2011 Investment Outlook

Russ KoesterichiShares® Chief Investment Strategist

FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

2FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

Year ahead: 2011

Scenarios

• Economic decoupling

• Double dip

• Inflation

• Return to Goldilocks

3FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

Base case for 2011: Continued economic rebound

Source: Bloomberg.

ISM Survey Pricing & New Orders

20

30

40

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60

70

80

1/00 4/01 7/02 10/03 1/05 4/06 7/07 10/08 1/10

ISM

In

de

x

ISM New Orders

30

35

40

45

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55

60

65

1/00 4/01 7/02 10/03 1/05 4/06 7/07 10/08 1/10IS

M N

on

-Ma

nu

fac

turi

ng

ISM Non-Manufacturing Survey

4FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

Base case continued: Other developed markets also rebound and emerging markets engineer “soft landing”

80

85

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110

1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10If

o I

nd

ex

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1/05 9/05 5/06 1/07 9/07 5/08 1/09 9/09 5/10

New

Ord

ers

PM

I S

A

Chinese Manufacturing Index Ifo Pan Germany Business Climate Index

Source: Bloomberg.

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More good news: Low rates/inflation allow for multiple expansion

10-Year Yield Average P/E Median P/E P/E > Average Observations

Below Average (< 6%) 20.27 18.98 86% 152

Average (6% to 9%) 16.32 16.28 47% 240

Above Average (> 9%) 10.28 10.01 2% 92

Average P/E

CPI YoY Less than 1% 15.62

CPI YoY 1% to 3% 19.24

CPI YoY 3% to 5% 16.95

CPI YoY 5% to 7% 13.18

CPI YoY 7% to 9% 10.34

CPI YoY Above 9% 8.77

Rates and Equity Multiples

Inflation and Equity Multiples

Source: Bloomberg, as of 11/30/10.

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Not all good—continued consumer deleveraging a headwind

Source: Bloomberg.

Household vs. Federal Debt Growth

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0

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3/52 3/61 3/70 3/79 3/88 3/97 3/06

De

bt

Gro

wth

(%

)

Growth Household Debt Growth Federal Debt

What could go wrong?

8FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

Inflation is the major near-term risk in emerging markets

Source: Bloomberg.

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0

5

10

15

20

1/00 2/01 3/02 4/03 5/04 6/05 7/06 8/07 9/08 10/09 11/10

CP

I Y

oY

(%

)

US Japan China Brazil Europe

Global Inflation Sample 2000 to Present

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US consumer increasingly dependent on transfer payments

US consumers now get more than $0.20 in every dollar of disposable income from the Federal government

Source: Bloomberg.

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

1/59 1/66 1/73 1/80 1/87 1/94 1/01 1/08

Tra

ns

fer

Pa

ym

en

ts/D

isp

os

ab

le I

nc

om

e

Transfer Payments as a % of Disposable Income

10FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

Deficits are not going away

With the Bush tax cut extension and additional stimulus, the fiscal 2011 deficit is likely to eclipse 2009’s record $1.415 trillion

Source: Bloomberg.

US Treasury Federal Budget Yearly Deficit or SurplusFiscal 1962 to Present

-1,600

-1,400

-1,200

-1,000

-800

-600

-400

-200

0

200

400

1962 1968 1974 1980 1986 1992 1998 2004 2010

An

nu

al D

efic

it o

r S

urp

lus

($ B

illio

ns)

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Even in the absence of inflation, deficits will push rates higher

Historically, for every 1% of GDP rise in the deficit, real interest rates rise by 25–50 bps

Source: Bloomberg.

-6

-4

-2

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-12 -10 -8 -6 -4 -20

2 4

Deficit as % GDP

Re

al

10

-Ye

ar

Inte

res

t R

ate

s (

%)

US Deficits and Real Interest Rates1962 to Present

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Look ahead: 2011

Scenarios

• Economic decoupling: Probability 55%

• Double dip: Probability 25%

• Inflation: Probability 10%

• Return to Goldilocks: Probability 10%

Investment Strategies

1. Overweight equities versus bonds

2. Within equities, favor exporters and energy while underweighting US consumer

3. Within bonds, favor corporates over treasuries

This information should not be construed as research, investment advice or a recommendation regarding any security in particular. This information is strictly for illustrative and educational purposes and is subject to change.

13FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

Long term: Who is the biggest sovereign risk?

Sources: Eurostat, CBO, Morgan Stanley Research.

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Spain France Germany UnitedKingdom

Portugal Italy Ireland Greece US (Federal

Government)

De

bt/

Re

ve

nu

e (

%)

Government Debt/Revenue2009

Questions?

Appendix

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Government debt: Who is the biggest risk?

US has shortest maturity, second highest maturing debt and second highest gross financing needs

Advanced Economies Gross Financing Needs: 2010(in % of GDP, unless otherwise specified)

Maturing Deficit Gross Gross Debt Average MaturityDebt Financing 2009 (years)

Needs

Australia 2.0 -5.0 7.0 15.5 4.8Belgium 20.8 -5.1 25.9 97.3 5.4Canada 15.9 -5.3 21.2 82.5 5.6France 16.9 -8.2 25.1 77.4 6.5Germany 10.2 -5.7 15.9 72.5 6.0

Greece 13.4 -8.1 21.5 115.1 7.4

Ireland 7.7 -12.2 19.9 64.5 6.7

Italy 21.2 -5.2 26.4 115.8 6.7

Japan 54.2 -9.8 64.0 217.7 5.2

Portugal 13.0 -8.8 21.8 77.1 6.2

Spain 10.3 -10.4 20.7 55.2 6.7

Sweden 6.8 -3.3 10.1 40.9 6.0

United Kingdom 8.6 -11.4 20 68.2 12.8

United States 21.2 -11.0 32.2 83.2 4.4

Sources: April 2010 IMF World Economic Outlook; Bloomberg and IMF staff estimates for maturing debt and average maturities.

17FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

Spot Gold vs. US Money Supply (M2) 1959 to Present

Commodity run should continue, absent a “hard landing” in emerging markets

Gold does not look as frothy when compared against the growth in the money supply

Source: Bloomberg.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

3/59 3/65 3/71 3/77 3/83 3/89 3/95 3/01 3/07

Ch

ang

e G

old

/Ch

ang

e M

2

18FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

Surge in government spending and record deficits are supporting gold—this is likely to continue

Based on changes in money supply and federal spending, increase in gold prices looks more reasonable

Source: Bloomberg.

Federal Spending vs. Gold/M2 Ratio

0.0

0.5

1.0

1.5

2.0

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3.0

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4.0

-20% -10% 0% 10% 20% 30% 40%

Annual Change Federal Spending

Ch

an

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Go

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e M

2

The information included in this material has been taken from trade and other sources considered reliable. No representation is made that this information is complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date and are subject to change. This information should not be construed as research, investment advice or a recommendation regarding any security in particular. No part of this material may be reproduced in any manner without the prior written permission of BlackRock, Inc.

Russ Koesterich is an affiliate of BlackRock Fund Distribution Company and BlackRock Execution Services, which are subsidiaries of BlackRock, Inc.

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