013F 2014F CCY pair Spot rate 2011 2012 2013F
Global and Regional Aggregates Global 3.9 3.2 2.9 3.7 4.3 3.1 2.9 3.2 2.44 2.56 2.5 2.71
Global ex US 4.4 3.3 3.2 3.9 4.6 3.4 3.2 3.7 3.09 3.19 3.11 3.36
Developed Markets 1.5 1.5 1 1.9 2.6 1.9 1.5 1.6 0.35 0.46 0.37 0.39
G5 1.4 1.4 1 1.9 2.7 2 1.5 1.6 0.29 0.38 0.3 0.32
Emerging Markets 6.2 4.9 4.7 5.2 6 4.3 4.2 4.7 4.75 4.59 4.5 4.8
Europe, Middle East and Africa (EMEA) 2.4 0.5 0.6 1.6 4 3.3 2.7 2.6 2.12 2.42 2.13 2.26
European Union 1.7 -0.3 -0.1 1 3 2.6 1.7 1.6 0.64 0.93 0.63 0.67
Emerging EMEA 5 2.9 2.3 3 5.9 4.7 4.6 4.4 5.73 5.94 5.38 5.6
PacRim 5.8 5.4 5.4 5.7 4.7 3 2.7 3.8 3.14 3.26 3.08 3.35
PacRim ex Japan 7 6.1 6 6.4 5.6 3.6 3.2 4 3.82 3.88 3.63 3.92
Emerging Asia 7.2 6.2 6.2 6.6 5.7 3.7 3.2 4.1 3.88 3.9 3.68 3.99
Americas 2.6 2.7 1.8 2.9 4.2 3.2 3.2 3.1 2.12 2 2.28 2.46
Latin America 4.5 2.9 2.3 3.2 6.9 6.1 7.2 7.3 7.68 6.78 7.72 8.28
G5 US 1.8 2.8 1.6 2.8 3.2 2.1 1.5 1.5 0.08 0.13 0.13 0.13
Euro area 1.5 -0.5 -0.5 0.6 2.7 2.5 1.5 1.4 0.5 0.75 0.5 0.5 EUR-USD 1.32 1.3 1.32 1.25 Japan -0.6 2 2 1.9 -0.3 -0.1 0.1 2.3 0.1 0.05 0.05 0.05 USD-JPY 99 77 87 105 UK 1.1 0.2 1.3 2.2 4.5 2.8 2.7 2.4 0.5 0.5 0.5 0.75 EUR-GBP 0.84 0.83 0.81 0.83 Canada 2.5 1.7 1.5 2.1 2.9 1.5 4.2 1.2 1 1 1 1.25 USD-CAD 1.04 1.02 0.99 1.04 Notes: Global and regional aggregates are based on the IMF PPP weights unless stated otherwise. Countries within each region are ordered according to these weights. * Annual averages. The HICP measure of inflation is used for Euro area economies. ** Central bank target rate, year-end, where available, short-term rates elsewhere. Note: US short-term rate forecast for 2012 year-end is 0-0.25%. Midpoint used in table above for global and regional aggregation purposes. Source: BofA Merrill Lynch Global Research
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The RIC Report 10 September 2013
Methodology: US High Quality & Dividend Screen We list a screen of preferred securities that meet specified selection criteria and have relatively high yields for their credit rating and industry sector. The US High Quality & Dividend Yield Screen is not a recommended list.
Screening criteria We combined our two secular themes through the following criteria. In our view, these screening factors were likely to uncover higher- quality companies that offered relatively secure dividend yield. The stocks are selected from the S&P 500.
S&P Common Stock Rank of A+, A, or A-. The S&P Common Stock Rankings are our main measure of quality. These rankings are based primarily on the growth and stability of earnings and dividends over a 10-year period.
Return on Equity (ROE) greater than the average S&P 500 ROE.
Debt/Equity lower than the S&P 500.
Dividend yield greater than the S&P 500.
BofA Merrill Lynch Research Investment Opinion indicates Buy or Neutral as well as the likelihood that the dividend will remain the same or be increased (ie, a dividend rating of “7”).
The ratio of the last 12 months’ free cash flow to dividends must be greater than 1.0.
Methodology: International Low Volatility & Dividend Yield Screen We list a screen of preferred securities that meet specified selection criteria and have high yields relative to their index. The International Low Volatility & Dividend Yield Screen is not a recommended list.
This monthly screen selects low volatility and high dividend yield stocks from the universe of non-US stocks that have ordinary shares or ADRs that trade on the NYSE or NASDAQ, are covered by BofA Merrill Lynch Global Research, and are constituent members of the MSCI AC World ex-USA Index. The screen uses the following criteria to uncover low volatility companies that offer relatively secure dividend yield.
BofAML Investment Rating indicates Buy or Neutral.
BofAML Volatility Risk Rating is A-low or B-medium.
BofAML Income Rating is 7, which indicates the dividend is expected to remain the same or be increased.
The dividend yield is greater than the MSCI AC World ex-USA index.
The debt/equity ratio is less than the MSCI AC World ex-USA index.
The 5-year annualized dividend growth rate is >0%.
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The RIC Report 10 September 2013
Footnote key /#/ One or more analysts responsible for covering the securities in this report owns such securities. /b/ MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report. /g/ MLPF&S or an affiliate was a manager of a public offering of securities of this company within the last 12 months. /i/ The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates. /j/ MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months. /o/ The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates. /p/ The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates. /q/ In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale. /r/ An officer, director or employee of MLPF&S or one of its affiliates is an officer or director of this company. /s/ MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months. /v/ MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company within the next three months. /w/ MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company. If this report was issued on or after the 10th day of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 10th day of a month reflect the ownership position at the end of the second month preceding the date of the report. /x/ Customers of MLPF&S in the US can receive independent, third-party research on companies covered in this report, at no cost to them, if such research is available. Customers can access this independent research at http://www.ml.com/independentresearch or can call 1-800-637-7455 to request a copy of this research. /z/ The country in which this company is organized has certain laws or regulations that limit or restrict ownership of the company's shares by nationals of other countries. /A/ One of the analysts covering the company is a former employee of the company and, in that capacity, received compensation from the company within the past 12 months. /B/ MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis. /C/ Merrill Lynch is affiliated with an NYSE specialist organization that specializes in one or more securities issued by the subject companies. This affiliated NYSE specialist organization makes a market in, and may maintain a long or short position in or be on the opposite side of orders executed on the Floor of the NYSE in connection with one or more of the securities issued by these companies. /N/ The company is a corporate broking client of Merrill Lynch International in the United Kingdom. /O/ MLPF&S or one of it affiliates has a significant financial interest in the fixed income instruments of the issuer. If this report was issued on or after the 10th day of a month, it reflects a significant financial interest on the last day of the previous month. Reports issued before the 10th day of a month reflect a significant financial interest at the end of the second month preceding the date of the report.
Link to Definitions Macro Click here for definitions of commonly used terms.
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The RIC Report 10 September 2013
Important Disclosures
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation). Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster* Buy ≥ 10% ≤ 70% Neutral ≥ 0% ≤ 30% Underperform N/A ≥ 20% * Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent BofA Merrill Lynch Comment referencing the stock.
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The RIC Report 10 September 2013
General Investment Related Disclosures: Taiwan Readers: Neither the information nor any opinion expressed herein constitutes an offer or a solicitation of an offer to transact in any securities or other financial instrument. No part of this report may be used or reproduced or quoted in any manner whatsoever in Taiwan by the press or any other person without the express written consent of BofA Merrill Lynch. 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. 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The RIC Report 10 September 2013
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The RIC Report 10 September 2013
Team Page Evan Richardson Research Investment Committee (RIC) Fixed Income Strategist MLPF&S Alberto Ades GEM FI/FX Strategy, Economist MLPF&S Cheryl Rowan Portfolio Strategist MLPF&S John Bilton, CFA >> European Investment Strategist MLI (UK) Savita Subramanian Equity & Quant Strategist MLPF&S Francisco Blanch Global Investment Strategist MLPF&S Stephen Suttmeier, CFA, CMT Technical Research Analyst MLPF&S Jill Carey Equity Strategist MLPF&S Dan Suzuki, CFA Equity Strategist MLPF&S Steven G. DeSanctis, CFA Small-Cap Strategist MLPF&S Matthew Trapp, CFA Investment Strategist MLPF&S Philip Fischer Municipal Research Strategist MLPF&S Nigel Tupper >> Strategist Merrill Lynch (Hong Kong) Christina Giannini, CFA Small-Cap Strategist MLPF&S Mark Ulrich Portfolio Strategist MLPF&S Ethan S. Harris Global Economist MLPF&S David Woo FX and Rates Strategist MLPF&S Michael Hartnett Chief Investment Strategist MLPF&S John Wraith Rates Strategist MLI (UK) Naoki Kamiyama, CFA >> Equity Strategist Merrill Lynch (Japan) >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a Ajay Singh Kapur, CFA research analyst under the FINRA rules. Equity Strategist Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch Merrill Lynch (Hong Kong) entities that take responsibility for this report in particular jurisdictions.
Martin Mauro Fixed Income Strategist MLPF&S
Hans Mikkelsen Credit Strategist MLPF&S
Priya Misra Rates Strategist MLPF&S
Ralf Preusser, CFA Rates Strategist MLI (UK)
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