First Quarter 2016 GLOBAL ECONOMIC & CAPITAL MARKETS UPDATE€¦ · First Quarter 2016 . GLOBAL ECONOMIC & CAPITAL MARKETS UPDATE . ... PART TIME . January 2004–March 2016. Official

First Quarter 2016 GLOBAL ECONOMIC & CAPITAL MARKETS UPDATE

For investment professionals only. Not for further distribution.

2 2

page 86

page 112

page 108

page 87

Table of Contents

Economics page 4

Capital Markets page 46

Equities page 48

Fixed Income

Real Assets

Global Risk Summary

Currency

3 3

Capital Markets Environment: First Quarter 2016

U.S. Equities U.S. stocks rebounded from an early quarter slump. Fears about the fall-out from the sharp decline in oil prices and the slowdown in China remain in the forefront, leaving investors skittish about any warning signs. Valuations remain in a tight range and margins are near peak levels, placing the onus on revenue growth to drive further market gains.

Earnings Earnings continued to recede, driven by the fall in energy prices and ongoing dollar strength. Year-over-year growth was -0.8%, but only four of the 10 sectors were negative: energy, materials, industrials, and utilities. Forward expectations remain modestly positive, with significant dispersion at the sector level.

Corporate Actions

Corporations continue to favor returning cash to shareholders over new investments. Capital expenditures are modest and M&A activity has slowed since mid 2015. A more discerning corporate bond market has begun to weigh on financing activity, but companies are still levering balance sheets upward to finance enhanced buyback programs.

Asia China continues its transition toward a consumer-based economy with mixed results. Further yuan devaluation and stock market halts spooked investors early in the quarter, but signs of renewed fiscal support helped spark a rebound. The rest of emerging Asia fared well. Meanwhile, Japan suffered a difficult quarter as the yen strengthened despite aggressive monetary policy. Wages and consumer spending remain stubbornly low.

Emerging Markets

Emerging markets stocks fared well during the quarter, outperforming developed markets during both the market decline and rebound. Brazil led the way higher as investors reacted positively to the increasing likelihood that President Dilma Rousseff will be impeached, while other commodity-driven areas rallied as oil moved back above $40 late in the quarter.

Fixed Income Bonds returns were broadly positive during the quarter. The Fed’s more dovish stance lowered rate expectations, while the late bounce in oil prices eased fears of widespread defaults among energy producers. Spreads remain somewhat elevated but retreated dramatically after spiking in mid-February.

Currencies Most currencies gained ground versus the U.S. dollar, as the Fed indicated a willingness to slow the pace of tightening because of global concerns. The Fed’s dovish approach buoyed emerging markets currencies, including the Chinese yuan, which ended the quarter higher versus the U.S. dollar despite early weakness. Meanwhile, a stronger yen poses a significant headwind to Japanese exporters, leading many to expect new intervention by the Bank of Japan.

Europe European stocks also endured an up and down quarter and finished slightly lower. Banks were hit harshly during the quarter on renewed regulatory concerns and further decreases in interest rates. The late rally came after the ECB showed a willingness to be both aggressive and creative with monetary policy. Expectations remain muted but positive.

4 4

U.S. Economy: Measured growth continues

Sources: Factset, Bureau of Economic Analysis, Bureau of Labor Statistics, T. Rowe Price

Solid payroll gains and a falling unemployment rate suggest labor market health.

U.S. economic growth is likely to stay moderate and trend around 2%. We may see quarterly volatility but the year-on-year rate should be between 2.0% and 2.5%.

Economics Economics

-10

-8

-6

-4

-2

0

2

4

6

8

Perc

enta

ge C

hang

e, A

nnua

l Rat

e

REAL GDP GROWTH January 2006 – December 2015

-1,000

-800

-600

-400

-200

0

200

400

600

0

2

4

6

8

10

12

Mon

thly

Cha

nge

(thou

sand

s)

Une

mpl

oym

ent (

%)

UNEMPLOYMENT AND NON-FARM PAYROLLS January 2006– March 2016

Non-Farm Payrolls (R)

Unemployment (L)

5 5

U.S. Economy: Weakness abroad, inventory correction remain headwinds

*Personal Consumption Expenditures + Residential Investment + Business Fixed Investment Sources: Bureau of Economic Analysis, Federal Reserve, Haver Analytics, T. Rowe Price

Inventories have been increasing at a higher rate than underlying economic growth should warrant, indicating a near-term inventory destocking is likely.

Core demand remains strong, but exports and the drag from inventory destocking have limited U.S. economic growth.

Economics Economics

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

Con

trib

utio

n to

GD

P (P

erce

ntag

e C

hang

e,

Annu

al R

ate)

GDP CONTRIBUTIONS January 2010–December 2015

GovernmentNet ExportsInventory ChangePrivate Domestic Final Demand*

Trend Rate = 60

-250

-200

-150

-100

-50

0

50

100

150

Q/Q

Cha

nge

(SA

AR

, Bill

ions

of C

hain

ed 2

009

USD

)

CHANGE IN PRIVATE INVENTORIES January 2004 to December 2015

6 6

Sources: Haver Analytics, Bureau of Economic Analysis, T. Rowe Price

Strength in the labor market is pushing consumer spending higher. Trends have been somewhat weaker since the fall in oil prices in mid 2014 but remain strong on an absolute basis.

Massive deleveraging in the wake of the 2008 financial crisis has resulted in a large-scale reduction in consumer debt.

Economics Economics

U.S. Consumer: Higher wages and low debt drive increased spending

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

70

80

90

100

110

120

130

Perc

ent a

ge o

f Dis

posa

ble

Inco

me

Perc

ent o

f Dis

posa

ble

Inco

me

HOUSEHOLD DEBT AND DEBT SERVICE AS % OF DISPOSABLE INCOME December 1997–December 2015

Mortgage Debt & Consumer Credit (L)

Household Debt Service Ratio (R)

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Year

-Ove

r-Ye

ar C

hang

e

PAYROLL VS. PERSONAL CONSUMPTION EXPENDITURES January 2008–March 2016

Payroll Index, Private IndustriesPersonal Consumption Expenditures

7 7

U.S. Economy: Business spending and housing rebound should support growth

Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Haver Analytics, T. Rowe Price

Thus far in this cycle, we have not seen housing starts outpace household formation, meaning there is significant room for housing to accelerate.

A cutback in capital expenditures in the oil industry accounts for the decline in investment in structures over the past 4 quarters. This decline has created a significant drag in growth since mid-2014, a drag which may begin to subside in the near term.

Economics Economics

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Con

trib

utio

n to

GD

P

BUSINESS FIXED INVESTMENT January 2010–December 2015

Structures Equipment Intellectual Property

0

500

1000

1500

2000

0

400

800

1200

1600

2000

2400

12 Q

uart

er C

hang

e, A

nnua

lized

Thou

sand

s of

Uni

ts, S

AA

R

HOUSEHOLD FORMATION VS. HOUSING STARTS January 2000–December 2015 Housing Starts (L) Households (R)

8 8

U.S. Fiscal Environment: Government spending is a modest tailwind to growth

Sources: Haver Analytics, Bureau of Economic Analysis, Department of the Treasury, T. Rowe Price

Government finances and employment trends continue to improve. Government spending remains a slight contributor to, rather than a drag on, economic growth.

State and local sectors are making a modest contribution to growth.

Economics Economics

-200

-150

-100

-50

0

50

100

150

-1.0

-0.5

0.0

0.5

1.0

Qua

rter

ly C

hang

e in

Tho

usan

ds

Perc

enta

ge C

hang

e., A

R, 4

Qtr

. Avg

.

GOVERNMENT EXPENDITURES VS. GOVERNMENT EMPLOYMENT January 2007–December 2015

Gov't. Expenditures—Contribution to Real GDP (L)

Gov't. Employment (R)

-8

-6

-4

-2

0

2

4

6

8

10

Perc

enta

ge C

hang

e, Y

ear A

go

REAL GOVERNMENT EXPENDITURES January 2007–December 2015

State and Local Federal

9 9

U.S. Labor Market: Strong but moderating

Employment trends remain broadly positive, however the pace of job creation has moderated since the beginning of 2015.

The unemployment rate is approaching the lows from the prior economic cycle. Meanwhile, the reduction in “under employed” workers has been accelerating since the beginning of 2013, after showing little improvement in the early stages of the recovery.

Economics Economics

0

50

100

150

200

250

300

350

400

450

Cha

nge

in T

hous

ands

PAYROLL EMPLOYMENT January 2011–March 2016

Payroll Employment 12-month average

3

4

5

6

7

8

9

10

11

Perc

ent a

ge o

f Lab

or F

orce

UNEMPLOYMENT RATE VS. PART TIME January 2004–March 2016 Official (U3) Unemployment Rate

Marginally Attached and Involuntary Part TimeWorkers

Sources: Haver Analytics, Bureau of Labor Statistics, T. Rowe Price

10 10

U.S. Inflation: Rising labor costs should begin to affect inflation

PCE = Personal Consumption Expenditures Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics, T. Rowe Price

Economics Economics

-2

-1

0

1

2

3

4

5

Year

-Ove

r-Ye

ar p

erce

ntag

e C

hang

e

PERSONAL CONSUMPTION EXPENDITURES (PCE) PRICE INDEX January 2006–February 2016

PCE Price IndexPCE Price Index Excl. Food & Energy

The increase in labor costs is beginning to have an effect on inflation as low unemployment and a tight labor market put upward pressure on wages.

The collapse in energy prices is keeping core inflation below the Fed’s 2% longer-term target. This effect is likely to fade as energy prices stabilize.

-3

-2

-1

0

1

2

3

4

-3

-2

-1

0

1

2

3

4

Year

-Ove

r-Ye

ar %

Cha

nge

8-Q

uart

er A

nnua

l Per

cent

age

Cha

nge

LABOR COSTS VS. PERSONAL CONSUMPTION EXPENDITURES (PCE) January 2006–December 2015

PCE Price Index Excl. Food & Energy* (R)Unit Labor Costs (L)

11 11

Fed Policy: Tight labor markets are the primary catalyst for tightening

An improvement in the labor market suggests there is a need to begin tightening. Inflation would be likely to accelerate if the actual employment rate fell below the natural rate, which represents full employment.

But the Fed is expected to move slowly because of its concerns about global financial conditions.

Economics Economics

Forecasts based on midpoints of central tendency ranges of FOMC participants’ growth and core inflation projections, March 16, 2016 Summary of Economic Projections (SEP). Source: Bureau of Economic Analysis, Federal Reserve, Haver Analytics, T. Rowe Price.

2

4

6

8

10

12

Perc

ent

UNEMPLOYMENT VS. NATURAL RATE OF UNEMPLOYMENT January 1971 to December 2015

RecessionsActual Unemployment Rate"Natural" Rate of Unemployment

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Perce

nt

FOMC PARTICIPANTS' FORECASTS OF YEAR END TARGET FED FUNDS RATE March 16, 2016

2016 2017 2018 Longer Run

12 12

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Year

-Ove

r-Ye

ar %

Cha

nge

BANK CREDIT GROWTH BY TYPE January 2007–December 2015

Consumer Commercial Real EstateResidential Real Estate Commercial and Industrial

U.S. Credit: Credit growth in industrial sector wavering

* All U.S. domestically chartered commercial banks, break adjusted and seasonally adjusted data Sources: Federal Reserve Board, Haver Analytics, T. Rowe Price

Credit growth in most areas continues to accelerate, with the notable exception of commercial and industrial loans. The uptick in consumer credit growth is a positive sign.

Credit growth has been healthy but volatile. Total credit growth moderated slightly in the second half of 2015, primarily due to a slowdown in corporate bond issuance.

Economics Economics

-15%

-10%

-5%

0%

5%

10%

15%

Year

-Ove

r-Ye

ar %

Cha

nge

CREDIT GROWTH BANK AND NON-BANK FINANCING January 2007–December 2015

Commercial bank loans and leases*

Total credit extended to private nonfinancial sectors

13 13

U.S. Credit: Lending conditions tighten; delinquencies in check


Despite concerns in the high yield bond market, there are not yet any significant signs of rising delinquency rates in bank credit markets. However, commercial/industrial rates have ticked slightly upward.

Lending standards have tightened for businesses as we near the latter stages of the business cycle.

Economics Economics

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2010 2011 2012 2013 2014 2015

Net

% o

f Res

pond

ents

Tig

hten

ing

Stan

dard

s

CREDIT STANDARDS NET TIGHTENING BY LOAN OFFICERS January 2010–December 2015

Consumer

Large and Mid Size Business

Small Business

0%

2%

4%

6%

8%

10%

12%

Perc

enta

ge o

f loa

ns o

utst

andi

ng

CREDIT CYCLE DELINQUENCY RATES December 2005–December 2015

Consumer Residential Real EstateCommercial Real Estate Commercial and Industrial

14 14

U.S. Economy: Impact of the sharp drop in commodity prices limited


The negative effects of falling commodity prices on employment have been contained in manufacturing and mining. All other sectors have remained healthy, which bodes well for the economy going forward.

After an initial net benefit to the economy in 2014, the fall in oil prices was a drag on growth in 2015. The effect is likely to become positive again in 2016.

Economics Economics

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

2014H2 2015H1 2015H2

Perc

enta

ge o

f GD

P (%

), A

nnua

l Rat

e

OIL PRICE IMPACT ON GDP Mining Industry Capex Consumer Purchasing PowerNet Impact of Both Effects

-1,000

-800

-600

-400

-200

0

200

400

-250

-200

-150

-100

-50

0

50

100

Cha

nge,

thou

sand

s, th

ree-

mon

th a

vera

ge

PRIVATE INDUSTRY EMPLOYMENT January 1998 to February 2016

Manufacturing & Mining (L) All Other Sectors (R)

15 15

U.S. Economy: How much longer can the expansion last?

NAIRU = Non-Accelerating Inflation Rate of Unemployment Sources: U.S. Census Bureau, Bureau of Labor Statistics, Haver Analytics, T. Rowe Price

The unemployment gap closure typically occurs when the expansion is 2/3 complete. We are close to that point, but have not reached it yet—another positive signal that the expansion may continue.

While some of the shortfall in housing starts relative to household formation is due to excess inventory from the prior cycle, the absence of a cyclical housing overhang bodes well for a continued expansion.

Economics Economics

400

800

1200

1600

2000

2400

2800

400

800

1200

1600

2000

2400

2800

12 Q

uart

er C

hang

e, A

nnua

lized

Thou

sand

s of

Uni

ts, S

AA

R

HOUSEHOLD FORMATION VS. HOUSING STARTS January 2000–December 2015 Housing Starts (R) Household Formation (L)

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1975 1980 1985 1990 1995 2000 2005 2010 2015

Rat

io

RATIO OF FULL EMPLOYMENT TO ACTUAL EMPLOYMENT January 1975 to December 2015

NAIRU/Unemployment RateTheoretical Equilibrium

Percent of expansion (based on NBER dates) completed when ratio reaches 1

65.0% 64.5%

62.5%

62.5%

16 16

U.S. Economy: Are we heading toward recession?

Sources: Federal Reserve, Bureau of Economic Analysis, Haver Analytics

Credit standards typically go through a process of tightening significantly prior to recession. This appears to have commenced but is in the very early stages.

Corporate profits typically fall significantly prior to a recession. This process may have begun, which could indicate the coming of a recession.

Economics Economics

-20

0

20

40

60

80

100

1990 1995 2000 2005 2010 2015N

et P

erce

nt T

ight

enin

g

BANK LENDING STANDARDS January 1990 to December 2015

Recessions

Bank Lending Standards,All Loan Types

1

3

5

7

9

11

13

15

17

19

Year

-ove

r-Ye

ar C

hang

e (%

)

PROFIT GROWTH January 1955 to December 2015

Recessions

Profits - DomesticNonfinancial Corporations

17 17

U.S. Economy: Recession probability low

Sources: Federal Reserve Bank of New York, Haver Analytics

According to a model based on Treasury spreads, published by the Federal Reserve Bank of New York, the estimated probability of a recession over the next twelve months as of the end of February is 3.8%.

Economics Economics

0

0

0

1

1

1

1

1

0

10

20

30

40

50

60

70

80

90

100

Prob

ablit

y (%

)

U.S. RECESSION PROBABILITY, NEXT 12 MONTHS Based on the Treasury Spread (Federal Reserve Bank of New York

Recessions

Recession Probability, 12 Months Ahead

18

Slower emerging markets economic growth has weighed on the world economy. Despite the significant monetary stimulus in the U.S., Europe, and Japan, developed market economies have not accelerated enough to offset this emerging market slowdown. In the U.S., we have seen a muted expansion and very little investor optimism.

-6

-4

-2

0

2

4

6

8

10

2000 2002 2004 2006 2008 2010 2012 2014

GD

P G

row

th (%

)

GLOBAL GDP GROWTH 2000 to 2015

As of December 2015

Sources: IMF and T. Rowe Price.

Global Economy: Is slower growth the “new normal”?

World

Avg. World GDP Growth

Emerging Markets

Developed Markets

Economics

Average '84 to '07:

3.3% Average '10 to '15:

2.1

-5

-3

-1

1

3

5

7

9

1984 1988 1992 1996 2000 2004 2008 2012

Rea

l GD

P G

row

th (Y

/Y %

Cha

nge)

U.S. REAL GDP GROWTH 1984 to 2015

19 19

Global Economy: Weakness evident among commodity-producing nations

Sources: Haver Analytics, IMF, Markit, T.Rowe Price

GLOBAL MANUFACTURING PMIs As of March 2016

PMI < 50 & Declining m/m PMI < 50 & Increasing m/m PMI > 50 & Declining m/m PMI > 50 & Increasing m/m Scale:

Economics Economics

Mar-16 Feb-16 Jan-16 Dec-15 Nov-15 Oct-15 Sep-15 Aug-15 Jul-15 Jun-15 May-15 Apr-15 Mar-15

Global 50.5 50.0 50.9 50.9 51.2 51.3 50.6 50.7 51.1 51.0 51.3 51.0 51.8

Americas

U.S. 51.5 51.3 52.4 51.2 52.8 54.1 53.1 53.0 53.8 53.6 54.0 54.1 55.7

Canada 51.5 49.4 49.3 47.5 48.6 48.0 48.6 49.4 50.8 51.3 49.8 49.0 48.9

Mexico 53.2 53.1 52.2 52.4 53.0 53.0 52.1 52.4 52.9 52.0 53.3 53.8 53.8

Brazil 46.1 44.5 47.4 45.6 43.8 44.1 47.0 45.8 47.2 46.5 46.0 46.0 46.2

Asia / Pacific

Japan 49.1 50.1 52.3 52.6 52.6 52.4 51.0 51.7 51.2 50.1 50.9 49.9 50.3

Australia 58.1 53.5 51.5 51.9 52.5 50.2 52.1 51.7 50.4 44.2 52.3 48.0 46.3

China 49.7 48.0 48.4 48.3 48.6 48.3 47.2 47.3 47.8 49.4 49.2 48.9 49.6

South Korea 49.5 48.7 49.5 50.7 49.1 49.1 49.2 47.9 47.6 46.1 47.8 48.8 49.2

India 52.4 51.1 51.1 49.1 50.3 50.7 51.2 52.4 52.7 51.3 52.6 51.3 52.1

Indonesia 50.6 48.7 48.9 47.8 46.9 47.8 47.4 48.4 47.3 47.8 47.1 46.7 46.4

Europe / Africa

U.K. 51.0 50.8 52.9 51.9 52.5 55.5 51.5 51.6 51.9 51.4 51.9 51.8 54.3

Euro Area 51.6 51.2 52.3 53.2 52.8 52.3 52.1 52.3 52.4 52.5 52.3 52.0 52.2

Russia 48.3 49.3 49.8 48.7 50.1 50.2 49.1 47.9 48.3 48.7 47.6 48.9 48.1

South Africa 50.5 47.1 43.5 45.5 43.3 48.1 49.0 48.9 51.4 50.0 49.5 47.9 47.9

Turkey 49.2 50.3 50.9 52.2 50.9 49.5 48.8 49.3 50.1 49.0 50.2 48.5 48.0

20 20

Global Economy: Weakness in emerging markets and manufacturing mutes global growth

Sources: Haver Analytics, Markit, T.Rowe Price

Economics Economics

As of March 2016

48

50

52

54

56

58

2012 2013 2014 2015 2016

DEVELOPED VS. EMERGING PMI

Developed Markets Emerging Markets

48

50

52

54

56

58

2012 2013 2014 2015 2016

GLOBAL MANUFACTURING VS. SERVICES

Services Manufacturing

21 21

Global Economy: Manufacturing weakness is most pronounced in China and the U.S.

Sources: Haver Analytics, Markit, T.Rowe Price

Economics Economics

As of March 2016

44

46

48

50

52

54

56

58

60

2012 2013 2014 2015 2016

GLOBAL PMI


44

46

48

50

52

54

56

58

60

2012 2013 2014 2015 2016

USA PMI


44

46

48

50

52

54

56

58

60

2012 2013 2014 2015 2016

EURO AREA PMI


44

46

48

50

52

54

56

58

60

2012 2013 2014 2015 2016

JAPAN PMI


44

46

48

50

52

54

56

58

60

2012 2013 2014 2015 2016

EMERGING MARKETS PMI


44

46

48

50

52

54

56

58

60

2012 2013 2014 2015 2016

CHINA PMI


22 22

Global Economy: Negative surprises were widespread early in 2016

* Emerging Market countries include Brazil, Chile, China, Colombia, the Czech Republic, Hong Kong, Hungary, India, Indonesia, South Korea, Malaysia, Mexico, Peru, the Philippines, Poland, Singapore, South Africa, Taiwan, Thailand, and Turkey. Sources: Citigroup, Factset, T. Rowe Price

Economics Economics

-150

-100

-50

0

50

100

2012 2013 2014 2015 2016

Inde

x Le

vel (

%)

U.S. CITI SURPRISE INDEX March 2012–March 2016

-150

-100

-50

0

50

100

2012 2013 2014 2015 2016

Inde

x Le

vel (

%)

EUROZONE CITI SURPRISE INDEX March 2012–March 2016

-150

-100

-50

0

50

100

150

2012 2013 2014 2015 2016

Inde

x Le

vel (

%)

JAPAN CITI SURPRISE INDEX March 2012–March 2016

-75

-50

-25

0

25

50

2012 2013 2014 2015 2016

Inde

x Le

vel (

%)

EM CITI SURPRISE INDEX* March 2012–March 2016

23 23

Eurozone: Economy growing modestly but deleveraging incomplete

Sources: Factset, Haver Analytics, T. Rowe Price

Unlike in the U.S. and the U.K., the private sector in the Eurozone has not significantly delevered in the post-financial crisis period.

European growth remains slow but positive. Political obstacles and a slowdown in China remain downside risks.

Economics Economics

-12

-10

-8

-6

-4

-2

0

2

4

6

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Qua

rter

to Q

uart

er %

Cha

nge,

Ann

ual R

ate

EUROZONE REAL GDP GROWTH January 2006–December 2016

170

180

190

200

210

220

230

Perc

ent o

f GD

P

CREDIT TO NON-FINANCIAL PRIVATE SECTORS January 2003–September 2015

Euro area United Kingdom

24 24

Eurozone: Quantitative easing a success thus far

Sources: Haver Analytics, Markit, European Central Bank, T. Rowe Price

Better financing conditions allow banks to loosen lending standards, while expectations for renewed economic growth boost demand for consumer and business loans. Demand remains strong but supply is wavering as European banks are struggling with low (or negative) rates and increased regulations.

Money supply is growing, spurred by the ECB’s quantitative easing program. Lower financing costs should encourage companies to increase capital expenditures, thereby boosting economic growth.

Economics Economics

0

2

4

6

8

10

12

14

42

44

46

48

50

52

54

56

58

60

2010 2011 2012 2013 2014 2015 2016

M1

Annu

al G

row

th R

ate

(%)

Euro

zone

PM

I

MONEY SUPPLY VS. PMI January 2010– February 2016

Eurozone Flash PMI (12 month lag)

ECB Money Supply: M1: AnnualGrowth Rate

-80

-60

-40

-20

0

20

40

60

80-80

-60

-40

-20

0

20

40

60

80

2006 2008 2010 2012 2014

Cha

nge

in L

endi

ng S

tand

ards

(%) (

Inve

rted

)

Cha

nge

in D

eman

d (%

)

ECB BANK LENDING SURVEY January 2006– March 2016

Business Loan Demand (L)

Household Loan Demand (L)

Lending Standards for Business (R)

Lending Standards for Households (R)

25 25

Eurozone: Periphery conditions improving

Sources: Haver Analytics, European Central Bank, Banca d’Italia, Banco de Espana, Central Statistics Office Ireland, Greece Ministry of Finance, T. Rowe Price

Many of the periphery countries have also made significant progress in balancing their fiscal budgets, although Italy’s progress has been mixed. These improvements should open the way for the pullback in austerity programs going forward.

The current account balances of periphery countries have benefited from a weaker euro.

Economics Economics

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

2009 2010 2011 2012 2013 2014 2015 2016

Perc

ent o

f GD

P

CURRENT ACCOUNT BALANCES 2009 to 2015

Euro Area Portugal ItalyGreece Spain

-30

-25

-20

-15

-10

-5

0

5

2009 2010 2011 2012 2013 2014 2015

Perc

ent o

f GD

P

FISCAL BALANCES 2009 to 2015

Spain Greece Ireland Italy

26 26

Eurozone: Progress made; potential for further improvement remains

Sources: Haver Analytics, Factset, World bank Group, T. Rowe Price

Structural reforms have improved the business climate, but there is still significant room for improvement.

Unemployment has been falling over the past three years, but remains elevated, particularly in periphery countries.

Economics Economics

0

5

10

15

20

25

30

2009 2010 2011 2012 2013 2014 2015 2016

Une

mpl

ymen

t Rat

e (%

)

EURO AREA UNEMPLOYMENT January 2009 to February 2016

Euro Area Germany FranceItaly Spain PortugalGreece

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 2015W

orld

Ban

k G

roup

Sur

vey,

Low

er is

Bet

ter

EASE OF DOING BUSINESS 2009 to 2015

Greece Ireland ItalyPortugal Spain Germany

27 27

Japan: Wages and inflation remain stubbornly slow

*Total gross cash earnings Sources: Japan Cabinet Office, Factset, Haver Analytics, T. Rowe Price

After initially strong responses to policy intervention, both wage and inflation have slowed. Wage growth is an important factor to the ultimate success of Abe’s program.

Japan’s economic growth has been uneven, bolstering the case for more monetary easing by the Bank of Japan.

Economics Economics

-20

-15

-10

-5

0

5

10

15

Qua

rter

to Q

uart

er %

Cha

nge,

Ann

ual R

ate

JAPAN—REAL GDP GROWTH January 2006–December 2015

-25

-20

-15

-10

-5

0

5

10

15

-25

-20

-15

-10

-5

0

5

10

15

Year

-Ove

r-Ye

ar %

Cha

nge

Year

-Ove

r-Ye

ar %

Cha

nge

JAPAN—CONSUMER PRICE INDEX January 2007–February 2016

CPI ex. Fresh Food (L) Wages* (R)

28 28

Japan: Domestic consumption hampered by tax, demographics

Sources: Cabinet Office of Japan, Japan Ministry of Health, Labour & Welfare, Haver Analytics, T. Rowe Price

Labor force participation has improved in recent years, but the aging of the population remains a significant challenge.

Domestic consumption has stagnated since the consumption tax was increased from 5% to 8% in 2014.

Economics Economics

6,500

6,550

6,600

6,650

6,700

6,750

6,800

6,850

1996 1999 2002 2005 2008 2011 2014Te

n Th

ousa

nd P

erso

ns, S

AA

R

JAPAN - TOTAL LABOR FORCE January 1996 to March 2016

0%

2%

4%

6%

8%

10%

12%

14%

2009 2010 2011 2012 2013 2014 2015 2016

Cum

ulat

ive

Gro

wth

Sin

ce M

arch

200

9

JAPAN - SOURCES OF CONSUMPTION GROWTH 1Q09 to 4Q15 Private Consumption

Government Consumption

29 29

Japan: Is “Abenomics” working?

Sources: Haver Analytics, Bank of Japan, Japan Ministry of Health, Labor, & Welfare

One of the keys to reviving the Japanese economy is to increase wages, which should lead to an improvement in consumer spending. We have not seen such an increase, especially after wages are adjusted to account for the inflationary effects of a weaker yen.

Business conditions in Japan have improved substantially throughout this decade, but have stagnated after an initial boost from the business-friendly policies of Prime Minister Shinzō Abe.

Economics Economics

-30

-25

-20

-15

-10

-5

0

5

10

15

2010 2011 2012 2013 2014 2015 2016

Tank

an S

urve

y R

esul

ts

JAPAN: BUSINESS CONDITIONS SURVEY January 2010 to March 2016

91

93

95

97

99

101

103

2010 2011 2012 2013 2014 2015 2016

Wag

e In

dex

Surv

ey R

esul

ts (2

010

= 10

0)

JAPAN: WAGE INDEX SURVEYS January 2010 to March 2016

Total Earnings IndexReal Earnings Index

30 30

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2010 2011 2012 2013 2014 2015 2016

Year

-Ove

r-Ye

ar P

erce

ntag

e C

hang

e

EMERGING MARKETS INFLATION January 2010–March 2016

India Brazil China Russia

0

2

4

6

8

10

12

14

16

18

20

2010 2011 2012 2013 2014 2015 Pe

rcen

t (%

)

EMERGING MARKETS CENTRAL BANK RATES January 2010–March 2016

India Brazil China Russia

Emerging Markets: Divergent monetary paths

Sources: Various National Statistical Agencies, Haver Analytics, T. Rowe Price

As growth slows and inflation moderates, many central banks in emerging markets are shifting from tightening to easing monetary policies.

Inflation levels vary significantly across emerging markets. Inflation is accelerating in countries that are most vulnerable to currency devaluation, although this effect has moderated thus far in 2016.

Central Bank policy rate: All Items CPI:

Economics Economics

31 31

Emerging Markets: Commodity producers face elevated risks

Private credit (non-government) has grown significantly in emerging markets since 2007, but rates vary widely among countries. Most emerging markets have relatively small debt loads relative to developed markets. Markets that have issued new debt to build capacity for commodity production are most at risk, especially if commodity prices remain low.

Economics Economics

Sources: Bank for International Settlements, Haver Analytics, T. Rowe Price

-50

0

50

100

150

200

Priv

ate

Non

-Fin

anci

al C

redi

t as

% o

f GD

P PRIVATE NON-FINANCIAL CREDIT

1997 2007 Current Change since 2007

32 32

Emerging Markets: Wide disparity in credit growth

Deleveraging Countries: Bolivia, Hungary, India, Israel, Kazakhstan, Nigeria, Philippines

Lower Risk Countries: Belarus, Chile, Colombia, Czech Republic, Ecuador, Egypt, Indonesia, Korea, Malaysia, Mexico, Peru, Poland, South Africa, Taiwan

Higher Risk Countries: Brazil, China, Croatia, Hong Kong, Russia, Singapore, Thailand, Turkey, Ukraine

Economics Economics

Sources: Bank for International Settlements, Haver Analytics, T. Rowe Price

75%

100%

125%

150%

175%

PUBLIC CREDIT AND PRIVATE DOMESTIC CREDIT AS % OF GDP

Deleveraging Countries

Low Risk Countries

High Risk Countries

-50% 0% 50% 100% 150% 200% 250%

BoliviaHungary

IndiaIsrael

KazakhstanNigeria

PhilippinesBelarus

ChileColombia

Czech Rep.Ecuador

EgyptIndonesia

KoreaMalaysia

MexicoPeru

PolandSouth Africa

TaiwanBrazilChina

CroatiaHong Kong

RussiaSingapore

ThailandTurkey

Ukraine

PUBLIC CREDIT AND PRIVATE DOMESTIC CREDIT AS % OF GDP, BY COUNTRY

2014 Change Since 2009

33 33

Emerging Markets: Wide disparity in commodity exposure

Economics Economics

*2014 is the most recent available data Sources: Citi, World Trade Organization

0

5

10

15

20

25

30

35

40

45

Perc

ent o

f 201

4 G

DP

COUNTRY EXPORTS BY TYPE As Percent of 2014 GDP*

Total Commodities Agricultural products Fuels and mining products Manufactured Products

Commodity exposure varies significantly by region. Russia, Malaysia, Chile, and Venezuela were the most prominent exporters of fuels and mining products in 2014.

34 34

China: Hoping to engineer a palatable slowdown

Sources: Factset, Haver Analytics, China National Bureau of Statistics

Chinese officials are vowing to make policy adjustments amid rising expectations that China will miss its growth targets.

Economics Economics

4

6

8

10

12

14

16

Year

-Ove

r- Y

ear %

Cha

nge

CHINA: REAL GDP January 2005–December 2015

-10%

0%

10%

20%

30%

40%

50%

60%

Perc

ent C

hang

e, Y

ear A

go

CHINA: FIXED ASSET INVESTMENT GROWTH January 2006–February 2016

ManufacturingReal EstateInfrastructure

Fixed asset growth in manufacturing and real estate has been declining. Infrastructure spending has slowed but at a much more gradual rate.

35 35

China: Credit binge and overcapacity leads to eroding business profits

Credit has grown exponentially since 2008. Higher debt service payments mean fewer businesses can survive a sharp slowdown.

Economics Economics

Overly zealous buildouts have resulted in overcapacity, which has eroded prices and profit margins.

100

120

140

160

180

200

30

35

40

45

50

Perc

ent o

f GD

P

CHINA CREDIT AND INVESTMENT 2000 to 2014

Gross Fixed Capital Formation (L)

Debt of Private NonfinancialSectors (R)

Sources: China National Bureau of Statistics, Haver Analytics, T. Rowe Price

-90

-60

-30

0

30

60

90

120

150

-9

-6

-3

0

3

6

9

12

15

Year

ove

r Yea

r Cha

nge

(%)

PRICES AND PROFITS January 2004 to March 2016

PPI, All Industry Products (L)

Profits of Industrial Enterprises (R)

36 36

China: Reliance on infrastructure and debt

Sources: CIEC, UBS, China National Bureau of Statistics, Haver Analytics

Infrastructure investment has been a primary driver of economic growth in China. However, the use of infrastructure to stimulate growth has become less effective, while elevated debt loads are making financing new investments more expensive.

Economics Economics

Chinese debt loads have risen dramatically. However, the vast majority of Chinese debt is held within China, which lowers the chances of credit contagion and offers the government more control if credit market intervention is necessary.

0

50

100

150

200

250

Gro

ss D

ebts

as

% o

f GD

P

CHINA EXTERNAL VS. INTERNAL DEBT 2003 to 2014

External debt in foreign currencyNon-financial sector domestic debt

-10

0

10

20

30

40

50

60

4

6

8

10

12

14

16

Year

ove

r Yea

r Cha

nge

(%)

GDP GROWTH VS. INFRASTRUCTURE INVESTMENT January 2007 to February 2016

China GDP (Left Axis)

Fixed Asset Investment: Infrastructure(Right Axis)

37 37

China: Gradual yuan devaluation needed

Given how much other currencies have declined in relation to the U.S. dollar, a correction in the yuan was likely overdue.

Economics Economics

The yuan’s strength has been a headwind for exports. However because of the risk of capital flight, devaluation must remain limited in scope.

Sources: Factset, T. Rowe Price Past performance cannot guarantee future results.

30

40

50

60

70

80

90

100

110

120

2011 2012 2013 2014 2015

Inde

x of

Per

form

ance

vs.

USD

(100

= 5

Yea

rs A

go)

VARIOUS CURRENCIES VS. USD 5 years ending April 1, 2016

Chinese Yuan Russian RubleJapanese Yen EuroBrazilian Real Indian Rupee

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Year

ove

r Yea

r Cha

nge

CHINA EXPORT GROWTH January 2008 to March 2016

Exports

Exports (12 month moving average)

38 38

China: Capital outflow concerns

Initial moves to devalue the yuan/renminbi versus the dollar have caused significant capital outflow, as investors fear further devaluation. This has forced China to spend significant currency reserves stabilizing the currency, but more than $3 trillion in reserves remains.

Economics Economics

However, it is notable that capital flows into China have slowed significantly. This is a stark change in the environment in China, where significant capital inflows have been the norm for many years.

Sources: Haver Analytics, People’s Bank of China, State Administration of Foreign Exchange

-250

-200

-150

-100

-50

0

50

100

150

200

250

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Mill

ions

of U

.S. D

olla

rs

CHINA: FOREIGN CURRENCY RESERVES January 2000 to March 2016

Foreign Currency Reserves (L)Quarterly Change (R)

-1,000

-500

0

500

1,000

1,500

2,000

Mill

ions

of U

.S. D

olla

rs

CHINA: CAPITAL ACCOUNT January 2007 to December 2015

39 39

China: Shifting to a consumption economy?

China’s economy is transitioning toward domestic-led growth model reliant on service-oriented industries and away from an export-driven mode that emphasized external demand.

Economics Economics

Electricity consumption sheds further light on the nature of the shift. Household electricity use grew in 2015, while industry use fell by 5%.

Sources: Haver Analytics, China National Bureau of Statistics, T. Rowe Price

51.3%

30%

35%

40%

45%

50%

55%

Serv

ices

as

% o

f GD

P

CHINA: SERVICES SHARE OF THE ECONOMY 1992 to 4Q15

-5%

0%

5%

10%

15%

20%

25%

All Households IndustryYe

ar o

ver Y

ear C

hang

e (%

)

CHINA: ELECTRICITY CONSUMPTION 2011 2012 2013 2014 2015

40 40

China: New economy now powering growth

* "Old Economy" is defined as the secondary sectors, which are principally industrial-related sectors, of the Chinese economy. "New Economy" is defined as the tertiary sectors, which are the service-related sectors of the Chinese economy. Sources: Factset, Haver Analytics, China National Bureau of Statistics

Economics Economics

-10

-5

0

5

10

15

20

25

2012 2013 2014 2015 2016

Year

-Ove

r-Ye

ar C

hang

e (%

)

RETAIL SALES HOLDING UP January 2012 to March 2016

Retail Sales

Industrial Production

Urban Fixed AssetInvestmentExports (12 monthmoving average)

0.5% 0.6%

4.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2010 2011 2012 2013 2014 2015

Year

-ove

r-Ye

ar C

hang

e in

Nom

inal

GD

P (N

ot S

easo

nally

Adj

uste

d)

CHINESE NOMINAL GDP GROWTH January 2010 to December 2015

Nominal GDP Growth

Agriculture Contribution

Old Economy* Contribution

New Economy* Contribution

41 41

China: Considerable firepower to maintain growth

Economics Economics

Sources: Factset, Haver Analytics, China National Bureau of Statistics, US Department of Treasury, Federal Reserve Board, Bank of Japan, European Central Bank, People’s Bank of China, International Monetary Fund, T. Rowe Price *Based on the following exchange rates: 0.009052 USD per JPY, 1.13755 USD per Euro, 0.154424 USD per Yuan/Renminbi

Transforming the world’s second-largest economy has proven difficult. However, policymakers are motivated to maintain healthy growth rates and have the tools to do so. These tools include a strong central government that can implement growth policies with few political or procedural impediments, huge cash reserves, and the ability to manipulate interest rates and reserve requirements.

$1.84 Trillion

$3.77 Trillion

$3.35 Trillion

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Total CentralGovernment

Budget Surplus,2012 to 2014

CurrentHoldings of U.S.

TreasurySecurities

Current ForeignReserves

Excluding Gold

Bill

ions

of U

S D

olla

rs

CHINA’S “FIREPOWER” As of December 31, 2015

0

1,000

2,000

3,000

4,000

5,000

6,000

Cen

tral

Ban

k As

sets

, bill

ions

of U

.S. D

olla

rs

CENTRAL BANK ASSETS* January 2005 to February 2016

China United StatesJapan Euro Area

42 42

China: Chinese demand has peaked and is dragging commodity prices lower

Global commodity prices have fallen as a result of a decline in Chinese demand. We have seen a clear correlation between Chinese industrial production and global prices of industrial metals.

Economics Economics

Over-investment leads to over-capacity. In South Korea, investment as a percentage of GDP peaked at 42%. In China, this ratio is currently at 46%--a level that appears unsustainable.

Sources: Factset, Haver Analytics, China National Bureau of Statistics, Bank of Korea, T. Rowe Price

20%

25%

30%

35%

40%

45%

50%

Gro

ss F

ixed

Cap

ital I

nves

tmen

t as

Perc

ent o

f GD

P

INVESTMENT AS PERCENT OF GDP 1970 to 2015

Korea China

250

300

350

400

450

500

5%

7%

9%

11%

13%

15%

17%

2011 2012 2013 2014 2015 2016

Inde

x Le

vel

Year

ove

r Yea

r Cha

nge

(%)

CHINA INDUSTRIAL PRODUCTION VS INDUSTRIAL METALS PRICES January 2011 to March 2016

China - Industrial Production (Left)S&P GSCI Industrial Metals Index Price (Right)

43 43

China: China hard landing would be global event

Source: IMF World Economic Outlook Database

A hard landing for the Chinese economy would be a significant global event, given the size of China’s economy…

Economics Economics

…especially since China’s economy is expected to experience the fastest growth rate among global economies over the balance of the decade.

28%

25%

8%

4% 2%

0

5

10

15

20

25

30

0

1

2

3

4

5

6

7

China UnitedStates

India UnitedKingdom

Japan

Perc

ent a

ge o

f Wor

ld T

otal

(%)

Gro

ss D

omes

tic P

rodu

ct (T

rillio

ns o

f USD

)

PROJECTED GDP GROWTH 2014 TO 2020

% of World Total

0

5

10

15

20

25

Gro

ss D

omes

tic P

rodu

ct (T

rillio

ns o

f USD

)

GLOBAL GDP COMPARISONS

2014 GDP Projected 2020 GDP

44 44

China: Will investment flows shift?

Source: IMF World Economic Outlook Database, Haver Analytics

China’s share of global investment has risen rapidly over the 15 years…

Economics Economics

…which raises the question of how investment patterns will shift, as China transitions toward a consumption-driven economy.

2% 5% 5% 8% 15% 17% 11%

11% 9% 10%

13% 13%

77% 79% 81% 75%

64% 62%

9% 6% 5% 6% 8% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1995 2000 2005 2010 2013

Shar

e of

Glo

bal C

apita

l For

mat

ion

SHARE OF WORLDWIDE INVESTMENT

China EM ex. China OECD Rest of World

1223%

326%

87% 49%

0%

200%

400%

600%

800%

1000%

1200%

1400%

Cum

ulat

ive

Cha

nge

in C

apita

l For

mat

ion

(%)

INVESTMENT GROWTH SINCE 1990 China Emerging Markets World OECD

45 45

Global economy: Country comparison As of March 31, 2016

1 As of 6 April 2016 per The Economist 2 As of 14 October 2015 release of IMF World Economic Outlook via Factset 3 As of 6 April 2016 per the CIA World Factbook (2015 est.) Sources: IMF, The Economist, CIA World Factbook, World Bank

Developed Markets Emerging Markets

United States Europe

United Kingdom Japan Australia Canada Brazil Russia India China Mexico

Inflation Rate (CPI)1 1.0% -0.1% 0.3% 0.3% 1.7% 1.4% 10.4% 7.3% 5.2% 2.3% 2.9%

Savings Rate (as a % of GDP)2 17.7% 23.0% 13.4% 24.3% 22.3% 20.8% 12.9% 23.5% 29.% 45.9% 20.5%

Investment Rate (as a % of GDP)2 20.6% 19.3% 17.7% 21.3% 26.4% 22.7% 16.7% 18.1% 30.6% 43.1% 22.5%

Current Account Balance (as a % of 2015 GDP)1 -2.6% 2.8% -4.2% 3.5% -4.0% -2.9% -2.4% 3.9% -1.1% 3.0% -2.7%

Budget Balance (as a % of 2015 GDP)1 -2.5% -1.9% -3.6% -6.2% -2.0% -1.4% -5.4% -2.2% -3.7% -3.0% -3.0%

Gov’t Debt to GDP2 80.7% 69.7% 79.5% 128.1% 18.3% 38.% 42.1% 13.5%3 51.7%3 16.7%3 52.1%

Short-term Rates1 0.63% -0.25% 0.57% 0.00% 2.34% 0.86% 14.11% 12.16% 6.76% 2.85% 4.07%

2014 Real GDP Growth2 2.5% 1.89% 2.20% 0.60% 2.37% 1.2% -3.80% -3.70% 7.30% 6.90% 2.50%

Projected 2015 Real GDP Growth4 2.60% 1.95% 2.20% 1.00% 2.85% 1.70% -3.50% -1.00% 7.50% 6.90% 2.60%

Economics Economics

46 46

First-Quarter Returns: Modest return numbers mask large intra-quarter volatility As of March 31, 2016

Annualized Returns

Barclays U.S. Treasury Index

Barclays U.S. Agg Bond

Index

Barclays U.S. High Yield Index

S&P 500 Index

Russell 2000 Index

MSCI EAFE Index

MSCI Emerging Markets Index

MSCI All Country World Index

GSCI Commodity

Index

3 Years 2.12% 2.49% 1.85% 11.79% 6.82% 2.67% -4.14% 6.08% -24.43%

5 Years 3.59% 3.78% 4.93% 11.57% 7.20% 2.76% -3.80% 5.80% -17.43%

10 Years 4.63% 4.89% 7.03% 7.00% 5.25% 2.27% 3.34% 4.63% -10.66%

Capital Markets

Past performance cannot guarantee future results. Returns in U.S. dollars, MSCI returns assume dividends gross of taxes Source: FactSet.

3.2% 3.0% 3.4% 1.3%

-1.5% -2.9%

5.8%

0.4%

-2.5%

2.4% 2.0%

-3.7%

1.8%

-9.8% -0.5%

-11.7%

-3.8%

-36.8%

-40%

-30%

-20%

-10%

0%

10%

BarclaysGlobal U.S.

TreasuryIndex

Barclays U.S.AggregateBond Index

Barclays U.S.High Yield

Index

S&P 500Index

Russell 2000Index

MSCI EAFEIndex

MSCIEmerging

Markets Index

MSCI AllCountry World

Index

GSCICommodity

Index

Ret

urn

(%)

CAPITAL MARKETS RETURNS BY ASSET CLASS Quarter 1 Year

47 47

Flows into international stocks rise

-200

-100

0

100

200

300

-40

-20

0

20

40

60

Mar-09 Mar-11 Mar-13 Mar-15

U.S. STOCKS March 2009–February 2016

Mutual Fund (L)ETF (L)Cumulative (R)

All numbers in $U.S. billions

Charts are based on monthly asset flows. Sources: Morningstar, T. Rowe Price.

-1200

-800

-400

0

400

800

1200

-150

-100

-50

0

50

100

150


MONEY MARKETS March 2009–February 2016

Tax-Free (L)

Taxable (L)

Cumulative (R)

-1500-1000-500050010001500

-60-40-20

0204060


U.S. BONDS March 2009–February 2016

Mutual Funds (L)ETF (L)Cumulative (R)

-300

0

300

600

900

-20-10

0102030405060


INTERNATIONAL STOCKS March 2009–February 2016

Mutual Fund (L)

ETF (L)

Cumulative (R)

Capital Markets

48 48

Performance: Markets rebound mid-quarter as concerns ease about oil and China As of March 31, 2016

Past performance cannot guarantee future results. Chart is shown for illustrative purposes only and does not represent the performance of any specific security. Sources: Factset, The Wall Street Journal, T. Rowe Price.

1,800

1,850

1,900

1,950

2,000

2,050

2,100

Dec-15 Jan-16 Feb-16 Mar-16

Clo

sing

Pric

e

S&P 500 INDEX

Stocks climb higher after Fed slows expected pace of

interest rate hikes

Period Return Jan: -4.96%

Feb: -0.13%

Mar: 6.78%

Q1 ’16: 1.35%

Markets trade lower as U.S. oil benchmark closes

at $26.21 a barrel

Chinese currency devaluation raises anxiety regarding health

of global economy

Equities

Stocks rise as BOJ initiates negative interest rates

Stocks move higher after more-aggressive-than

expected ECB policy move

49 49

U.S. Markets: Small-cap and growth stocks underperform in first quarter

1.6% 1.3% 0.7%

-1.5% 1.8% 2.5%

3.9%

0.6% -3.4%

-4.7%

1.7% -1.5% -4.7% -7.7% -9.8% -11.8%

As of March 31, 2016

FIRST QUARTER ONE YEAR Russell 1000 Value S&P 500 Russell 1000 Growth Russell 1000 Value S&P 500 Russell 1000 Growth

Russell M

id-Cap G

rowth

Russell 2000 Value Russell 2000 Russell 2000 Growth Russell 2000 Value Russell 2000 Russell 2000 Growth

Equities

<-10% -5% to -10% 0% to -5% 0 to +5% +5% to +10% >+10% Scale:

Past performance cannot guarantee future results. Sources: FactSet, Russell, Standard & Poor’s.

50 50

U.S. Sectors: Investors favor defensive sectors As of March 31, 2016

Equities

1.3

16.6 15.6

5.6

2.6 1.6

5.0

-5.1 -5.5

3.6 4.0 1.8

18.7

16.0

11.4

8.1 6.7

3.2

-4.5 -5.2 -6.0

-15.5

-20

-15

-10

-5

0

5

10

15

20

25

30

Ret

urn

(%)

Quarter One YearHeath Care

15%

Telecom 3%

Discretionary 13%

Utilities 3%

Technology 21%

Staples 10%

Financials 15%

Materials 3%

Industrials 10%

Energy 7%

S&P 500 INDEX WEIGHTS

Past performance cannot guarantee future results. Sources: Standard & Poor’s, FactSet, T. Rowe Price.

51 51

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

S&P

500

Div

. Yie

ld M

inus

Ten

Yea

r Tre

asur

y Yi

eld

S&P 500 DIVIDEND YIELD VS. 10 YEAR TREASURY YIELD January 1997–March 2016

10

12

14

16

18

20

22

24

26

28

Pric

e-Ea

rnin

gs M

ultip

le

S&P 500 PRICE TO 12 MONTHS FORWARD EARNINGS January 1997–March 2016

U.S.: Valuations hover near long-term averages As of March 31, 2016

Chart is shown for illustrative purposes only and does not represent the performance of any specific security. Sources: FactSet, T. Rowe Price.

Equities remain attractive based on dividend yields, which are favorable relative to U.S. Treasury yields.

Equity climbed steadily from 2011 to 2013, but have been range-bound for the past two years.

Current 16.6x

Average 17.2X

Average: -2.1%

Current 0.5%

Equities

Median 15.9x

Median -2.4%

52 52

U.S.: Valuations favor growth stocks across market capitalizations

Sources: FactSet, T. Rowe Price.

P/E Ratios (1 Year Forward) by Russell Style Indices

Current (3/31/16) Average High Low

Current Valuation to 20 Year Average

Russell 1000 Value 15.21 14.28 19.90 9.67 6%

Russell 1000 Growth 18.25 21.12 54.50 11.09 -14%

Russell Mid Cap Value 16.28 14.55 17.84 9.24 12%

Russell Mid Cap Growth 19.26 22.10 61.60 10.34 -13%

Russell 2000 Value 15.99 14.69 20.40 10.36 9%

Russell 200 Growth 19.09 21.62 50.80 12.14 -12%

Past 20 Years

Equities

5

10

15

20

25

30

Russell 1000Value

Russell 1000Growth

Russell Mid CapValue

Russell Mid CapGrowth

Russell 2000Value

Russell 2000Growth

Pric

e to

Ear

ning

s M

ultip

le

FORWARD P/E RATIOS March 1996–March 2016

53 53

0.0

0.5

1.0

1.5

2.0

Energy Materials ConsumerDiscretionary

Industrials InformationTechnology

Financials ConsumerStaples

Health Care Telecom. UtilitiesPric

e to

Ear

ning

s M

ultip

le R

elat

ive

to S

&P

500

RELATIVE FORWARD P/E RATIOS March 1996–March 2016

U.S.: Defensive sectors are commanding a premium, energy distorted by impaired earnings


Past 20 Years

Equities

P/E Ratios (1 Year Forward) by Sector

Current (3/31/16)

Relative to S&P 500 Average High Low


Energy 62.87 3.78 0.94 3.78 0.64 404%

Materials 17.16 1.03 0.98 1.72 0.43 105%

Consumer Discretionary 18.09 1.09 1.13 1.31 0.85 96%

Industrials 16.02 0.96 1.03 1.19 0.80 94%

Information Technology 16.33 0.98 1.27 2.10 0.95 77%

Financials 12.40 0.75 0.78 1.16 0.53 96%

Consumer Staples 20.98 1.26 1.17 1.46 0.74 108%

Health Care 14.90 0.90 1.09 1.47 0.75 83%

Telecom. 13.93 0.84 1.05 1.54 0.74 80%

Utilities 17.71 1.07 0.87 1.25 0.49 123%

54 54

-6

-4

-2

0

2

4

6

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Perc

ent (

%)

S&P 500 12-MONTH FWD. EARNINGS YIELD MINUS BBB U.S. CORPORATE BOND YIELD January 1997–March 2016

U.S.: Equity earnings yield remains attractive versus corporate bonds


The spread between the earnings yield and bond yield has fallen over the past four years but remains attractive. Currently the S&P 500 earnings yield is 2.2% higher than that of BBB rated corporate bonds, well above the long-term average of 0.3%.

+/- 1

Sta

n. D

ev.

Equities

Current +2.2%

Average: +0.3%

55 55

0

10

20

30

40

50

60

70

Inde

x Le

vel

CBOE MARKET VOLATILITY INDEX January 1990– March 2016

VIX Average

U.S.: Volatility and correlations fall as macro concerns ease

1 Intra-stock correlations represent the average pair-wise correlation of returns over monthly rolling 90-day periods. Sources: FactSet, T. Rowe Price.

Equities

Volatility has fallen as concerns about China’s slowdown have eased and stock markets have recovered.

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

Cor

rela

tion

INTRA-STOCK CORRELATIONS1 IN THE S&P 500 INDEX December 1990–March 2016

90 Day Correlation Average

Current 14.0

Current 0.18

56 56

U.S.: Weaker energy prices continue to weigh on earnings

Equities

30

40

50

60

70

80

90

100

110

120

130

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Earn

ings

Per

Sha

re ($

)

Inde

x Le

vel

S&P 500 INDEX VS EARNINGS PER SHARE January 2000– March 2016

Price (L) Earnings Per Share (R)

Past performance cannot guarantee future results. Source: FactSet.

57 57

U.S.: Energy sector impact expected to dissipate next year

* Institutional Brokers’ Estimate System (IBES) estimate. Sources: FactSet, Standard & Poor’s.

Analysts also expect revenue growth to recover, albeit less dramatically. Revenue growth has been notably muted during the current bull market. This trend is not surprising given the subdued pace of economic growth during the current expansion.

Weakness in energy markets weighed down broader earnings during 2015, but estimates suggest this trend will abate by the end of 2016. Analysts currently expect double digit EPS gains in 2016 and 2017.

Equities

-1.5

32.7 26.0

18.6 13.2

7.4

-20.0

-37.8

74.1

17.2

4.5 4.5 6.5

-5.1

2.0

13.5 12.2

-60

-40

-20

0

20

40

60

80

100

Perc

ent (

%)

S&P 500 INDEX EARNINGS PER SHARE GROWTH 2000–2017E

-1.4

4.6

10.6

13.1 11.5

7.2 8.9

-12.5

7.6 9.7

3.2 2.0

3.3

-2.4

1.5

6.4 5.8

-15

-10

-5

0

5

10

15

20

Perc

ent (

%)

S&P 500 INDEX REVENUE GROWTH 2000–2017E

58 58

U.S.: Profit margins recede from peak levels

1 EBIT Margins = Earnings before Interest and Taxes. Sources: FactSet, Standard & Poor’s.

Profit margins may have plateaued and remain elevated relative to historical norms. Falling energy prices may push input costs lower in the near term, but this effect is likely to ultimately be offset by upward wage pressures.

Equities

11.3

12.0 12.6

13.5 13.8 13.6

11.5

10.2

13.3

13.9 13.8 13.8

14.8 14.3 14.4

5

7

9

11

13

15

17

Perc

ent (

%)

S&P 500 INDEX EBIT MARGINS1

2000– March 2016

11.7

14.8

16.0

17.1 17.3 17.5

14.0

9.1

14.1

15.4 15.3 15.5 15.5

14.7 14.6

5

7

9

11

13

15

17

19

Perc

ent (

%)

S&P 500 INDEX RETURN ON EQUITY

2000– March 2016

59 59

U.S.: Earnings recede amid energy weakness and margin compression

Sources: FactSet, Standard & Poor’s.

Equities

6

7

8

9

10

11

12

13

14

15

16

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

2000 2003 2006 2009 2012 2015

EBIT

Mar

gin

(%)

(YY

% C

hang

e)

S&P 500 EARNINGS COMPONENTS January 2000– March 2016

Revenues (Y/Y% Change) (L) EBIT Margin (Y/Y% Change) (L) EBIT Margin (%) (R)

Both profit margins and revenues continue to recede under pressure from the weakness in the energy, materials, and industrials sectors, which are highly levered to commodity prices and demand from emerging markets--notably China. In other sectors, a positive trend remains largely intact.

60 60

U.S.: Fourth-quarter 2015 earnings and revenues As reported through April 8, 2016

This report is based on trailing 12 month non-GAAP earnings per share and revenues. Sources: FactSet, Standard & Poor’s.

Earnings Growth (YoY) Earnings Surprise

Name YoY Growth Reported (%)

# Pos Growth

# Neg Growth

Surprise (%)

% Pos Surprise

% Neg Surprise

S&P 500 -0.8 289 178 1.2 69.6 19.6 Consumer Discretionary 9.3 58 26 4.8 73.6 17.2 Consumer Staples 0.9 23 14 2.5 65.8 18.4 Energy -61.6 4 33 9.5 67.5 30.0 Financials 5.7 41 24 -0.5 64.0 25.6 Health Care 13.6 48 8 4.5 65.5 18.2 Industrials -4.1 35 27 2.9 72.3 18.5 Information Technology 6.3 42 23 5.5 83.8 7.4 Materials -8.0 14 13 13.8 66.7 18.5 Telecommunication Services 20.4 4 1 1.1 60.0 40.0 Utilities -11.6 20 9 -1.1 55.2 27.6

Revenue Growth (YoY) Revenue Surprise

Name YoY Growth Reported (%)

# Pos Growth

# Neg Growth

Surprise (%)

% Pos Surprise

% Neg Surprise

S&P 500 -2.8 262 238 -0.4 48.4 51.2 Consumer Discretionary 3.5 55 32 0.6 43.7 55.2 Consumer Staples 1.3 19 18 -1.1 42.1 55.3 Energy -35.0 0 37 0.6 61.2 38.8 Financials -0.7 56 34 0.4 44.0 56.0 Health Care 11.2 48 9 0.7 69.1 30.9 Industrials -3.0 26 39 -1.6 40.0 60.0 Information Technology 4.3 40 26 0.4 66.2 33.8 Materials -12.7 7 20 -1.6 25.9 74.1 Telecommunication Services 7.3 4 1 -0.4 40.0 60.0 Utilities -8.6 7 22 -14.3 10.7 89.3

Equities

61 61

Sources: Standard & Poor’s, Factset

U.S.: Significant dispersion in earnings growth at the sector level

Equities


48%

26% 29%

-38%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

(E)

2016

Q2

(E)

2016

Q3

(E)

2016

Q4

(E)

Cum

ulat

ive

Gro

wth

in O

pera

ting

Earn

ings

Per

Sha

re

EARNINGS GROWTH BY SECTOR 2010 to 2016E

S&P 500 Health Care and Information Technology

S&P 500 Financials and Utilities

S&P 500 Consumer Discretionary and Consumer Staples

S&P 500 Energy, Industrials, and Materials

S&P 500Sector Annualized 5 Year Return

Cumulative 5 Year Revenue Growth

12 Months Forward P/E

Ratio

Health Care 17.6% 42.4% 14.9

Discretionary 17.1% 53.5% 18.1

Staples 15.2% 21.7% 21.0

Technology 13.7% 35.7% 16.3

Utilities 13.7% -6.8% 17.7

Industrials 10.8% 23.5% 16.0

Telecom 10.7% 3.3% 13.9

Financials 8.7% 4.3% 12.4

Materials 4.8% 6.1% 17.2

Energy -2.4% -23.2% 62.9

62 62

U.S.: Small-cap relative valuations are close to long-term median

Source: The Leuthold Group, LLC.

50%

60%

70%

80%

90%

100%

110%

120%

130%

1983 1987 1991 1995 1999 2003 2007 2011 2015

SMALL-CAP TO LARGE-CAP HISTORICAL P/E RATIO Based on Normalized Earnings, January 1983–March 2016

Small-cap valuations relative to those of large-cap stocks have declined since 2013 and are now just below their long-term median. Currently the P/E ratio of small-caps relative to large-caps is 102%, compared with a long-term median of 103%.

Median: 103%

Equities

Current 102%

63 63

U.S.: Growth vs value disparity has been narrowing

Source: Factset, Russell.

The spread between value and growth reverted significantly towards value during the quarter, as many of the best performers of 2015 (which were concentrated in growth sectors) retrenched.

Equities

Growth Outperforming

Value Outperforming

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

RUSSELL 1000 GROWTH VS. VALUE Rolling 3 year Return Difference

Growth Outperforming

Value Outperforming

-120%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

RUSSELL 2000 GROWTH VS. VALUE Rolling 3 Year Return Difference


Past performance cannot guarantee future results.

64 64

U.S.: Growth commanding a smaller-than-average valuation premium in large caps

Source: Factset, Russell.

Growth stocks appear cheaper than their value peers in the large-cap universe, while the opposite is true for small caps. P/Es of small-cap growth stocks are currently skewed to the upside because of the large presence of biotech companies that have minimal or negative earnings but high stock prices.

Equities

-10%

10%

30%

50%

70%

90%

110%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

VALUATION PREMIUM: GROWTH VS. VALUE Based on 1 Year Forward P/E Ratio, January 2005 to March 2016

Russell 1000 Growth/Value Long Term Median

Russell 2000 Growth/Value Long Term Median

65 65

Deleveraging has resulted in stronger balance sheets since the global financial crisis, but corporations are starting to increase debt loads amid attractive financing costs, particularly in the small cap universe.


U.S.: Balance sheets remain strong, offering flexibility for capital deployment

Corporate management has favored returning cash to shareholders through share repurchases and dividends, but ample capital remains for capital expenditures and merger and acquisition activity.

%

Equities

%

50

100

150

200

250

TOTAL DEBT AS % OF TOTAL EQUITY January 1995– March 2016

S&P 500 Large Cap S&P 600 Small Cap

2

4

6

8

10

12

14

16

18

20

CASH AS % OF MARKET CAPITALIZATION January 1995– March 2016

S&P 500 Large Cap S&P 600 Small Cap

66 66

* Data based on financial statements released as of 3/31/16. Sources: Citi Research, Factset, Deutsche Bank U.S. Equity Strategy.

U.S.: Shareholder-friendly actions continue; capex spending growth is muted

-100

100

300

500

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

U.S

. $, b

illio

ns

S&P 500 CASH DEPLOYMENT 2000–2015* Dividends Buybacks Capex

0

200

400

600

800

1,000

0

50

100

150

200

250

Num

ber of Deals

$ B

illio

ns

Value of Deals (L)Number of Deals (R)

NUMBER AND VALUE OF U.S. M&A DEALS January 2001–March 2016

0

100

200

300

400

500

600

700

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

U.S

. $, b

illio

ns

S&P 500 BUYBACK ANNOUNCEMENTS Rolling 12-month total, January 1996–March 2016

Equities

67 67

Sources: Standard & Poor’s, FactSet.

U.S.: Capex levels are muted relative to the prior cycle

Equities

414%

131%

153% 143%

169%

122% 110%

121%

155% 150%

70%

98%

130%

58%

126%

100% 102%

125%

204% 204%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

S&P 500 CAPEX AS PERCENT OF DEPRECIATION

Calendar Year Average, 1990-2007

Calendar Year Average, 2010-2014

As of December 31, 2015

While on an absolute basis capex levels have increased during the current bull market, they are well below levels typically seen when measured as a percent of depreciation. By this measure, only the energy, utilities, and materials sectors have seen more capital spending than in prior cycles. In other sectors spending has been significantly lower.

68 68

0%

1%

2%

3%

4%

5%

6%

7%

8%

Div

iden

d an

d B

uyba

ck Y

ield

S&P 500 TRAILING 12 MONTH DIVIDEND AND BUYBACK YIELD March 2006–March 2016

S&P 500 Buyback Yield S&P 500 Dividend Yield

Dividend yield plus buyback yields remains near 5%, which is attractive relative to the yields available on many fixed income securities.


U.S.: Dividend payouts continue to rise

Dividend payouts continue to rise steadily as corporate managers choose to pay earnings to shareholders rather than re-investing them in new projects.

Equities

25

30

35

40

15

20

25

30

35

40

45

50

Payo

ut R

atio

(%)

Div

iden

ds p

er s

hare

($)

S&P 500 PAYOUT RATIO AND DIVIDENDS PER SHARE June 1995– March 2016

S&P 500 Dividends Per Share (L)S&P 500 Dividend Payout Ratio (R)

69 69

Equity markets typically do not remain range-bound for an extended period of time. However, this has been the case for the S&P 500 since mid-2014.

U.S.: Flat markets are relatively rare

Equities

8%

11% 13%

7%

17%

9% 7%

11%

17%

12%

8% 6%

33%

25%

18%

11%

25%

42%

55%

64%

0%

10%

20%

30%

40%

50%

60%

70%

1 Year Periods 2 Year Periods 3 Year Periods 5 Year Periods

Cum

ulat

ive

Ret

urns

S&P 500 PRICE RETURN Rolling Monthly Periods, January 1927 to March 2016

-20% or worse -5% to -20% -5% to +%5

+5% to +20% +20% or better

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2012 2013 2014 2015 2016

Inde

x Le

vel

S&P 500 INDEX January 2012 to March 2016

Past performance cannot guarantee future results. Sources: FactSet, Standard & Poor’s

70 70

$100

$120

$140

$160

$180

2013 2014 2015 2016Ea

rnin

gs /

Shar

e

Valuations for U.S. equities are reasonable but not particularly cheap, so a significant increase in earnings multiples in the near term appears unlikely. If multiples stay range-bound, performance will need to be driven by growth in earnings (and with margins at very high levels, earnings will need to be driven by revenue growth). A look at earnings expectations, and the on-going downward trend in expectations, points to modest returns in the near term.


U.S.: Muted earnings growth expectations, limited upside potential for earnings multiples

Equities

5x

7x

9x

11x

13x

15x

17x

19x

21x

23x

25x

1978 1983 1988 1993 1998 2003 2008 2013

Fwd

P/E

Rat

io

LONG-TERM RUSSELL 3000 PRICE TO 12 MONTHS FORWARD EARNINGS (Long-Term) December 1978–March 2016

Long-Term Median: 14.0x 16.5x

Initial Estimate Final Estimate

RUSSELL 3000 EARNINGS January 2013 – March 2016

2017 2016

2015

3% EPS Growth estimated for 2016

7% EPS Growth Ex-Energy for 2016

Actual Russell 3000 Operating EPS

Sell-Side Analyst Calendar Year Earnings Estimates

71 71

Global: Emerging markets outperform during the first quarter As of March 31, 2016

PERFORMANCE FOR MSCI REGIONS In USD, Total Return - Gross*

1 Year 3 Year 5 Year 10 Year

MSCI World -2.9 7.4 7.1 4.9 MSCI USA 0.9 11.6 11.4 7.0 MSCI Europe -8.0 3.3 2.7 2.7 France -3.6 5.2 1.8 2.0 Germany -11.1 4.7 3.1 4.4 Italy -14.8 3.6 -4.9 -4.1 Spain -18.3 2.8 -3.4 0.8 United Kingdom -8.8 0.2 2.3 2.0 MSCI Japan -6.8 4.1 4.3 -0.2 MSCI Emerging Markets -11.7 -4.1 -3.8 3.3 MSCI Asia ex. Japan -11.6 0.4 0.3 5.7 China -18.7 1.2 -0.6 7.6 India -13.2 3.8 -1.9 4.9 MSCI Emerging Europe Mid East & Africa -4.8 -12.1 -10.7 -3.0

Russia 2.5 -11.7 -11.9 -5.0 Egypt -29.0 4.2 0.5 0.1 South Africa -17.5 -2.3 -2.5 3.2 MSCI Latin America -8.9 -14.5 -11.3 1.7 Brazil -11.5 -17.8 -15.9 0.0 Mexico -5.1 -7.2 -0.9 5.0 MSCI Frontier Markets -12.1 2.2 1.7 -0.6

Annualized

Equities

19.2

12.6

5.8

1.8 1.0

-0.2 -0.8 -2.4

-6.4 -10

-5

0

5

10

15

20

25

Tota

l Ret

urn

(%)

1Q16 PERFORMANCE

Past performance cannot guarantee future results. *Performance assumes dividends are gross of taxes rather than net of taxes Sources: FactSet, MSCI.

72 72

Global: U.S. maintains a wide performance advantage

Equities

+354%

+139%

+109% +92%

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016

REGIONAL RETURNS March 2009*–March 2016

S&P 500 Europe Emerging Markets Japan

*Begins on March 9, 2009 which was the low point for the S&P 500 during the financial crisis Past performance cannot guarantee future results. Source: Factset, Standard & Poor’s, MSCI. Returns in USD.

73 73

Global: Valuations are notably cheap in Japan


P/E Ratios (1 Year Forward) by MSCI Regional Indices

Current (3/31/16) Average High Low


USA 16.82 15.76 23.98 10.80 7%

Developed Europe 15.01 13.20 20.47 8.39 14%

Japan 12.84 17.84 37.74 11.05 -28%

Emerging Markets 12.07 11.04 15.20 7.29 9%

Emerging Asia 11.95 11.51 17.12 8.53 4%

Latin America 15.41 11.50 15.90 7.20 34%

EM Europe & Middle East 8.92 9.02 13.73 4.69 -1%

Past 20 Years

Equities

5

10

15

20

U.S. DevelopedEurope

Japan EmergingMarkets

Emerging Asia Latin America Emerging Europeand Middle East

Pric

e to

Ear

ning

s M

ultip

le

FORWARD P/E RATIOS March 1996–March 1996

Cheap valuations in Japan are likely driven by two factors: 1) earnings growth in Japan has recently outpaced earnings growth in the rest of the world, but 2) investors are skeptical about the sustainability of this earnings growth because it has been primarily driven by yen weakness.

74 74

Multiple expansion drove recent gains in the U.S. and Europe as investors focused on the potential for sustainable growth and profitability. Meanwhile, investors are skeptical that Japanese earnings can continue to accelerate without a weak yen.

Global: Multiple expansion drives a large share of recent gains in U.S. and Europe

Defensive market sectors have generally been rewarded with significant P/E multiple increases, despite limited improvements in earnings.

%

%

Equities

-40

-30

-20

-10

0

10

20

30

40

50

60

S&P 500 MSCI Japan MSCIEurope

MSCIEmergingMarkets

Perc

ent (

%)

REGIONAL RETURNS BY MULTIPLE EXPANSION AND EARNINGS GROWTH March 2013–March 2016

Trailing PE ChangeEPS ChangePrice Return

-50-40-30-20-10

01020304050

Perc

ent (

%)

GLOBAL SECTOR RETURNS BY MULTIPLE EXPANSION AND EARNINGS GROWTH MSCI All Country World Index, March 2013–March 2016

Trailing PE ChangeEPS ChangePrice Return

Past performance cannot guarantee future results. Sources: FactSet, MSCI. Returns in USD.

75 75

Global: Valuations still appear reasonable As of March 31, 2016

1 Source: MSCI and Factset Research Services. 2 Source: The Economist as of April 1, 2016. 3 5-year yield; source: The Economist.

United States Europe

United Kingdom Japan Australia Canada

Emerging Markets Brazil Russia India China Mexico

1-Year Forward PE1 16.82 15.01 16.12 12.84 15.78 16.05 12.07 13.38 6.78 17.24 10.19 19.02

1-Year Trailing PE1 16.90 15.28 15.75 13.86 15.21 16.16 11.95 13.42 5.89 18.68 9.62 23.32

10-Year Average Trailing PE1 17.08 15.36 14.59 17.11 15.53 16.27 12.44 12.26 5.87 19.58 11.23 21.70

Price/Book Value1 2.6 1.6 1.7 1.1 1.7 1.6 1.3 1.1 0.5 2.6 1.2 2.5

Return on Equity1 15.6% 10.8% 10.8% 8.5% 10.7% 10.2% 10.7% 8.7% 8.1% 15.4% 11.5% 13.1%

Trailing 1 Year EPS Growth1 2.6% 1.0% -6.0% 12.2% -2.2% 0.1% 6.2% 107.6% -13.2% 14.3% -0.5% 32.0%

Estimated Net Dividend Yield1 2.2% 3.9% 4.4% 2.4% 4.8% 3.1% 2.9% 3.0% 4.5% 1.7% 2.9% 2.0%

10-Year Rate2 (Local Currency) 1.9% 0.1% 1.5% 0.0% 2.5% 1.2% n/a 14.0% 9.2% 7.5% 2.5%3 5.9%

Equities

76 76

European earnings have historically been very cyclical. Median earnings growth has been in the double digits during periods when GDP growth has been greater than 1%.

As of December 31, 2015

Sources: J.P. Morgan, MSCI.

Europe: Economic improvement typically translates to strong earnings growth

Equities

-4.54%

-1.39%

-0.78%

0.64% 0.73%

-5%

-4%

-3%

-2%

-1%

0%

1%

<-3% -3% to -1% -1% to 1% 1% to 3% >3%

Mar

gin

Cha

nge

Eurozone Real GDP Growth Rate Range (Y/Y%)

EBIT MARGINS VS. GDP GROWTH 1992 to December 2015

Median Y/Y% Change inMSCI Europe ex.Financials EBIT Margins

-46.2%

-11.8% -7.4%

13.2%

19.5%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

<-3% -3% to -1% -1% to 1% 1% to 3% >3%Ea

rnin

gs P

er S

hare

Cha

nge

Eurozone Real GDP Growth Rate Range (Y/Y%)

EARNINGS VS. GDP GROWTH 1992 to December 2015

Median Y/Y% Change inMSCI Eurozone EPS

77 77


Sources: Factset, MSCI, Standard & Poor’s.

Europe: P/Es attractive on “normalized” earnings basis

Equities

13.3x

21.5x

10

12

14

16

18

20

22

24

2011 2012 2013 2014 2015

P/E

Bas

ed o

n 10

Yea

r Ave

rage

Ear

ning

s

P/E BASED ON "NORMALIZED" PRICE TO EARNINGS Past 5 Years

MSCI Europe ex. UK S&P 500

European equities do not appear particularly cheap on traditional P/E measures, primarily due to the fact earnings remain well below pre-crisis levels. However, on a normalized earnings basis European equities appear very cheap – indicating that a rebound in earnings would likely produce strong returns.

78 78


Europe: Safer areas outperform on the downside and upside

Equities

Past performance cannot guarantee future results. Source: FactSet, MSCI

-35

-30

-25

-20

-15

-10

-5

0

5

10

Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Cum

mul

ativ

e R

etur

n (%

)

MSCI EUROPE: REGIONAL RETURNS 1 Year Ending March 31, 2016

Periphery Core

-30

-25

-20

-15

-10

-5

0

5

10

Mar-15 Jun-15 Sep-15 Dec-15 Mar-16C

umm

ulat

ive

Ret

urn

(%)

MSCI EUROPE: STYLE RETURNS 1 Year Ending March 31, 2016

Cyclical Defensive

With the core outperforming the periphery and defensives outperforming cyclicals, both during downturns and upturns, it is clear that investors in Europe remain cautious.

79

Japan: Corporate governance improves

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1stSection

2ndSection

Mothers JASDAQ Total Memo:JPX-

Nikkei 400

JAPANESE SHARE OF STOCKS WITH INDEPENDENT DIRECTORS BY LISTING CATEGORY

2014 2015

Equities

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Aug 92 -Aug 94

Jun 99 -Apr 01

Jun 02 -Jul 04

Jul 09 -Aug 10

Aug 12 -Aug 14

Sep 14 -Dec 15

JAPAN CORPORATES USE OF INCREMENTAL FREE CASH WHEN RISING1

1992 to December 2015

Net New DividendsNet New Share BuybacksNet New Retained Cash

Source: Corporate Reports, Japan Exchange Group, Empirical Research Partners Analysis.

1Data exclude financials and utilities Share buybacks net of share issuance.

80

Japan: Earnings have driven performance, but currency weakness has driven earnings

Equities

0%

20%

40%

60%

80%

100%

120%

140%

Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15

CONTRIBUTION OF EARNINGS GROWTH AND MULTIPLE EXPANSION TO JAPAN EQUITY RETURNS October 2012-October 2015

Earnings Growth

Multiple Expansion

Stock Price Movement

-15

-10

-5

0

5

10

15

20

25

30

Jan 12 Jan 13 Jan 14 Jan 15

Cum

ulat

ive

Gro

wth

(%)

JAPAN SALES GROWTH IN YEN AND ADJUSTED FOR TRANSLATION EFFECT1

January 2012-August 2015

Yen

Adjusted for Translation Effect

Unlike most other equity markets, earnings improvement has been the driver of performance, rather than an increase in P/E multiples.

However, yen weakness has been a very important driver of revenues, and consequently of earnings growth. With further yen weakness unlikely, investor optimism is limited.

Source: Corporate Reports, Japan Exchange Group, Empirical Research Partners Analysis.

1Data exclude financials and utilities

81 81

579

11131517192123252729

Pric

e/Ea

rnin

gs R

atio

DEVELOPED VS. EMERGING MARKETS 12 Months Forward P/E Ratio January 1996–March 2016

MSCI World LT AVERAGE

MSCI EM LT AVERAGE

MSCI World Long Term

Average 16.2x

MSCI EM Long Term Average

11.8x 8

10

12

14

16

18

20

22

24

26

28

30

Pric

e/Ea

rnin

gs R

atio

U.S. VS. DEVELOPED MARKETS 12 Months Forward P/E Ratio January 1996–March 2016

S&P 500 (Operating Basis) LT AVERAGEMSCI EAFE LT AVERAGE

Forward P/E ratios in the U.S. and other developed markets have risen since mid-2011, and appear to be hovering in a “trading range”. The U.S. is commanding a premium, which is not abnormal.

Sources: FactSet, Standard & Poor’s, MSCI.

Emerging Markets: Valuation gap versus developed markets remains significant

Emerging markets equities are currently trading 4.0x lower than developed markets, which is close to the long term average of 4.4x.

S&P 500 Long Term

Average 17.0x

MSCI EAFE Long Term

Average 15.8x

Equities

82 82

Overall emerging markets earnings growth has disappointed since peaking in 2011. However, Brazil and Russia account for much of the weakness, while earnings growth in emerging Asia remains 20% above pre-crisis levels.

Sources: Factset, MSCI.

Emerging Markets: A closer look at earnings shows divergent trends

EM earnings growth has varied considerably by sector. Growth is strong in the information technology, consumer discretionary, and financials sectors but is weak in other sectors – particularly energy and materials.

Equities

25

50

75

100

125

150

175

200

225

Earn

ings

Per

Sha

re G

row

th

TRAILING EPS October 2007–March 2016

Emerging MarketsLatin AmericaEmerging AsiaEmerging Europe & Middle East

0

50

100

150

200

250

Earn

ings

Per

Sha

re G

row

th

MSCI EM SECTOR EPS GROWTH October 2007–March 2016 Discretionary Staples Energy Financial

Health Care Industrials Technology MaterialsTelecom Utilities

83 83

Company debt levels have grown in emerging markets since the outset of the financial crisis in 2007. During the same time period, developed market companies have been deleveraging.

Sources: Factset, MSCI.

Emerging Markets: Company debt levels have climbed

This increase has led to a significant increase in debt servicing costs at the same time that a drop in commodity prices has caused earnings to decline for many emerging markets companies. This has led to a troubling rise in debt-to-EBITDA ratios.

Equities

15%

20%

25%

30%

DEBT AS PERCENT OF ASSETS January 1997 to March 2016

MSCI Emerging Markets

MSCI World (Developed Markets)

1

2

3

4

5

6

7

8

DEBT TO EBITDA RATIO January 1997 to March 2016

MSCI Emerging Markets

MSCI World (Developed Markets)

Developed markets reduced leverage since

the financial crisis

Emerging markets increased leverage since

the financial crisis

84 84

Stock performance within China has been extremely diverse. Those companies levered to the “new economy” have performed well, while those levered to the “old economy” have not. The software and services industry has outperformed energy by more than a cumulative 250% over the past three years.

Sources: Factset, MSC

China: New economy versus old economy

Equities

-100

-50

0

50

100

150

200

250

2013 2014 2015 2016

Cum

ulat

ive

Perf

orm

ance

(%)

MSCI CHINA: INDUSTRY GROUP PERFORMANCE January 1, 2013 to March 31, 2016

Software & ServicesCommercial & Professional ServicesBanksReal EstateMaterialsEnergy

85 85

Global equity market returns

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD2016

MSCI Europe 34.36%

MSCI Asia ex-Japan 40.52%

MSCI Japan -29.11%

MSCI EM 79.02%

Russell 2000 26.86%

Russell 3000 Growth 2.18%


Russell 2000 38.82%

S&P 500 Index

13.70%

MSCI Japan 9.90%

MSCI EM 5.75%


MSCI EM 39.78%

Russell 2000 -33.79%



S&P 500 Index 2.11%

MSCI Europe 19.93%


Russell 3000 Value

12.70%


MSCI Asia ex-Japan

1.80%

MSCI EM 32.59%

MSCI Europe 14.39%

Russell 3000 Value

-36.25%


MSCI EM 19.20%

Russell 3000 Value

-0.10%

MSCI EM 18.63%

Russell 3000 Value

32.69%


S&P 500 Index 1.40%

Russell 3000 Value 1.64%

MSCI EAFE 26.86%

MSCI ACWI 12.18%

S&P 500 Index

-37.00%

MSCI Europe 36.81%


Russell 2000 -4.18%

MSCI EAFE 17.90%

S&P 500 Index

32.40%

MSCI Asia ex-Japan

5.11%

MSCI EAFE -0.40%

S&P 500 Index 1.30%

Russell 3000 Value

22.34%

MSCI EAFE 11.63%

Russell 3000 Growth -38.44%

MSCI ACWI 35.41%

Russell 3000 Value

16.23%

MSCI ACWI -6.86%

Russell 3000 Value

17.55%

MSCI Japan 27.35%

Russell 2000 4.89%

MSCI ACWI -1.84%

MSCI ACWI 0.38%

MSCI ACWI 21.53%


MSCI ACWI -41.85%

MSCI EAFE 32.46%

MSCI Japan 15,59%

MSCI Europe -10.50%

MSCI ACWI 16.80%

MSCI Europe 25.96%

MSCI ACWI 4.71%

MSCI Europe -2.34%


Russell 2000 18.37%

S&P 500 Index 5.49%

MSCI EAFE -43.06%

Russell 2000 27.17%

S&P 500 Index

15.06%

MSCI EAFE -11.73%

Russell 2000 16.35%

MSCI ACWI 23.44%

MSCI EM -1.82%

Russell 3000 Value

-4.13%

Russell 2000 -1.52%

S&P 500 Index

15.79%

Russell 3000 Value

-1.01%

MSCI Europe -46.08%

S&P 500 Index

26.46%

MSCI ACWI 13.21%

MSCI Japan -14.19%

S&P 500 Index

16.00%

MSCI EAFE 23.30%

MSCI Japan -3.72%

Russell 2000 -4.41%

MSCI Europe -2.37%


Russell 2000 -1.57%

MSCI Asia ex-Japan -52.23%

Russell 3000 Value

19.76%

MSCI EAFE 8.21%



MSCI Asia ex-Japan

3.33%

MSCI EAFE -4.50%


MSCI EAFE -2.90%

MSCI Japan 6.33%

MSCI Japan -4.14%

MSCI EM -53.18%

MSCI Japan 6.39%

MSCI Europe 4.49%

MSCI EM -18.17%

MSCI Japan 8.36%

MSCI EM -2.27%

MSCI Europe -5.68%

MSCI EM -14.60%

MSCI Japan -6.38%

PERIODIC PERFORMANCE TABLE 2005–1Q2016

Equities

Past performance cannot guarantee future results. Indexes: S&P 500 Index, MSCI EAFE Index, MSCI All Country World Index (MSCI ACWI), MSCI Emerging Markets Index (MSCI EM), Russell 2000 Index, MSCI Europe Index, MSCI Asia ex-Japan Index, MSCI Japan Index, Russell 3000 Growth Index, Russell 3000 Value Index. Sources: Zephyr StyleADVISOR, T. Rowe Price.

86 86

Currencies: Widespread rebound vs. U.S. dollar

% Change Currency vs. USD QTD 1 Year 3 Year 5 Year 10 year Brazilian Real 11.6 11.6 -12.9 -43.7 -54.8

Russian Ruble 9.2 9.2 -17.0 -52.7 -57.8

Japanese Yen 7.0 7.0 5.9 -13.5 -24.0

Australian Dollar 5.7 5.7 0.4 -25.9 -26.3

S. African Rand 5.4 5.4 -20.4 -38.1 -54.6

Euro 4.9 4.9 3.3 -12.5 -20.6

Mexican Peso 0.8 0.8 -13.7 -28.3 -31.3

Chinese Yuan 0.4 0.4 -4.2 -4.1 1.2

Indian Rupee -0.1 -0.1 -6.0 -17.2 -33.3


Cumulative

Currency

Emerging Market Currency

Developed Market Currency

Past performance cannot guarantee future results. Source: FactSet.

Brazilian Real Russian Ruble

Japanese Yen Australian Dollar

S. African Rand Euro

Mexican Peso Chinese Yuan

Indian Rupee British Pound

-6 -4 -2 0 2 4 6 8 10 12 14Returns (%)

1ST QUARTER RETURNS VS. U.S. DOLLAR

87 87

5.9 5.2

1.7

3.9 3.6

2.0

3.2 3.0

1.4 2.2

4.0 4.1

11.0

3.4

4.6 4.4 4.0

2.8 2.8 2.4 2.4 2.0 1.7 1.5 0.9 0.6

-1.6

-3.7

-6

-4

-2

0

2

4

6

8

10

12

Ret

urn

(%)

TOTAL RETURNS BY SECTOR

Last Qtr 1 Year

Fixed Income: EM, U.S. high yield rally as global growth worries ease As of March 31, 2016

Fixed Income

Past performance cannot guarantee future results. Indexes: JP Morgan Emerging Markets Bond Index Global, JP Morgan GBI-EM Global Diversified, JP Morgan CEMBI Broad Diversified Index, Barclays Global High Yield Index, Barclays U.S. Corporate Investment Grade, Barclays CMBS ERISA-Eligible, Barclays U.S. Aggregate, Barclays Global Aggregate, Barclays U.S. Treasury, Barclays Mortgage-Backed Securities, Barclay’s U.S. Corporate High Yield Sources: Factset, Barclays, JPMorgan

88 88

Credit Quality: Low-quality credits stage first-quarter turnaround As of March 31, 2016

Fixed Income

Both high yield and investment-grade credit performed well during the quarter, as fears of a credit downturn eased.

4.7

3.6 3.9 4.1 3.9

2.5

3.8 2.9

2.5 2.2

-0.7

0.1

-4.9

-10.6 -12

-10

-8

-6

-4

-2

0

2

4

6

AAA AA A BBB BB B CCC

Ret

urn

(%)

TOTAL RETURNS BY CREDIT QUALITY* Last Qtr 1 Year

Past performance cannot guarantee future results. * Ratings categories represented by Barclays U.S. Aggregate Index. Sources: Barclays, Factset

89 89

Source: Factset

U.S. Treasuries: Mid to long-term rate expectations shift even lower

Fixed Income

Yields fell across the curve amid low inflation expectations and dovish U.S. Fed. The spread between 2-year and 10-year Treasuries fell below 100 basis points for the first time in eight years as slower global growth expectations solidified.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2011 2012 2013 2014 2015 2016

Yiel

d (%

)

U.S. TREASURY NOMINAL YIELDS March 2011–March 2016

10 Year 5 Year

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2011 2012 2013 2014 2015 2016Yi

eld

Spre

ad (%

)

U.S. TREASURY YIELD CURVE March 2011–March 2016

2 Year vs. 10 Year 10 Year vs. 30 Year

90 90

U.S. Treasuries: Yield curve shifts lower; steepens at the long end As of March 31, 2016

Source: Barclays

3/31/2015 12/31/2015 3/31/2016 2 Year 0.49 0.97 0.72 5 Year 1.17 1.59 1.08 10 Year 1.82 2.18 1.68 30 Year 2.52 2.95 2.54

U.S. TREASURY YIELDS

Fixed Income

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0 2 5 10 20 30

Yiel

d (%

)

Years to Maturity

U.S. TREASURY YIELD CURVES 3/31/2015 12/31/2015 3/31/2016

-20

-10

0

10

20

30

40

2 5 10 20 30

Bas

is P

oint

s

Years

YEAR-OVER-YEAR CHANGE IN YIELDS

91 91

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Perc

ent (

%)

10 YEAR BREAKEVEN SPREADS* 10 Years Ending March 2016

* Difference between 10-year nominal Treasury yield and 10-year Treasury Inflation Protected Securities (TIPS) yield Sources: Barclays, Haver Analytics, T. Rowe Price

U.S. Inflation: Inflation expectations remain subdued amid lower oil prices

Fixed Income

Energy prices continue to keep headline inflation tame, allowing the Fed to take a cautious approach to rate increases. However, base effects are moving year-over-year comparisons higher.

-2

-1

0

1

2

3

4

5

Year

-Ove

r-Ye

ar %

Cha

nge

PERSONAL CONSUMPTION EXPENDITURES (PCE) PRICE INDEX January 2006–February 2016

PCE Price Index

PCE Price Index Excl. Food & Energy

92 92

Interest Rates: The Fed policy loop As of March 31, 2016

Sources: Barclays, JPMorgan, T. Rowe Price

Financial Conditions

Tighten • USD Appreciates • Spreads Widen • VIX Rises • Equites Fall • Curve Flattens

Dovish Fed

Financial Conditions

Ease • USD Depreciates • Spreads Tighten • VIX Falls • Equities Rise • Curve Steepens

Hawkish Fed

Fixed Income

93 93

Global Yields: U.S. yields remain attractive relative to the rest of the developed world As of March 31, 2016

.

Fixed Income

-2

0

2

4

6

8

10

12

14

Yiel

d (%

)

10-YEAR SOVEREIGN BOND YIELDS

Current 5 Year Average

Most sovereign yields are well below their five-year averages. With rates so low in other developed markets, U.S. Treasury yields are unlikely to rise dramatically as foreign inflows support prices.

94 94

30

40

50

60

70

80

90

2013 2014 2015 2016

Spre

ads

(bps

)

ASSET-BACKED SECURITIES March 2013–March 2016

Barclays ABS

10 Year Median: 66 10 Year Average: 143

0

10

20

30

40

50

60

70

80

90

100

2013 2014 2015 2016

Spre

ads

(bps

)

AGENCY MBS SPREADS March 2013–March 2016

Barclays MBS


Investment Grade: Asset-backed spreads mixed, hold below 10-year average

Fundamentals remain strong in the asset backed sector, where bonds are primarily levered to consumer spending, and are well-insulated from energy weakness. None the less spreads continue to creep higher. Sources: Barclays, T. Rowe Price.

22

73

Fixed Income

95 95

60

80

100

120

140

160

180

2013 2014 2015 2016

Spre

ads

(bps

)

COMMERCIAL MORTGAGE-BACKED SECURITIES March 2013–March 2016

Barclays CMBS


80

100

120

140

160

180

200

220

240

2013 2014 2015 2016

Spre

ads

(bps

)

U.S. INVESTMENT GRADE CORPORATES March 2013–March 2016

Barclays U.S. Investment Grade Corporates

10 Year Average: 183 10 Year Median: 153

Investment Grade: Corporate spreads decline as credit concerns ease

Sources: Barclays, T. Rowe Price

162

109

Fixed Income

CMBS and investment grade corporate spreads narrow in line with the overall improvement in the market, reversing the widening trend seen earlier this year.

96 96

300

400

500

600

700

800

900

2013 2014 2015 2016

Spre

ads

(bps

)

GLOBAL HIGH YIELD March 2013–March 2016

Barclays Global High Yield


300

400

500

600

700

800

900

2013 2014 2015 2016

Spre

ads

(bps

)

U.S. HIGH YIELD March 2013–March 2016

Barclays U.S. High Yield

10 Year Average: 592 10 Year Median: 538

High Yield: Spreads tighten, led by higher-beta energy credits

Sources: JPMorgan, T. Rowe Price

Fixed Income

A strong March rebound was bolstered by positive momentum in the in the oil and equity markets. Despite the pullback in yields among lower-quality bonds, spreads remain above their 10-year average.

663 635

97 97

High Yield: Default rates expected to rise, driven by energy producers

*Forecasts as of March 2, 2016 **Based on the J.P. Morgan Domestic High Yield Index Sources: Barclays, J.P. Morgan, T. Rowe Price

Fixed Income

Default rates are likely to increase in 2016, led by defaults among energy producers. Barring a rebound in the price of oil, default rates among high yield energy companies could approach 20%. In the absence of a significant economic downturn, the broader market, however, is expected to see a much less dramatic increase.

27%

23%

15%

10%

2%

40%

36%

25%

16%

4%

30%

24%

11%

8%

2% 3%

1% 1% 1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

$20 $30 $40 $50 $60

Proj

ecte

d D

efau

lt R

ate

Oil Price Scenario

HIGH YIELD ENERGY SECTOR Barclays Default Rate Forecasts for 2016*

All Energy

Independent

Oil Field Services

Midstream

756 651

1339

300

500

700

900

1100

1300

1500

1700

1900

2100

Spre

ad to

Wor

st (b

ps)

HIGH YIELD SPREADS** December 31, 2013 Through March 31, 2016

High YieldHigh Yield Ex. Energy/Metals&MiningHigh Yield Energy

98 98

High Yield: Downgrades dramatically outpace upgrades

Source: JP Morgan Chase & Co.


Fixed Income

16 15 16 24

29

10

24 16 13

31 38

30

19 27

13

33 35

52

84

46 50

1 6

12

3

14 11

25

66

142

40 37

113

30

51 56

150

28

38

27

41 37

143 140

0

25

50

75

100

125

150

$Bill

ions

HIGH YIELD RISING STARS VS. FALLEN ANGELS 1995 - 2016

Rising stars ($bn)

Fallen angels ($bn)

Plummeting commodities prices have put the energy and metals & mining sectors of the high yield bond market under significant pressure, leading to a dramatic increase in the number of “fallen angel” issuers who were once considered investment grade, but are now part of the high yield universe. This trend reflects the trouble in those sectors, but it also means there has been a general upgrade in the quality as fallen angels typically make up the higher-quality buckets of high yield (i.e. BB rated).

99 99

200

250

300

350

400

450

500

550

600

2013 2014 2015 2016

Spre

ads

(bps

)

EUROPEAN HIGH YIELD March 2013–March 2016

Barclays Euro High Yield


50

70

90

110

130

150

170

190

210

2013 2014 2015 2016

Spre

ads

(bps

)

EURO INVESTMENT GRADE CORP. March 2013–March 2016

Barclays Euro Investment Grade Corporates


European Credit: Limited energy exposure, earlier credit cycle buoys high yield

Sources: JPMorgan, T. Rowe Price

Fixed Income

European credit continued to do well in first quarter. Europe’s exposure to energy producers is much smaller than that of the U.S. high yield market. Europe also appears to be in an earlier stage of the credit cycle.

129 413

100 100

5.5

6.0

6.5

7.0

7.5

Yiel

d (%

)

EM LOCAL YIELDS March 2014–March 2016

275

300

325

350

375

400

425

450

475

500

Spre

ad (b

ps)

EM CORPORATES SPREAD March 2014–March 2016

2Y Avg. 364

200

250

300

350

400

450

500

Spre

ad (b

ps)

EM $—SOVEREIGN SPREAD March 2014–March 2016

2Y Avg. 352

Emerging Markets: Yields and spreads end the quarter lower after an early spike

Sources: JP Morgan

409 420

2Y Avg. 6.6%

6.5%

Fixed Income

While concerns eased late in the quarter, anxiety about the near-term outlook for emerging markets debt is still widespread. Further tightening by the Fed may drive EM currencies lower, although much of this adjustment should already be priced in. Concerns in the corporate market are driven by the slowdown in China and associated weakness in commodity prices, as many EM companies derive revenue from the production of commodities. Sovereign issues have been primarily idiosyncratic, headlined by a very tumultuous situation in Brazil. On the bright side, valuations are attractive and long-term drivers are intact.

101 101

Emerging Markets: Default rates are well below levels of previous crises

*Sources: Barclays T. Rowe Price

Fixed Income

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

US High Yield EM Corporate High Yield

TRAILING 12 MONTH ISSUER WEIGHTED DEFAULT RATE January 1996 to March 2016

Financial crisis

Asia crisis

Russia crisis

LatAm crisis

102 102

Emerging Markets: Dollar-denominated debt obligations and supply peak in 2018

*Sources: Strategas

Fixed Income

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

Bill

ions

of U

SD

Maturity Date

EMERGING MARKET CORPORATE & GOVERNMENT DOLLAR-DENOMINATED BOND DEBT OUTSTANDING

CorporateGovernment

'16-'50 Sum Corp: $1,398Bn Gov't: $788Bn

Investors remain concerned about the effect a stronger dollar may have on emerging market debt. The peak in maturities of dollar-denominated debt will arrive in 2017 – 2020 and will be concentrated among corporate issuers.

103 103

Municipal Bonds: AAA yield curve flattens

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 2 5 10 20 30

Yiel

d (%

)

Years to Maturity

AAA MUNICIPAL YIELD CURVES 3/31/2015 12/31/2015 3/31/2016


Sources: Municipal Market Data

3/31/2015 3/31/2016 Change in bps 2 Year 0.49% 0.67% 18 5 Year 1.24 1.07 -17 10 Year 1.96 1.70 -26 30 Year 2.80 2.69 -11

AAA MUNICIPAL YIELDS

The downgrade of Chicago’s general obligation bonds to junk status and Puerto Rico’s request to postpone debt payments have raised concerns. However, longer municipal yields have continued to fall, suggesting that the market believes these issues are isolated events. Both technicals and cash inflows have been strong over the past two quarters.

Fixed Income

-40

-30

-20

-10

0

10

20

30

40

1 3 5 7 10 15 20 25 30

Bas

is P

oint

s

Years to Maturity

YEAR-OVER-YEAR CHANGE IN YIELDS

104


Source: U.S. Treasuries: Barclays U.S. Treasury Index; U.S. Aggregate: Barclays U.S. Aggregate Index;U.S. Corporates: Barclays U.S. Corp IG index; U.S. High Yield: Barclays U.S. High Yield Index; EM Sovereign Hard Currency: JPMorgan Emerging Market Global Diversified Bond Index; EM Corporates: JPMorgan CEMBI Broad Diversified Index; EM Sovereign Local Currency: JPMorgan GBI EM Global Diversified Index; Global Bonds: Barclays Global Aggregate Index; International Bonds: Barclays Global Aggregate ex-U.S. Index; Euro Corporates: Barclays Euro Agg Corporates Index ; Euro HY: Barclays Pan-European High Yield Index; EURO Agg: Barclays Euro Agg Index; JGB: Barclays Asian Pacific Japan Index; Bunds: Barclays Global Treasury Germany Index; U.K. Gilts: Barclays Global Treasury U.K. Index; Global HY: J.P. Morgan Global High Yield Index. This information demonstrates, in part, the firm’s risk return analysis. This information is intended for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

Yield and duration for fixed income sectors

Fixed Income

U.S. Treasuries

U.S. Corporate I.G.

U.S. High Yield

EM Sovereign Hard Currency EM Corporate

EM Sovereign Local Currency

Global Corporate I.G.

Global Agg ex-U.S.

Euro Corporate I.G.

Euro HY

U.S. Agg

Euro Agg Japanese Gov’t Bonds Bunds

UK GILTS

Global High Yield

Bank Loans

-1

0

1

2

3

4

5

6

7

8

9

3 4 5 6 7 8 9 10 11 12

Yiel

d to

Mat

urity

(%)

Duration (Years)

Negative Yield

Positive Yield

105 105

0

50

100

150

200

250

300

Inde

x Le

vel

MERRILL LYNCH MOVE INDEX Past 20 Years

Fixed Income: Fed policy uncertainty spurs volatility As of March 31, 2016

Fixed Income

Source: Merrill Lynch, Factset

Fixed income volatility has increased, as Fed policy has become less certain, beginning in 2014 with the “taper tantrum”.

50

55

60

65

70

75

80

85

90

95

100

Inde

x Le

vel

MERRILL LYNCH MOVE INDEX Past 2 Years

106 106

Bond flows: Flows into municipals, and out of emerging markets and bank loans persist All numbers in U.S. $, billions

Charts are based on monthly asset flows. Sources: Morningstar, T. Rowe Price.

-100-80-60-40-20020406080

-6

-4

-2

0

2

4


EMERGING MARKETS DEBT March 2009–February 2016 Mutual Fund (L)

ETF (L)Cumulative (R)

-120

-80

-40

0

40

80

120

-15

-10

-5

0

5

10

15


HIGH YIELD March 2009–February 2016 Mutual Fund (L)


-240-180-120-60060120180

-20-15-10

-505

1015


MUNICIPALS March 2009–February 2016 Mutual Fund (L)


-120

-80

-40

0

40

80

120

-10

-5

0

5

10


BANK LOANS March 2009–February 2016

Mutual Fund (L)ETF (L)Cumulative (R)

Fixed Income

107 107

Global Fixed Income Market Returns



2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD 2016

EM—Local 15.22%

EM —Local 18.11%

U.S. TSY 13.74%

Global HY 58.90%

CMBS 20.40%

U.S. TIPS 13.56%

EM—Sov. 17.44%

Global HY 7.41%

Munis 9.05%

Munis 3.30%

EM—Local 11.02%

Global HY 11.45%

U.S. TIPS 11.63%

Gov’t. Rel. 8.51%

Bank Loans 52.53%

EM—Local 15.68%

Munis 10.70%

EM—Local 16.76%

Bank Loans 5.41%

U.S. IG Corp 7.46%

Agency MBS 1.51%

EM-Sov. 5.04%

EM—Sov. 9.86%

U.S. TSY 9.01%

Agency MBS 8.34%

EM—Corp 34.88%

Global HY 15.05%

U.S. TSY 9.81%

Global HY 16.21%

CMBS 0.23%

Gov’t. Rel. 6.14%

EM-Corp 1.30%

U.S. TIPS 4.46 %

Bank Loans 6.89%

Gov’t. Rel. 7.68%

U.S. TIPS -2.35%

EM—Sov. 29.82%

EM—Corp. 13.08%

U.S. IG Corp 8.15%

EM—Corp 15.02%

ABS -0.27%

Agency MBS 6.08%

ABS 1.25%

U.S. IG Corp 3.97%

EM—Corp 6.53%

Agency MBS 6.90%

Munis -2.47%

CMBS 28.45%

EM—Sov. 12.24%

EM—Sov. 7.35%

U.S. IG Corp 9.82%

EM—Corp -0.60%

EM—Sov. 5.53%

Gov’t Rel. 1.18%

EM-Corp 3.89%

Agency MBS 5.22%

EM—Sov. 6.16%

U.S. IG Corp -4.94%

ABS 24.2%

Bank Loans 10.38%

Gov’t. Rel. 6.67%

Bank Loans 9.78%

Agency MBS -1.41%

U.S. TSY 5.05%

EM-Sov. 1.18%

CMBS 3.61%

Munis 4.84%

CMBS 5.57&

EM—Local -5.22%

EM—Local 21.98%

U.S. IG Corp 9.00%

Agency MBS 6.23%

CMBS 9.66%

U.S. IG Corp -1.53%

EM—Corp 4.96%

CMBS 0.97%

Global HY 3.29%

CMBS 4.73%

U.S. IG Corp 4.45%

EM—Sov. -12.03%

U.S. IG Corp 18.68%

U.S. TIPS 6.31%

CMBS 6.02%

U.S. TIPS 6.98%

Munis -2.55%

CMBS 3.86%

U.S. TSY 0.84%

U.S. TSY 3.20%

ABS 4.70%

EM—Corp 3.91%

ABS -12.72%

Munis 12.91%

U.S. TSY 5.87%

Global HY 5.73%

Munis 6.78%

Gov’t. Rel. -2.71%

U.S. TIPS 3.64%

Bank Loans 0.10%

Gov’t Rel. 2.28%

U.S. IG Corp 4.30%

Munis 3.36%

EM—Corp -15.86%

U.S. TIPS 11.41%

ABS 5.85%

ABS 5.14%

Gov’t. Rel. 4.90%

U.S. TSY -2.75%

ABS 1.88%

U.S. IG Corp -0.68%

Agency MBS 1.98%

Gov’t. Rel. 4.28%

Global HY 2.88%

CMBS -20.52%

Agency MBS 5.89%

Agency MBS 5.37%

EM—Corp 2.31%

ABS 3.66%

EM—Sov. -5.25%

Bank Loans 1.82%

U.S. TIPS -1.44 %

Bank Loans 1.68%

U.S. TSY 3.08%

ABS 2.21%

Global HY -26.83%

Gov’t. Rel. 2.48%

Gov’t. Rel. 5.02%

Bank Loans 1.49%

Agency MBS 2.59%

U.S. TIPS -8.61%

Global HY 1.67%

Global HY -4.25%

Munis 1.67%

U.S. TIPS 0.41%

Bank Loans 2.04%

Bank Loans -29.32%

U.S. TSY -3.57%

Munis 2.38%

EM—Local -1.75%

U.S. TSY 1.99%

EM—Local -8.98%

EM—Local -5.72%

EM—Local -14.92%

ABS 1.36%

Fixed Income

Past performance cannot guarantee future results. Indices: JP Morgan Emerging Markets Bond Index Global, JP Morgan Global High Yield, JP Morgan GBI-EM Global Diversified, JP Morgan CEMBI Broad Diversified, Barclays U.S. Corporate Investment Grade, Barclays CMBS ERISA-Eligible, Barclays U.S. Aggregate, Barclays U.S. Treasury, Barclays Mortgage-Backed Securities, Barclays U.S. Municipal (Tax-Exempt Munis), S&P/LSTA Performing Loan Index, Barclays U.S. Aggregate Government Related, Barclays Asset-Backed Securities Sources: Barclays, JPMorgan, S&P/LSTA, T. Rowe Price

108 108

Real Assets: Commodity prices stabilize; precious metals show strength

Real Assets

500

1,000

1,500

2,000

2,500

3,000

100

200

300

400

500

600

700

800

900

1,000

2011 2013 2015

Index Level Inde

x Le

vel

GSCI COMMODITY INDEX March 2011–March 2016

GSCI Index (L)Energy (L)Industrial Metals (L)Precious Metals (R)

15

35

55

75

95

115

135

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2011 2013 2015

($/Barrel) ($

/Tro

y O

z)

GOLD AND OIL PRICES March 2011–March 2016

Gold (L) Oil (R)

Past performance cannot guarantee future results. Currently the S&P GSCI™ includes 24 commodity nearby futures contracts. The S&P GSCI™ index tracks the price of the nearby futures contracts, not returns available to investors. Sources: Factset, Goldman Sachs, T. Rowe Price

109 109

Oil: Supply is well ahead of demand

Real Assets

Sources: Factset, OECD, Energy Information Agency, Baker Hughes, T. Rowe Price

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

2,000

4,000

6,000

8,000

10,000

12,000

U.S. OIL PRODUCTION VS. U.S. OIL RIG COUNT

U.S. Crude Oil Field Production(Thousand Barrels Per Day)(L)

Rig Count (R)


Oil prices have fallen dramatically because of oversupply in the market. While there has been a significant pullback in the number of oil rigs in the U.S., production has not fallen significantly. With U.S. production stubbornly high and OPEC struggling to curtail production, a significant rebound in oil prices seems unlikely in the near term.

0

20

40

60

80

100

120

140

160

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Oil

Pric

e ($

)

Mill

ions

of B

arre

ls P

er D

ay

GLOBAL DEMAND MINUS SUPPLY VS. OIL PRICE (BRENT CRUDE)

12 Month Average of DemandMinus Supply (R)Oil Price (L)

110 110

Real Assets: Oil prices are moving in concert with riskier asset categories

Real Assets

Sources: Factset, Russell, J.P. Morgan, Barclays

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

Rol

ling

six-

mon

th c

orre

latio

n w

ith o

il pr

ice

(WTI

)

OIL PRICE CORRELATIONS January 1996 to March 2016

Russell 3000

Barclays U.S. High Yield

JP Morgan EMBI Global

Barclays US Aggregate

Oil price correlations with equities and fixed income have increased dramatically since the end of the financial crisis, with correlations rising when macro concerns are heightened. Correlations also appear to have been particularly heightened thus far in 2016.

$25

$30

$35

$40

$45

$50

1,800

1,850

1,900

1,950

2,000

2,050

2,100

2,150

OIL VS. S&P 500 PRICE November 1, 2015 to April12, 2016

S&P 500 - Price (Left)

WTI Crude Oil ($/bbl) (Right)

111 111

Real Assets Returns


2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD 2016

Global REITS 42.35%

Oil 57.24%

Gold 4.32%

Metals & Mining 90.25%

Gold 29.24%

Oil 10.01%

Global REITS 28.65%

MSCI ACWI 23.44%

Global REITS 15.89%

Global REITS 0.05%




Global Infrastructure

-32.39%

Oil 77.94%


Gold 8.93%

MSCI ACWI 16.80%


18.45%


6.99%

MSCI ACWI -1.84%

Gold 16.45%


34.81%

GSCI Commodity

32.67%

MSCI ACWI -41.85%

Global REITS 38.26%

Global REITS 20.40%


-0.17%

Gold 8.26%

Oil 6.92%

MSCI ACWI 4.71%


-7.39%


8.25%

Gold 23.20%

Gold 31.92%

GSCI Commodity

-46.49%

MSCI ACWI 35.41%

Oil 13.21%

GSCI Commodity

-1.18%


7.43%

Global REITS 4.39%

Gold 0.12%

Gold -10.51%

Global REITS 5.43%

MSCI ACWI 21.53%


25.47%

Global REITS -47.72%

Gold 25.04%

MSCI ACWI 13.21%

Global REITS -5.82%


GSCI Commodity

-1.22%

Metals & Mining

-18.95%

Oil -13.60%

MSCI ACWI 0.38%

Oil 0.03%

MSCI ACWI 12.18%

Oil -53.55%


15.06%

GSCI Commodity

9.03%

MSCI ACWI -6.86%

GSCI Commodity

0.08%

Metals & Mining

-17.04%

GSCI Commodity

-33.06%

GSCI Commodity

-32.86%

GSCI Commodity

-2.50%

GSCI Commodity

-15.09%

Global REITS -6.96%

Metals & Mining

-56.14%

GSCI Commodity

13.48%


7.50%

Metals & Mining

-28.25%

Oil -7.09%

Gold -27.33%

Oil -45.51%

Metals & Mining

-38.97%

Oil -20.62%

Real Assets

Past performance cannot guarantee future results. Indexes: MSCI AC World Infrastructure Index, MSCI AC World Index U.S., MSCI AC World Metals and Mining Index, FTSE EPRA/NAREIT Developed Real Estate Index, GS Commodity Index. Oil represents the change in West Texas Intermediate spot price. Sources: Factset, T. Rowe Price

112 112

Global Risk Summary

Source: T. Rowe Price

Summary

Upside Downside

United States

A positive, albeit muted, economic cycle continues as the slowdown in emerging markets has a limited effect on the domestic economy

An improved job market, lower energy costs, and rebounding housing demand support improving consumer spending

Business spending may rebound as the pullback in energy-related capex spending abates and weakness in the industrial economy proves transitory

Credit markets are stabilizing, having digested the uptick in energy defaults in an orderly fashion

The Fed maintains a slow pace of rate increases amid low inflation

The ongoing downshift in Chinese growth and fallout from plunging commodity prices weakens exports

A rising wave of defaults could cause credit markets to freeze Dollar strength slows U.S. exports and manufacturing sector capital spending An uptick in protectionist policies could ignite a global trade and currency war The specter of rising interest rates, a credit cycle downturn, and a dramatic

increase in volatility could weaken confidence and ignite a downward spiral in asset prices

Europe

The recovery remains on track despite tailwinds from China’s slowdown Quantitative easing continues to drive credit growth and consequently an

uptick in spending habits among consumers and corporations A weaker euro would support export growth Corporate profit margins have ample room to improve Pent-up demand would likely emerge if consumer and corporate confidence

improves Progress on structural reforms creates improved business conditions

Germany, Europe's strongest growth engine, is weakened by China exposure Political uncertainty has reignited amid the ongoing refugee crisis, and the UK

potentially exiting the European Union Although improving, growth remains muted, with a wide divergence between

countries Unemployment remains elevated, particularly in peripheral nations High government debt levels limit fiscal stimulus measures Banking sector challenged by extremely low interest rates

Japan

The BOJ is likely to attempt to weaken the yen to more favorable levels Exporters will gain share if BOJ is able to maintain a weaker yen Rebalancing of public pension funds supports equity markets Corporations continue to focus on improved corporate governance Corporate profit margins are improving Increased female participation in labor markets provides a much-needed

labor force expansion

China’s export demand weakens as Chinese growth slows Political relations with China remain tense Wage growth continues to stall Lower tax revenues and growing debt undermine fiscal sustainability Improvements in corporate governance may be cosmetic, as profitability

improvements are mostly driven by yen weakness Challenging structural issues remain, including an aging population and high debt

levels

Emerging Markets

Overall, EM countries have become less vulnerable to external forces, given

lower external debt, improved current accounts, and higher currency reserves. These elements should help EM avoid the near-crisis scenario that appears to be currently priced in.

Commodity-importing countries benefit from lower commodity prices Currencies have stabilized as anxiety over U.S. rate increases fades Potential for consumption growth remains attractive given the rising

purchasing power of the middle class and improving internet connectivity

Exposure to China is broad based, as many EM economies are heavily dependent on demand from China, either through direct exposure or exposure to commodity prices

Commodity exporting countries are highly vulnerable to an elongated period of weak commodity prices

Broad increases in credit growth throughout the 2000s leave numerous corporations unprepared for a sustained drop in commodity prices

Federal Reserve interest rate policy normalization remains a near-term risk to capital flows

China

The powerful central government is committed to engineering a gradual transition toward slower growth

Numerous policy tools are available, including more fiscal stimulus, rate cuts, lower reserve requirements, and quantitative easing

Consumption and service industries remain healthy, and are gradually becoming a more significant driver of economic growth

Lower oil prices and yuan devaluation would help trade surplus

Industrial production continues to weaken with significant excess capacity in many sectors, particularly among state-owned enterprises (SOEs)

Local governments in industrial-oriented regions are an obstacle to the transition toward a service-oriented economy

Infrastructure spending has become a poor tool for stimulating the economy, making policy intervention more complicated, experimental, and prone to errors

Weak profitability in industrial sector raises debt-service concerns Size and pace of China’s credit expansion remains risky Yuan devaluation fears create potential for massive capital outflows

113 113

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