2013 Outlook from the BlackRock Investment Institute: WORLD TO SURPASS (LOW) EXPECTATIONS IN 2013

  2013 Outlook from the BlackRock Investment Institute: WORLD TO SURPASS (LOW)

US, Emerging Economies Poised to Outperform – US’s Prospects Hinge on Bridging
                                “Fiscal Cliff”

 Policy Remains Key Driver of Markets, Asset Values; If US Fed Changes Tack,
                “Vast Store" of Cash Could Empty into Equities

Eurozone Could Beat (Very Low) Expectations for Growth By "Spreading the Pain"
                             of Fiscal Tightening

Caution Is the Watchword for 2013: Fixed Income Investors Especially Must Look

Business Wire

NEW YORK -- December 12, 2012

Prospects are improving for a positive albeit gradual turn next year in global
economic and investment conditions, according to the BlackRock (NYSE: BLK)
Investment Institute’s 2013 investment outlook, released today and entitled:
“Slow Turn Ahead?”

Investors need to keep a close eye on the impact of government policy – first
and foremost, the urgent effort to avoid the looming “fiscal cliff” in the US,
which will drive the direction of both the US and global economies in 2013,
according to the BlackRock Investment Institute (BII).

“Our big questions for 2013 are whether the wave of ultra-loose monetary
policies and quantitative easing has crested and if private sector credit can
stage a modest recovery,” said Ewen Cameron Watt, BII’s Chief Investment
Strategist. “Trillions of dollars in monetary stimulus and record low interest
rates have failed to spur much credit growth and economic activity so far. But
what if this changes?”

“Policy - fiscal, monetary and regulatory - drove markets in 2012 and will
remain central to 2013 outcomes,” he said.

With global central banks apparently refocusing monetary stimulus away from
preventing a financial sector collapse and toward targeting economic growth,
next steps by the US Federal Reserve will merit particularly close attention,
according to the report.

“We do not expect the Fed to raise rates any time soon. But it could take its
foot off the monetary accelerator on signs of quickening job growth in the
second half of 2013,” Cameron Watt noted. “Markets need only a whiff of a Fed
preparing to slow its QE programs because of improving employment to empty
some of the vast store of investor money in cash and low-yielding fixed income
assets, and put it into equities.”

Yet, in the US, much hinges on efforts to avoid the fiscal cliff, a set of tax
hikes and spending cuts set to go into effect Jan. 1. "The United States may
turn the corner on growth -– if Washington can avoid falling off the fiscal
cliff and negotiate a long-term budget reduction plan,” according to the

Regulation remains an important focus too, whether it be financial sector
reform in the developed world or social security and welfare reforms in
emerging economies. Politics too will play a role again in 2013 with elections
in, among other nations, Italy, Germany and Israel alongside US budget reform.

The BlackRock Investment Institute is a global platform launched in 2011 that
leverages the firm’s expertise in markets, asset classes and investor segments
to generate investment insights. In addition to Cameron Watt, its 2013
Investment Outlook, “Slow Turn Ahead?”, was authored by:

Nigel Bolton, Head of European Equities, BlackRock Alpha Strategies; Peter
Fisher, Head of BlackRock Fixed Income Portfolio Management; Philipp
Hildebrand, BlackRock Vice Chairman; Russ Koesterich, BlackRock Chief
Investment Strategist; Rick Rieder, Chief Investment Officer, BlackRock
Fundamental Fixed Income; Andrew Swan, Head of Asian Equities, BlackRock Alpha
Strategies; and Richard Urwin, Head of Investments, BlackRock Solutions
Fiduciary Mandates.

                      An "Age of Separatism" Next Year,
                      As US, Emerging Economies Advance

For its 2013 outlook, the BII has updated several potential investment
scenarios originally developed at the beginning of 2012, and revised further
in mid-year. The year-end updates reflect a generally more positive global

“Generally speaking, we are more upbeat about markets than when we last
reviewed our outlook in July 2012,” said Richard Urwin, Head of Investments,
BlackRock Solutions Fiduciary Mandates. “Many key indicators for growth and
risk appetite are perking up going into 2013 – albeit from a low base and low
expectations. It also lays the groundwork for positive surprises. On balance,
we see the world moving toward ‘good things’ albeit slowly, given on-going
deleveraging pressures in parts of the developed world.”

At mid-year, the BII gave highest odds – 40 to 45 percent – to a “stagnation”
scenario of sluggish global economic growth, with the US and emerging
economies losing steam. At year end, however, the BII has dropped the odds of
this scenario – which it labels “Stop ‘n Go” – to 30 percent.

Instead, the BII’s favored scenario is an “Age of Separatism” (35 percent
odds) under which the United States outpaces the rest of the developed world
and emerging economies -- and assets -- outperform. In this “Age of
Separatism,” Europe would continue to recover at a snail's pace while China's
economy re-accelerates.

                      Odds of Global Growth Get a Boost

At the same time, the BII has boosted the odds of a “growth” scenario – which
it labels “Go Growth” – to 20 percent, compared with just 5 to 10 percent at
mid-year. Under this scenario, key economies such as the US, China and Europe
grow faster than expected, and the global economy starts “weaning itself off”
monetary stimulus. However, the chance of this growth scenario drops by 10
points, if the US goes off the fiscal cliff, the BII believes.

Among the things that could go right, the BII says, are an acceleration in
credit creation, sell-offs in short-dated instruments such as bills and
commercial paper, a grand US budget bargain that puts its fiscal house in
order, and growth-boosting structural reforms in China, Brazil and India.

At this point, the BII sees reduced chances -- 10 percent, down from 15 to 20
percent at mid-year -- of a “Nemesis Redux” scenario involving a global
recession, fire sale asset realizations, social upheaval and steep losses
across asset classes. According to Urwin, “We see a smaller chance of Nemesis
as risks of a Eurozone breakup have receded and China’s economic momentum
looks to be strengthening. US and Middle East leaders hold the keys to
Pandora’s Box now.” (This scenario was named after the Greek goddess who
punishes the proud.) Yet, as with the BII’s growth scenario, the fiscal cliff
is a major variable – the chance of a Nemesis scenario doubles, to 20 percent,
if the cliff is jumped.

In the BII's view, there is an unchanged 5 percent chance of an “Inflate Away”
scenario, with high commodities prices and monetary easing driving up
inflation around the world, effectively cutting the developed world's debt

        Around the Globe, Government Policy Will Drive Asset Returns;
                A Call to Compromise on Resolving Fiscal Cliff

Throughout 2013, changes in government policy will directly translate into
changes in asset returns, the BII believes. “The legacies of the financial
crisis -- low economic growth, declining tax revenues, deleveraging, rising
unemployment, record-low bond yields, and government transfers that prop up
corporate profits -- add up to a central role for policy,” said Rick Rieder,
BlackRock’s Chief Investment Officer, Fundamental Fixed Income.

European policymakers are looking to "spread out the pain" of the Continent's
necessary fiscal tightening by extending deadlines for fiscal austerity – a
positive development that may arrest Europe's downward economic growth spiral.
“Aided by tax cuts in Germany, this may cause the Eurozone to beat (extremely
low) growth expectations in 2013, although ongoing deleveraging and the need
for structural reforms make Europe’s potential recovery a multi-year event,”
Rieder added.

In the US, market evidence suggests that investors are still not weighing
heavily the potential impact of the fiscal cliff. "Short-term market
volatility has been eerily low compared with political uncertainty that is at
levels hit during the depths of the financial crisis in 2008," said Russ
Koesterich, BlackRock’s Chief Investment Strategist. "The answer may be easy
monetary policy and liquidity. If financial markets are underwritten (albeit
precariously) by central banks and governments, there is no need for asset
prices to reflect any worries."

The BII called on US political leaders to craft a compromise to avoid the
crisis. "We hope politicians will rediscover the lost art of compromise.
Businesses and voters have sent strong signals to Washington to work together.
If politicians remain polarized, the fiscal cliff will turn into a fiscal
cloud overhanging markets in 2013,” said Barbara Novick, BlackRock Vice Chair
and Head of Government Relations, who co-authored recent BII reports on US
Elections and a BII focus in June 2012 on housing: “In the Home Stretch? The
US Housing Market Recovery.”

On the Pacific Rim, Japan is unlikely to tighten further and may loosen
monetary policy under a new political and central bank leadership. China is
emerging from policy induced growth deceleration and a political handover, yet
still faces long-term challenges, including shifting to a consumption society
from an investment-driven command economy. “Change will come slowly but
surely,” the BII says. “The new leadership is in place for a decade – and does
not need to worry about re-election.”

                   Charting a Course Amid All the “Noise”:
                           Caution Will Be Critical

With so much noise, it is difficult to invest with conviction, the BII notes.

“We generally like equities for 2013. But we are not enamored.” US companies,
which offer the best metrics globally, enjoy fat profit margins, and corporate
profits as a percentage of GDP hit a post-WW II record of 11% this year,
according to the Federal Reserve Bank of St. Louis. Entitlements and tax
breaks have created demand for products and services without burdening
companies with increased output costs. However, the BII cautions, this benefit
reverses once fiscal tightening sets in.

Income remains a dominant, global investment theme; the BII notes that most
investors – both institutional investors and retirees -- are desperate for
income to match their liabilities, a tall order in a world of record low
yields and much longer lives.

“Some investors are sacrificing safety and liquidity just to gain a couple of
basis points of yield,” the BII says. “Markets may pre-empt the Fed, and
trigger a rush (out of fixed income) for the exit (to equities). Safe-haven
fixed income assets may well provide disappointing returns from here.”

Quality businesses and dividend stocks would likely underperform leveraged
companies as the flow out of income could result in a temporary “dash for
trash,” the BII notes. “Casualties would be 'safe' assets such as government
bonds of the US, UK, Germany and other Eurozone core countries. It takes just
a miniscule rise in yield to trigger sizable bond price losses.”

To prepare for such a day, it is important to identify areas of value in
income investing – and pockets of overvaluation or risk, the BII says.

Above all, the BII notes, it will be critical to be cautious across the entire
investment landscape in the year to come.

Conflicts in the Middle East have been the focus of global foreign policy for
much of the new millennium, and have the potential to cause an oil price
spike, or “energy shock.” Another risk is China’s territorial dispute with
Japan and other nations over uninhabited but resource-rich islands in the
South China Sea. A major terrorist attack is a third risk.

“Other risks include a North Korean provocation against South Korea or Japan,
which may act up to (temporarily) regain the global spotlight and to test
China’s new leadership,” the BII notes.

The BII says: “How about major policy mistakes that would throw the world back
into recession? These worried us greatly a year ago. These risks appear to
have receded now, or at least this is what most investors think. So perhaps
there is a risk—the risk of complacency.”

                      BII’s Five-Point Summary for 2013

         We have become more upbeat about the prospects for risk assets and
  1.  stabilizing economic growth (albeit at low levels). Low expectations
         = potential upside surprises.
         The US economy should gain momentum and help boost global growth—IF
    2.   Washington can avoid the “fiscal cliff” and compromise on a
         sustainable budget.
         Many investors lack conviction in markets where risk taking is often
    3.   punished and trends last a skinny minute. Rome—and confidence—was not
         built in a day.
         The era of ultra-loose monetary policy may draw to a close,
    4.   challenging “safe” fixed income assets and heralding a shift toward
         equities. Safety = new tail risk.
         Income investing works in a zero-rate world—but the hunt for yield
    5.   has narrowed valuations between top-quality and not-so great income
         assets. Take out the garbage.

                       So What Do I Do With My Money?™

Here is a summary of the BII’s investment recommendations for 2013:

Fixed Income: Danger in Safety

Prices of safe-haven government bonds and similar assets could plunge when
yields start to rise. Low yield = high price risk. We like global high yield
and US munis for income -- but do not expect much capital appreciation. We
favor emerging market debt. In Europe, we prefer Italian and Spanish bonds
over debt of weaker core countries. We are bullish on commercial
mortgage-backed securities and collaterized loan obligations.

Equities: Global Smorgasbord

We like global companies with strong balance sheets, steady cash flows and
growing dividends. We favor high-quality US stocks, global energy and emerging
markets. We are bullish on domestic consumption plays in Brazil and China,
North Asian cyclical stocks, and Mexican banks and industrials. We like
discounted exporters on Europe’s periphery and small “self-help” UK companies.

Commodities: Long View

We like metals with long-term supply gaps and agricultural commodities.
China’s appetite is huge.

Currencies: Dollar Bulls

We are bullish on the US dollar due to the country’s energy boom and long-term
growth prospects.

Good and Bad Income

Income investing remains our strategy of choice in a zero-rate world. The hunt
for yield has created pockets of overheating and narrowed valuations between
top-quality and less desirable income assets. The report details the state of
play in fixed income, high yield, emerging market debt, municipal bonds,
dividends, and real estate investment trusts.

Pain Trades

Our biggest contrarian idea is buying Japanese exporters while selling the
yen. Other pain trades include selling “safe” tobacco stocks, buying US
companies with cash piles abroad, and buying securities of European and US
financials. We have warmed up to Indian equities after the country’s reforms
on foreign investment.

The Gift of Insurance

Short-term implied volatility is eerily low whereas policy uncertainties are
near financial crisis levels. Consider options to hedge downside and upside

Volatility Reversal?

The fire hose of monetary liquidity and investor hunger for yield has
depressed short-term volatility, so maybe a reversal will have the opposite

About BlackRock

BlackRock is a leader in investment management, risk management and advisory
services for institutional and retail clients worldwide. At September 30,
2012, BlackRock’s AUM was $3.673 trillion. BlackRock offers products that span
the risk spectrum to meet clients’ needs, including active, enhanced and index
strategies across markets and asset classes. Products are offered in a variety
of structures including separate accounts, mutual funds, iShares^®  (exchange
traded funds), and other pooled investment vehicles. BlackRock also offers
risk management, advisory and enterprise investment system services to a broad
base of institutional investors through BlackRock Solutions^®. Headquartered
in New York City, as of September 30, 2012, the firm has approximately 10,400
employees in 29 countries and a major presence in key global markets,
including North and South America, Europe, Asia, Australia and the Middle East
and Africa. For additional information, please visit the Company's website at

About the BlackRock Investment Institute

The BlackRock Investment Institute leverages the firm’s expertise across asset
classes, client groups and regions. The Institute’s goal is to produce
information that makes BlackRock’s portfolio managers better investors and
helps deliver positive investment results for clients.

Executive Director     Lee Kempler
Executive Editor           Jack Reerink
Chief Strategist           Ewen Cameron Watt

Investing For a New World Initiative

In February 2012, BlackRock launched a multi-faceted, global communications
initiative – Investing For a New World™ – to provide guidance and practical
advice to investors struggling to make sense of this new world of low yields,
volatile markets and uncertain returns. See BlackRock’s dedicated microsite,


Catherine Keary, 212-810-5237
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