Investment Strategy Overview — Executive Summary CHIEF INVESTMENT OFFICE Investment Strategy Overview 2021 Year Ahead: The Gateway to the New Frontier December 2020 OVERVIEW ................................................................................................................................ 2 From a CIO view, what’s not likely to transition or shift materially in 2021? .............................2 The bull market for equities What type of potential risks should be considered for 2021? ...........................................................3 continues in 2021, in our What about capital market activity and potential asset allocation implications in 2021? ..4 opinion, and investors should MACRO ENVIRONMENT........................................................................................................ 5 reassess their portfolio allocations early in Q1 to What is the CIO’s outlook for the global economy for 2021? .............................................................5 What is the productivity growth outlook and its implications for potential GDP growth explore where they can take in 2021? ............................................................................................................................................................................7 advantage of this gateway year. EQUITIES .................................................................................................................................. 8 Christopher Hyzy What is the CIO’s outlook for corporate profit margins and its role in driving earnings in 2021? ............................................................................................................................................................................8 Chief Investment Officer Why does the CIO think we are currently in a secular bull market? .................................................9 Does the CIO believe equities are currently expensive? What are the surprise Listen to the audio cast catalysts that could drive valuations for equities, both positively and negatively?...............11 What are the prospects for International equities in 2021? Is it time to consider adding International to long-term portfolios? ...........................................................................................12 FIXED INCOME ......................................................................................................................14 What are the potential implications of monetary and fiscal policy on interest rates, the yield curve and fixed income assets for 2021? ...............................................................................14 Could the coronavirus have a lasting effect on the muni market, and what might we expect in 2021 and beyond? ...............................................................................................................................16 ALTERNATIVE INVESTMENTS ...........................................................................................16 How should qualified investors think about allocations to alternative investments in 2021? .........................................................................................................................................................................16 MARKET STRATEGY .............................................................................................................18 How does the CIO see the outlook for China for next year? Are international trade frictions likely to continue as the U.S. transitions to a new administration in 2021? ........18 How are the 2020 U.S. election results likely to shape the outlook for markets in 2021? .........................................................................................................................................................................19 Is there a way to increase yield in a low- or no-yield environment, and what are the potential risks in doing so? ..................................................................................................................................21 What could a change of administration mean for sustainable and impact investing? .......22 Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp. Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Please see back page for important disclosure information. 3366527 12/2020 OVERVIEW Following on our series that was produced this year called “The Book of Great,” which discussed 10 separate dynamics that developed in 2020, we believe 2021 represents a year of multiple transitions—“The Gateway to the New Frontier.” First and foremost, we believe this transition develops away from peak uncertainty to a more certain, albeit curious, environment. This would begin with a shift from various concerning coronavirus waves to vaccine advancements and distribution and encouraging therapeutics. In terms of the economy, it represents a transition back toward full economic recovery driven by a “Pent-up Demand Cycle”—the Fourth Phase of the Chief Investment Office (CIO) “Economic Recovery” within the workout process—away from shutdowns, phased reopenings and reimposed restrictions. The V-shaped rebound of 2020 evolves toward a reset in activity with new “learnings” across the Corporate, Consumer, Retail, Healthcare and Educational sectors. Businesses begin to transition back to a “work from the office” environment from the year of “work from anywhere.” Given the excessive pent-up demand, 2021 is a year in which the consumer begins to transition some of their spending away from goods back toward traditional service, such as, travel, leisure, entertainment, dining and lodging. Beginning January 20, a transition in Washington unfolds as President-elect Biden and a new administration begin their term. 2021 is also likely to include major shifts geopolitically regarding trade policy and the U.S.-China relationship, in general. This gateway year is also a shift, in our view, to higher capital investment across most segments of the economy and should be the base year for onshoring opportunities. In addition, a gradual rise in productivity should begin to emerge as technological advancements, process automation, and tangible learnings from the pandemic environment spread throughout the private sector. As part of “The New Frontier,” plans for effective use of digital technology, software, sensory-based chip programs, and real- time logistics learning should take hold in areas more equipped to shift manual, human labor-intensive workloads to robotics and artificial intelligence methods (e.g., warehouse and factory automation, drone cleaning agents at stadiums, contact tracing software used for multi-purposes, movie theater “token” tickets for viewing first time anywhere, etc.). 2021 becomes the base year in which the “must-do practices” utilized during the pandemic era transition to “common practices” in the post-pandemic era. This is typical, in our opinion, coming out of crisis periods—particularly those that involve science and technology together. The tangible transitions and shifts in the gateway year are likely to have wide-reaching effects on private sector profits, policy, and portfolio positioning in the year ahead. From a CIO view, what’s not likely to transition or shift materially in 2021? Let’s start with monetary policy. We expect central banks around the world to maintain ultra-accommodative policies and practices in 2021 as concerns linger around the sustainability of economic growth and the willingness for governments to maintain or develop new appropriate fiscal initiatives. Basically, in the U.S., an expansion of the balance sheet continues, and the zero bound in short rates is held, but we do not expect a sharp increase in longer-dated yields despite the higher deficit. On the fiscal front, an additional stimulus package is needed to provide relief in key areas most harmed by the pandemic. Fiscal 4.0 is most likely to be smaller than previous bills but still targeted. A “relief” package in 2021 would come on the back of a stronger economy than earlier ones in 2020. Therefore, we expect growth to gather momentum throughout the year. Past performance is no guarantee of future results. RETURN TO TABLE OF CONTENTS 2 of 25 December 2020 – Investment Strategy Overview Furthermore, we believe consolidation, mergers and economic recovery workouts should continue in 2021 as oversupply is met with decreased demand in the areas that consumers have learned to either live without or have found replacements for during the shutdown and restricted reopenings. A lower level of economic activity in these areas generally requires a period of consolidation but can be balanced out with new industry growth that has been accelerated by the pandemic. This is where innovation takes over. Increased technological innovation generally leads to higher operating leverage and a potential acquisition cycle. This is also where the entrepreneurial animal spirits of the U.S. kick in, with the number of new business startups in the U.S. reaching record highs in 2020 and expected to remain robust into 2021.1 Housing should remain a core engine of economic and job growth