Politics not quite as usual - BlackRock · Isabelle Mateos y Lago — Chief Multi-Asset ... to a further backlash against the free flow of people and ... 6 . POLITICS NOT QUITE AS

Politics not quite as usualViews on the intersection of politics and markets

GLOBAL INSIGHTS • JUNE 2017

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Contents

3–5The big picture

6–7Geopolitics

8–11U.S.

12-15Europe

LEFT TO RIGHT

Joanna Cound — Head of BlackRock Global

Public Policy Group, Europe

Kate Fulton — BlackRock Global Public Policy

Group, U.S.

Rupert Harrison — Portfolio Manager,

BlackRock Multi-Asset Strategies

Isabelle Mateos y Lago — Chief Multi-Asset

Strategist, BlackRock Investment Institute

Jonathan Pingle — Head of Economics,

BlackRock Fixed Income Americas

SummaryWe see diminished political risks in the short run in Europe, and potential for some growth-enhancing

reforms in major economies around the world. Some of this good news is already priced in, but we

expect a steady and synchronized global economic expansion to underpin risk assets for now.

Longer term, we see significant risk of populist policies that would hurt business, such as restrictions on

trade and immigration. A starkly more transactional U.S. approach to foreign affairs challenges long-

standing security and trade pacts, and we see North Korea’s nuclear ambitions as the top security threat.

We see fading prospects for comprehensive U.S. tax reform amid legislative gridlock and distracting

probes into ties between White House officials and Russia. Yet depressed expectations lower the bar for

positive surprises, and we see regulatory easing as an underappreciated force in business and markets.

Europe may have its best opportunity in decades to push through reforms that make the EU more

sustainable and effective. These are much needed to deal with rising populism and any economic

deterioration. Potential flare-ups are Italy’s fractious politics and a possible “no deal” on UK Brexit talks.

Investors have mostly shrugged off a series of political upsets — from Brexit to U.S.

President Donald Trump’s surprise election win. Yet these developments have

long-term consequences. There are fundamental questions about the future of the

European Union (EU) and how to address the complex root causes of populism and

nationalism. An increasingly transactional U.S. approach to foreign affairs, waning

support for free trade and uncertain prospects for U.S. tax reform also have big and

differentiated implications for economies, sectors and companies.

These topics are the subject of vigorous debate among BlackRock portfolio

managers and strategists. We do not have all the answers, but here we present some

of our thinking, including Q&As with our experts.

PhilippHildebrand

BlackRock Vice

Chairman

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The big pictureWe see political risk receding for now, returning attention to a steady global expansion. Yet

ongoing discontent could lead to policy responses that pose longer-term threats to markets.

The Republican policy agenda could be derailed if the

party loses control of either chamber of Congress in

the 2018 mid-term elections. A challenge is fulfilling

the promises Trump made during his campaign, which

attracted disproportionate support from older white

males, many in the so-called rust belt states. Stagnant

wage growth for the middle class, sharply rising health

insurance premiums and an epidemic of opioid addiction

are among the issues requiring policy responses.

Our bottom line: If current governments fail to implement

policies that improve the plight of disenfranchised and

disgruntled voters, we could see more populist election

victories in the years ahead. We believe this could lead

to a further backlash against the free flow of people and

goods across borders, threatening global supply chains

and economic growth. The longer governments wait to

address voter concerns, the greater the chance of eventual

policy overreach that could hurt markets.

A series of populist surprises has riveted investors. The

political shocks of 2016 — the UK’s Brexit vote and the

election of U.S. President Donald Trump — signaled a

dissatisfaction with the status quo, particularly among

baby boomers who make up an increasing share of

electorates. Rising inequality in some countries and a

perceived loss of sovereignty in others also play a part.

Economic issues such as the state of the economy,

unemployment and public finances dominated in the

years following the global financial crisis and European

sovereign debt woes. Terrorism and immigration have

leapt to the top of voter concerns since 2014. See the

Shifting worries chart. Similar trends are driving populist

politics in many countries.

Markets have proved resilient to political shocks to date,

recovering swiftly after initial selloffs. Investor caution

leading up to these events may be part of the story. A

benign reflationary backdrop and improving corporate

earnings around the world also help.

A political cloud seems to be lifting in Europe after the

French election delivered its most pro-European president

in decades. And German chancellor Angela Merkel looks

set to win a fourth term in September. This could open a

window of opportunity for Europe’s two largest economies

to cooperate in promoting reforms vital to the eurozone’s

sustainability. See pages 12-15 for details. There are risks.

Italian elections could result in fragile coalitions, and raise

questions about Italy’s commitment to the euro. And there

is a risk that the UK cannot reach a deal with the EU before

exiting in 2019.

In the U.S., the legislative agenda has slowed amid

investigations of potential Russian election interference

and other distractions. A fractious Republican caucus with

only a slim Senate majority leaves the party leadership with

little margin of error in approving legislation. And relations

between the two major parties are as fraught as ever.

Shifting worriesPublic’s view of key issues facing the EU, 2011-2016

2016

0

20

40

60%

20142013 201520122011

Unemployment

Economic situation

Terrorism

Public finances

Immigration

Sources: BlackRock Investment Institute and the European Commission, November 2016. Note: The lines show percentage support for the top-five responses to the question “What do you think are the two most important issues facing the European Union at the moment?” in the Eurobarometer public opinion survey.

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Room to runPolitical events have the potential to sway markets, but

we believe investors also need to look through short-term

noise and focus on the big picture: underlying economic

and market trends. The outlook is pretty bright in this

regard, in our view. The U.S. economic recovery from the

financial crisis has been slow and grinding, and some

worry that it may be on its last legs. We believe it has

room to run. The slower the pace of a recovery, the longer

it takes to absorb the economic slack created in the last

recession — and the longer it takes to reach full capacity

and ultimately the peak that signals the cycle’s end. See

our Global macro outlook of May 2017 for details.

The Are we there yet? chart shows U.S. economic cycles

since 1953, with each dot on a line depicting a calendar

quarter. What stands out when time is replaced by

economic progress? The current cycle (the orange line)

looks normal — and is closely tracking the previous two

cycles of 1990-2001 and 2001-2007 (blue and green).

Estimates of economic slack are imprecise. Yet even if there

is no slack left, as some labor market indicators suggest, the

economy’s anemic pace of growth implies there are years

— not quarters — to go in the current cycle, in our view.

European signs of lifeEurozone big-four GPS and market-implied GDP, 2010-2017

Ann

ual G

DP

gro

wth

2010

0

0.5

1

1.5

2%

2012 2014 2017

Market-implied GDP

Eurozone big-four GPS

Sources: BlackRock Investment Institute and Eurostat, May 2017.Notes: The BlackRock GPS shows where the 12-month consensus GDP forecast may stand in three months’ time for the top four eurozone economies: Germany, France, Italy and Spain. The market-implied eurozone GDP is based on a statistical model that analyzes co-movements in eurozone equity prices and real bond yields: Any simultaneous rise in real yields and equities is interpreted as the market pricing in a positive growth expectation. Using the GPS methodology, that is converted into a 12-month forward GDP reading.

Are we there yet?Comparison of U.S. economic cycles, 1953-2016

Prior peak

90

110

130

150

2007-present

1990-2001

2001-2007

GD

P in

dex

Trough Potential Peak

Sources: BlackRock Investment Institute, US BEA, Congressional Budget Office, National Bureau of Economic Research (NBER), May 2017. Notes: The chart shows the level of real US GDP compared against other cycles. Each line begins with the peak of the previous business cycle, as determined by the NBER. We align different economic cycles based on their peaks, troughs and the point when potential output is reached. This allows us to compare cycles of varying lengths. Potential output is reached when the economy is operating at full capacity, having used up all the slack created by the previous downturn. We use CBO measures of the output gap, or the difference between actual and potential output. Each dot on a line represents a calendar-year quarter. Each cycle peak is set at 100. All cycles since 1953 are represented.

European optimismInvestors have long been downbeat on the eurozone’s

growth prospects. The market is pricing in GDP growth

of just 1.2% in its big-four economies in the year ahead,

based on our analysis of bond and equity valuations.

See the European signs of life chart. The market-implied

growth rate has rebounded sharply in recent months, but

still lags the forward view of the BlackRock GPS, which

combines traditional economic indicators with big data

signals such as Internet searches. The unusual divergence

between our GPS and marked-implied growth rates since

2015 can be explained by political risks: most recently,

jitters ahead of the French presidential election.

We see further room for market-implied GDP rates to play

catch-up with our GPS in the coming quarters as political

uncertainty lifts. We see this pushing European equities

and bond yields higher, reflected in our overweight view on

European equities and an underweight view on European

sovereign debt and credit. What are the risks? Nominal

income growth is still sluggish and needs to pick up as tail

winds from lower oil prices and a weaker currency fade.

Also, Europe has greater exposure to China and emerging

markets than the U.S., and could be disproportionately

impacted by any stall in economic momentum there.

Click to view interactive GPS

Click to view interactive data

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All regions of the world economy are experiencing a

synchronized upturn in 2017 for the first time in several

years. The global reflationary dynamic is reflected in a

pickup in global trade volumes. Growth in the dollar value

of trade has rebounded sharply after contracting for much

of the past two years. This is a sign of health in the global

economy. See the Budding trade recovery chart.

The volume of world merchandise trade has tended to grow

about 1.5 times faster than world output since 1981, but the

ratio has slowed to 1:1 since the financial crisis, according

to a World Trade Organization (WTO) April 2017 report.

This partly reflects weak investment in much of the world.

Structural changes such as China’s rebalancing away from

investment and toward consumption are another potential

dampener in coming years.

Any rise in protectionism could pose a threat to the

nascent global trade recovery. We do not see risks of a

significant increase in actual protectionist measures this

year. Increased U.S. pressure on China and other countries

to open up their markets may actually yield benefits. Yet

escalating protectionist rhetoric and a more transactional

U.S. approach to trade that favors bilateral over multilateral

deals is a longer-term concern. See page 7 for details.

What, me worry?Fund manager top ‘tail risks’ and global equities, 2015-2017

Tota

l ret

urn

(Oct

. 201

5 =

10

0)

Oct. 2015

Economic worry Political worry

90

110

130

World equities

May 2017

May 2016

Jan. 2016

Oct. 2016

Jan. 2017

EU disintegrationChina recessionU.S. recession

Brexit

Trump winChina credit

Trade war

Sources: BlackRock Investment Institute, MSCI and Bank of America Merrill Lynch, May 2017. Notes: The vertical lines show the top ‘tail risk,’ or the top outside risk, from the Bank of America Merrill Lynch Fund Manager Survey. Only months where the top risk accounted for more than 25% of responses are shown. World equities are based on the MSCI All-Country World Index total return, rebased to 100 at the start of October 2015.

Budding trade recoveryGlobal export volume and value, 2003-2017

Ann

ual c

hang

e

2003

Value

Volume

U.S. recession

2005 2007 2009 2011 2013 2015 2017

-30

-15

0

15

30%

Sources: BlackRock Investment Institute, IMF and CPB - Netherlands Bureau for Economic Policy Analysis, May 2017. Notes: The lines show the annual percentage change in total global export volumes and export value in U.S. dollars.

Markets have climbed a wall of worry in the past few

years. What are investors most worried about in the world

today? The top tail risk cited by investors was dominated

by economic concerns from late 2015 through early

2016, mostly around fears of China dragging the world

into recession, the Bank of America Merrill Lynch Fund

Manager Survey shows. See the What, me worry? chart.

Political concerns and uncertainty then jumped into the

spotlight, with investors’ minds dominated by Brexit,

Trump’s surprise election victory and sporadic worries

about EU disintegration. We see concerns about EU

cohesion receding until the run-up to Italian elections,

which could occur as early as September. See page 12.

China credit risks became the top investor worry in

early 2017 as the country tapped its foot on the brakes

of credit creation. The lesson from recent history is that

fundamentals have mattered much more than politics.

Markets have shrugged off most of the top political risks,

with bouts of volatility treated as buying opportunities.

The question is when and where politics may start to

impact the favorable fundamentals. For example, we could

see a failure of the UK to reach an exit deal with the EU

hurting its economy and markets. See page 15.

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The coming year brings a mosaic of elections, monetary

policy decisions and geopolitical hot spots. See the map

below. Washington lawmakers face a shrinking window

of opportunity to implement tax reform (pages 8-10).

Populists have been beaten back in Europe for now, and

our attention has turned to trouble brewing in Italy (page

12), improving the workings of the EU (page 13-14) and

the shape and outcome of Brexit negotiations (page 15).

The backdrop of synchronized global growth puts central

banks at a crossroads. We see the European Central

Bank (ECB) debating how much longer its extraordinary

amount of monetary support is needed — and how to

communicate any changes. The Fed is contemplating how

to trim its balance sheet. We see the risks as contained, as

we expect central banks to move cautiously and gradually.

GeopoliticsWe highlight key events, trends and risks to watch in 2017 and beyond.

Mark your calendarEvents and geopolitical risks to watch in 2017 and beyond

Italy General elections before May 20, 2018

U.K.Parliamentary electionsJune 8

Brexit negotiations

China19th Party CongressFall 2017Attempts to rein in credit South China Sea disputes

European UnionKey ECB meetingsJune 8, July 20, Sept. 7,Oct. 26, Dec. 14

European Council meetingsJune 22-23, Oct. 19-20, Dec. 14-15

Mexico Start of NAFTA renegotiationSummer 2017

General electionsJuly 2018

Brazil General electionsOct. 2018 or earlier

Middle EastSyria and Yemen proxy warsSaudi economic transformationFuture of Iran nuclear deal

North KoreaMissile and nuclear tests

U.S. Key Fed meetingsJune 13-14, Sept. 19-20, Dec. 12-13

Debt ceiling and 2018 budget Summer/fall 2017

Potential tax reform2017-2018

Midterm electionsNov. 6, 2018

GermanyFederal elections Sept. 24

South AfricaANC leadership electionDec. 16-20

SpainPossible Catalan independence referendumSept. 17

Russia Presidential electionsMarch 2018

FranceLegislative electionsJune 11 and 18

Source: BlackRock Investment Institute, May 2017.

China’s growth momentum has slowed as authorities are

cracking down on credit excesses. These measures and

other structural reforms are crucial to put the economy

on a sustainable long-term path, but bring short-term

risks. Accidents can happen when liquidity is tightened in

economies addicted to credit. We see the upcoming 19th

National Congress of the Communist Party as a harbinger

for both reform momentum and China’s ambitions on the

world stage. See China’s tricky transition of February 2017.

Mexican elections loom large on the EM political calendar.

We see rising risks of a populist outcome, partly reflecting

the U.S. administration’s anti-Mexican rhetoric. Brazil’s

government is in crisis, and early elections are a possibility.

Geopolitical hot spots abound, with North Korea

representing the most immediate threat (page 7).

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Former U.S. National Security Advisor Tom Donilon gives investors a geopolitical tour.

What’s the current state of geopolitics?

First, there is significant uncertainty

about the direction and tone of U.S.

national security policy. Second, the

great power relationships are evolving

and becoming more competitive.

Third, there is an unusual number of

volatile and unstable situations. These

include North Korea’s nuclear and missile drive, failed

states and the resulting effects on migration and terrorism,

Russia’s confrontation with the West, populist pressures in

Europe and increasing cyber threats.

These are grim prospects …

There are near-term positives for investors. The French

election took an existential threat to the European project

off the table for now — and I don’t see a rejection of Europe

in the upcoming German elections. U.S.-China relations

have been constructive; a trade war is unlikely this year.

Let’s return to your first point: Washington’s agenda.

The Trump campaign challenged the pillars of the U.S.-

led post-WWII order, including the value of international

alliances, trade and institutions. An experienced national

security team has since had some moderating effect,

and some campaign slogans have run into the realities of

governing. Several characteristics of a new U.S. approach

to foreign affairs have emerged: First, policy is highly

transactional and focused on immediate results. Second,

the president embraces unpredictability as an operating

style. Both have the benefits of flexibility but can call

into question the U.S.’s reliability as a long-term partner

— and unnerve allies and investors alike. Third, there is a

persistent focus on bilateral economic relations, especially

trade deficits, which are seen as a zero-sum game.

How does this play into the great power relationships?

The principal development is that Russia has turned away

from integration with the West to challenging it, from

Ukraine and probing NATO’s borders to Syria and alleged

interference in Western elections. I don’t see U.S.-Russia

relations improving any time soon. Many administration

policymakers see Russia as a significant security threat,

and there are multiple inquiries into election meddling.

How about the upstart superpower, China?

China’s leaders appear confident and eager to fill any

leadership vacuum after the U.S. announced its withdrawal

from the Paris climate accord and pulled out of the Trans-

Pacific Partnership trade agreement. President Xi Jinping

is set to put in place his team and policy agenda for the

next five years at the 19th National Party Congress this

fall. Until then, I see Xi seeking to maintain economic

growth while trying to rein in financial excesses, avoid a

direct confrontation with the U.S. and assert international

leadership in trade and climate. Next year presents

challenges for U.S.-China relations, especially on North

Korea and bilateral trade.

Which area of instability worries you most?

North Korea represents the most significant security

challenge. Attempts to put it on a non-nuclear path have

failed, and all indicators are negative: nuclear tests and

increasingly capable missile technology. It represents both

a direct nuclear and proliferation threat. The approach

so far has been to push China to pressure North Korea to

denuclearize. It is unclear whether China is able or willing

to do so, making this issue a key source of tension in U.S.-

China relations. I expect more North Korean provocations

and continuing risk of escalation — but see military options

as very difficult given South Korea’s vulnerability.

How explosive is the Middle East?

The administration has made a top priority of forging

an alliance with the Gulf states against ISIS and Iran, an

initiative well-received in the Gulf. I see the U.S. adopting

a more confrontational stance toward Iran, but expect the

nuclear deal to hold. Saudi Arabia’s ambitious economic

and cultural transformation is pressured by low oil prices,

but we don’t expect political instability. ISIS is being

pushed out of its territory in Iraq and Syria, increasing the

risk of more terror attacks in Europe.

What risk is below investors’ radar screens?

The volume, sophistication and sources of cyberattacks

are increasing significantly — and the world has very

uneven defenses. More interconnectivity thanks to an

explosion in internet-of-things devices — with little regard

to security — will make us even more vulnerable.

Tom DonilonChairman, BlackRock Investment Institute

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U.S. The prospects for U.S. tax reform and infrastructure spending are fading, but we see an

underappreciated shift toward more flexible regulation that could help business.

Trump trade fizzlesU.S. equity performance around U.S. election, 2016-2017

90

100

110

120Winners

Losers

Neutral

TrendInd

ex

May 2016 Nov. 2016 May 2017

Sources: BlackRock Investment Institute and Thomson Reuters, May 2017.Notes: The chart shows the price performance of individual shares in the S&P 1500 index around the 2016 U.S. election, rebased to 100 on Nov. 8. The breakdown reflects how different shares performed in the three trading days after the election (Nov. 9-11). Those individual shares that rose by more than one standard deviation of their historical three-day moves relative to the overall market move were put into the “winners” bucket. Those that fell by more than one standard deviation are grouped in “losers”. The rest represent the “neutral” bucket.

Growing the wrong wayU.S. long-term budget projections, March 2017

Shar

e o

f GD

P

Public debt share of GDP

2017 2027 2037

0

5

10

15

20

25%

Net interest

Other spending

Health

Social Security

Income tax

Payroll tax

Corporate taxOther revenue

77% 89% 113%

Deficit

RevenueSpending

Sources: BlackRock Investment Institute and Congressional Budget Office, March 2017.Notes: The data show the Congressional Budget Office extended baseline budget projections. Health programs consist of spending for net Medicare spending, Medicaid and the Children’s Health Insurance Program, as well as outlays to subsidize health insurance under the Affordable Care Act and related spending. Other revenue consists of excise taxes, customs duties, estate and gift taxes and miscellaneous fees and fines.

Media headlines paint a picture of political disarray in

Washington. Yet a closer look tells a more nuanced story,

we believe. First, a system of checks and balances and

strong institutions blunt the sharper edges of any new

president’s agenda. Second, the administration has

appointed steady and experienced hands in key posts

such as national security and defense. Lastly, the private

sector is humming along regardless of dramatic political

headlines, with a corporate earnings recovery in full swing.

Some of the froth has come off of the so-called Trump

trade. Shares of companies that performed best after the

election such as banks have given up some of those gains,

while initial losers such as tech have recouped relative

losses. See the Trump trade fizzles chart. Other legs of the

Trump trade have fully reversed, with the Mexican peso — a

barometer of anxiety about a tougher U.S. stance on trade

— recovering from its post-election losses.

The U.S. faces long-term fiscal challenges. Health care and

Social Security make up roughly half of federal spending

today, and this share is set to grow over the coming

decades as the population ages. Absent any changes, this

will lead to a steady rise in the deficit and debt levels over

time. See the Budget breakdown chart. These dynamics

leave the U.S. with little fiscal wiggle room. This is why

most plans to reform the tax system typically aim for

budget neutrality over the long term, after accounting

for any growth-boosting effects. Unfunded tax cuts could

worsen an already poor fiscal trajectory.

Congress also has yet to draft a budget for fiscal 2018,

which starts Oct. 1. Controversial aspects of Trump’s

agenda, such as funding a border wall and cutting social

programs, are sticking points. Another short-term deal to

fund the government may be needed if Congress cannot

agree on a budget. A battle also looms over raising the

U.S. debt ceiling. The second half of 2017 could be bumpy.

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Legislative clock is ticking Many Republicans see this as a once-in-a-generation

opportunity to rewrite an overly complex and onerous tax

code. On their menu: big cuts to the U.S. corporate tax

rate, a one-off “deemed repatriation tax” on the roughly

$2.5 trillion of corporate cash held overseas, lowered

tax rates on investment income, and a cut in the top

personal tax rate. The goal is to stimulate investment and

consumption, and thereby boost growth.

A troubled attempt to repeal and replace “Obamacare”

health legislation and controversy over Russia’s alleged

interference in the 2016 election — now being investigated

by a special counsel — add to the risk of legislative delays.

This could play out in two ways:

Positive: The investigation activates Congress to focus

more on tax reform — a key measure of legislative progress

ahead of 2018 midterm elections. The White House shows

leadership on policy priorities, and Congress passes tax

reform legislation early in the new year.

Negative: A distracted White House fails to clarify policy

priorities, and the Russia scandal deepens. Congressional

Republicans start to distance themselves from the Trump

administration. The reform agenda is derailed.

Tax: It’s all in the detailsWe see three scenarios for U.S. tax reform: major reforms

including a sharp reduction in the corporate tax rate;

a scenario whereby reforms are watered down and the

budget deficit rises; and an outcome in which tax reform is

delayed indefinitely. See the Taxing challenge table below.

Our comprehensive reform scenario would be budget-

neutral over time. It would be stimulative in the near

term, but with a payback in later years as loopholes and

deductions are limited. This would benefit global equities

and lead to rising interest rates. The modest tax cuts

scenario, which we see as the most likely outcome, would

have a similar market impact in the short run. It would

result in an economic stimulus — but with the likely cost

of higher budget deficits and inflation. Our derailment

scenario is partly priced in as expectations for tax reform

are low, we believe, but still could hurt risk assets in the

near team.

We see any market fallout as nuanced. Take the credit

markets. The removal of interest deductibility would likely

reduce new issuance, benefiting investment grade credits.

But this impact could be offset by any stimulus that leads

to rising rates. And we see more leveraged credits faring

worst from losing the ability to deduct interest expense.

A taxing challengeBlackRock Market-Driven Scenarios on potential impact of U.S. tax reform, May 2017

Comprehensive reform Modest tax cuts Derailment

Description

Comprehensive reform, including a large cut in the corporate rate, and the closing of many personal and corporate deductions to make the plan roughly revenue-neutral.

Moderate tax cuts are only partially offset with caps on deductions, leading to larger budget deficits and rising inflation.

Congressional gridlock derails tax reform and even modest attempts at tax cuts.

Key ingredients

• Tax cuts are permanent. Deep corporate tax cut, with lower income tax rates, offset with removal of most deductions.

• One-off deemed repatriation tax on overseas corporate cash.

• End of corporate interest deductibility; immediate capex expensing.

• Tax cuts mostly expire after a decade; watered-down elements of the comprehensive scenario.

• Lower corporate and personal tax rates; caps on deductions.

• But the stimulus generates some positive investor sentiment.

• Trump administration introduces piecemeal plans to cut corporate and personal taxes.

• Proposals fail to gain traction ahead of 2018 midterm elections.

Global equities

+Highly taxed U.S. domestic

companies outperform.

+Personal income tax cuts support consumer stocks.

—Post-election gains in value stocks are further eroded.

U.S. credit+

Investment grade (IG) spreads tighten; highly leveraged names underperform.

+IG spreads tighten; highly leveraged

names underperform.

—Spreads widen in flight

to quality.

Government debt

—U.S. Treasury yields rise and the

yield curve steepens.

—Treasury yields rise on the back of

rising deficits; yield curve steepens.

+Treasuries rally on lower

growth expectations.

Sources: BlackRock Investment Institute and BlackRock’s Risk and Quantitative Analysis group.

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Munis mull tax reformU.S. municipal bond implied tax benefit, 2016-2017

May 2017Jan. 2017Sept. 2016May 2016Jan. 2016

Imp

lied

tax

ben

efit

10

20

30

40

50%

U.S. election

Sources: BlackRock Investment Institute and Bloomberg Barclays, May 2017.Notes: The market implied tax benefit is a rough measure on how munis are pricing value of their tax-exempt status. It is calculated by subtracting the ratio of the yields on the Bloomberg Barclays Municipal Bond Index and U.S. Aggregate Corporate Index from one.

Muni murmursAsset prices have waxed and waned with expectations

of U.S. tax reform. Municipal bonds are a case in point.

Any large cut to the top personal marginal tax rate would

diminish the value of their tax-exempt status.

Munis used to trade with a market-implied tax benefit

of just over 40%, in line with the top personal marginal

tax rate. This figure slumped to 17% when expectations

for comprehensive tax reform peaked just after the U.S.

election, and has now recovered to almost 30%. See the

Munis mull tax reform chart. We see room for further gains

in this metric — and muni valuations. Our “compromise”

scenario sees only modest personal tax cuts being

implemented, with the tax exemption for muni income

remaining intact. Any introduction of caps on other

individual deductions would only boost demand for munis

as one of the few remaining tax shelters, we believe.

Loopholes and deductionsComprehensive tax reform has eluded both major political

parties since the mid-1980s. The ingredients are simple:

Cut marginal tax rates, while reducing loopholes and

deductions to offset the budget impact. Cutting taxes

alone runs the risk of creating a big hole in the deficit.

Example: Each percentage point cut in the 35% corporate

rate leads to $100 billion in lost tax revenue over a

decade, the Joint Committee on Taxation estimates. Many

potential offsets such as cutting popular deductions are

politically off limits. What’s on the table this time?

Deemed repatriation tax: A one-off tax on corporate

profits held abroad — applied regardless of whether

companies bring the cash back. The proceeds could

be set aside to finance other policy priorities such as

infrastructure expenditure, making it potentially appealing

to both Republicans and Democrats.

Interest deduction and capex expensing: Tax reformers

propose allowing companies to immediately deduct the

cost of capital expenditures from their income, rather

than depreciating it over time. This is meant to encourage

investment. It would be offset by capping the interest

deduction, which lets companies deduct net interest

payments on debt from their taxes. This would reduce

incentives to leverage up and level the tax playing field

with dividend payouts. It would make it less attractive to

issue debt and use the proceeds to buy back shares.

Border adjustment: House Republican leaders have

proposed a border adjustment tax (BAT) to pay for deeper

corporate tax cuts, increase U.S. competitiveness and

reduce incentives to offshore production and profits. The

BAT would effectively subject imports to a 20% tax, while

exempting exports. Supporters argue the BAT’s impact

would be offset by a 25% rise in the dollar, leaving no net

impact on trade balances or consumer prices. Opponents

say the BAT risks retaliation by other countries and is

hard to apply to financial services. We believe currency

movements are driven by many factors beyond any BAT.

An imperfect dollar adjustment would hurt importers.

We see little chance of the BAT being implemented as

proposed, given opposition in the Senate and White

House. We may see a move toward a territorial tax system.

“ Investors should move away from the notion that tax reform will have a big impact on munis — and focus on the income and value the asset class offers.”

Peter Hayes — Head of BlackRock’s

Municipal Bonds Group

BII0617U/E-169622-471642

BLACKROCK INVESTMENT INSTITUTE 11

FOR INSTITUTIONAL, PROFESSIONAL, WHOLESALE AND QUALIFIED INVESTORS/CLIENTS. FOR PUBLIC DISTRIBUTION IN U.S.

BlackRock co-founder Barbara Novick highlights underappreciated regulatory changes.

What do you see Washington getting done this year?

It is critical to look beyond the legislative efforts of the

White House and Congress. We have a lot of independent

regulators and agencies, and all have — or will soon have —

new heads who are eager to make their mark. As they staff

up, I see efforts to rightsize regulation gaining momentum.

Some people talk about this as if the sky is falling: repeal

of all rules resulting in polluted waters and banks running

amok. That narrative simply does not reflect reality. You

have to put it into context: We’ve seen an unprecedented

amount of rulemaking during the previous administration.

And now policymakers are reviewing and potentially

reversing some of it. This is about lightening the regulatory

burden by making rules more efficient and tailored.

That’s why I call it rightsizing regulation. It’s important this

happens in a thoughtful way. Some regulations had adverse

unintended consequences. An easing of regulations needs

to be well thought-out to avoid similar problems.

Why should investors care?

A lighter regulatory burden benefits business. This tends

to get lost in the noise coming out of Washington — and is

an underappreciated market force. Even just a business-

friendly or softer interpretation of current regulations can

reduce costs substantially.

Source: BlackRock Investment Institute, June 2017.

For example, most people would agree

the U.S. needs to replace and upgrade its

aging infrastructure. But many projects

get stuck in a quagmire of federal, state

and local permits, environmental reviews

and legal challenges. If you want to

attract private capital, you need clear and

enforceable rules, streamlined procedures, and a consistent

and predictable policy framework. This applies to much

more than infrastructure. Knowing the rules creates a

positive climate for companies to invest in their business.

Tax reform could help in that respect. Will it happen?

We have an incredibly complicated tax code. It’s a

bipartisan goal to have a tax system that is simple, fair and

globally competitive. Of course the problem is how you

define “fair,” both on the individual and corporate level.

Actual tax reform cannot be a complete budget buster, so

you’ll need some revenue raisers. This leads you into the

winners-and-losers problem that has vexed policymakers

on both sides of the aisle. Every exemption or deduction

affects a constituency that wants to keep it. Try to take

it away, and somebody is going to complain about it —

loudly. The bottom line is that tax reform is just really hard

and takes a long time to get over the finish line.

Barbara Novick BlackRock Vice Chairman

Regulatory reviewSelected examples of regulation-related U.S. actions and reviews, 2017

Industry Action Date

Financial

A new fiduciary rule for financial professionals is partially implemented but subject to ongoing review. May 22

Presidential memorandums instruct the U.S. Treasury to review the process for designating financial institutions as “systematically important” and the federal government’s orderly liquidation authority.

April 21

An executive order directs Treasury secretary and regulators to revise and review Dodd-Frank rules. Feb. 3

HealthAn executive order authorizes the heads of federal agencies to waive Affordable Care Act rules that impose any fiscal or regulatory burden.

Jan. 20

InfrastructureAn executive order allows governors and agency heads to request expedited environmental reviews and approvals for infrastructure works.

Jan. 24

Resources

U.S. announces intent to withdraw from the Paris Agreement on climate change. June 1

The Congressional Review Act is used to revoke the Stream Protection Rule. Feb. 16

An executive order advances the construction of the Keystone XL and Dakota Access oil pipelines. Jan. 24

TelecomsThe Federal Communications Commission (FCC) proposes to roll back 2015 Internet neutrality rules. May 18

The FCC loosens a 39% national cap on audience share for TV station owners. April 20

Transport The Environmental Protection Agency announces it will re-examine fuel efficiency standards March 15

BII0617U/E-169622-471642

12 POLITICS NOT QUITE AS USUAL

FOR INSTITUTIONAL, PROFESSIONAL, WHOLESALE AND QUALIFIED INVESTORS/CLIENTS. FOR PUBLIC DISTRIBUTION IN U.S.

Worrying about ItalyOur bigger concern: Italy. Anti-establishment parties

hostile to the euro have total support of about 45%, polls

show. The largest is the Five Star Movement, which has

promised a referendum on eurozone membership. Polls

show Five Star running neck and neck with former Prime

Minister Matteo Renzi’s Democratic Party heading into a

national election due to be held by May 2018. We believe

the election may be held as early as September after major

parties agreed on electoral reform in late May.

We see Renzi’s party stitching together another unhappy

coalition with a coterie of other parties on the center and

left. Forming a stable coalition will be daunting. Changes

to Italy’s electoral law have taken the system back to a

proportional representation that makes outright majorities

hard to achieve. The next coalition is likely to be weak and

fragmented, making structural reforms a challenge.

Italy has made limited strides cleaning up bad debts at its

troubled banks, including recapitalizing smaller banks and

encouraging bigger banks to raise capital. Yet the problem

remains sizable and is a brake on growth. The combination

of high debt levels, subpar economic growth, political

instability and looming ECB policy normalization could

lead to a spike in borrowing costs. The path to a rescue

package in any crisis would likely be a bumpy one, given

that eurozone assistance would be conditional on a stable

government able and willing to implement harsh reforms.

We believe Italy’s risks are only partly reflected in the yield

spreads of its government bonds versus German bunds.

See the Eurozone spreads in context chart. We expect

those spreads to widen as the election approaches and

could see them blowing out if Five Star wins. The party so

far has no allies in Italy’s parliament, but we cannot rule

out a coalition of convenience with the Northern League

and others. Bottom line: We see potential for an electoral

surprise that could rattle risk assets and peripheral bonds.

EuropeNationalist, anti-immigration parties are not going away, but Europe now has a window of

opportunity to reform and consolidate the EU so that it can endure.

Emmanuel Macron went from third place in the polls to

a large victory as French president in just four months —

all while remaining outside the mainstream parties that

have ruled France for decades. He could pave the way

for business-friendly reforms, with an immediate focus on

loosening the labor market. Even if Macron’s new party

falls short of an outright majority in the June parliamentary

elections, we believe he will likely be able to work with

centrists to pass legislation.

Macron’s victory came after the populist Freedom Party

underperformed high expectations in the Dutch elections

in March. Importantly, German Chancellor Angela Merkel’s

party has built a double-digit lead in the polls ahead of

the Sept. 24 federal election. Support for both the pro-EU

Social Democrats and populist AFD has faded, and Merkel

looks set to win a fourth term in office just as Macron

begins his term. Together, Macron and Merkel have the

potential to consolidate and revive the European project.

Eurozone spreads in contextEurozone government bond spreads, 1992-2017

Spre

ad v

s. G

erm

an b

und

s

1992

0

2

4

6

8%

1997 2002 2007 2012 2017

Introduction of the euro

Lehman collapse

SpainItaly

France

Draghi “Whatever it takes” speech

Sources: BlackRock Investment Institute and Thomson Reuters, May 2017.Notes: The lines show the difference between the countries’ 10-year government bond yields and German 10-year bund yields in percentage points.

BII0617U/E-169622-471642

BLACKROCK INVESTMENT INSTITUTE 13

FOR INSTITUTIONAL, PROFESSIONAL, WHOLESALE AND QUALIFIED INVESTORS/CLIENTS. FOR PUBLIC DISTRIBUTION IN U.S.

Currency confidence comebackEuro and sterling option trading trends, 2007-2017

Ris

k re

vers

al v

ola

tilit

y

2007

-5

-4

-3

-2

-1

0

1%

2009 2011 2013 2015 2017

Sterling

Euro

Speculation on currency appreciation

Greece’s first bailout request

Brexit vote

Speculation on currency depreciation

▲

▲

Sources: BlackRock Investment Institute and Thomson Reuters, May 2017.Notes: The chart shows risk reversal for sterling and euro versus the U.S. dollar, based on trading of one-year options. A positive risk reversal means the volatility of calls is greater than the volatility of similar puts. This implies that more market participants are betting on a rise in the currency than on a drop, and vice versa if the risk reversal is negative.

Delivering reformsOptimism on Europe’s outlook is building. Investors are

seizing on the improving political outlook and upbeat

data signaling stronger growth. See the European wakeup

call chart. Net equity purchases were a record in the week

around the finale of France’s presidential election.

Many eurozone countries are in need of structural reform.

As the region’s biggest growth and debt laggards, France

and Italy are especially important. We see reforms in both

as key to reassuring Germany about the willingness of the

EU’s other core members to become more competitive.

Italy’s Renzi initiated some labor market and insolvency

reforms, but that drive stalled. The OECD has listed

reforms that could lift growth by 6.3% over a decade.

These include: reducing regulation and administrative

burdens, loosening up the labor market, encouraging

more female participation and cutting taxes for low-

income earners, it argued in a 2015 report.

Macron’s proposed reforms include increasing labor

market flexibility, shrinking the government’s role in the

economy, cutting business social security contributions

and corporate taxes (the highest in the EU), and reducing

regulatory burdens.

European wakeup callEuropean equity flows and economic activity, 2013-2017

Net

flo

w (b

illio

ns)

PMI level

2013

-6

-4

-2

0

2

4

6

$8

Flow

2014 2015 2016 2017

44

46

48

50

52

54

56

58

Eurozone PMI

Sources: BlackRock Investment Institute, EPFR and Markit, May 2017.Notes: The bars show weekly net flows into Western European mutual funds and ETFs. The line shows the eurozone composite purchasing managers’ index (PMI). A number above 50 indicates expansion.

Macron will likely face resistance, with unions fighting

attempts to increase flexibility in the implementation of

labor laws. Yet he is likely to succeed in pushing at least

some reforms through, we believe. Germany could do

its part to boost growth and reduce imbalances, such as

encouraging stronger wage gains to stimulate consumer

spending and launching more public investment. Europe-

wide burden sharing or pooling of risk have so far been a

much harder sell in Berlin.

Investors have become less worried about eurozone

breakup risks, as seen in currency options pricing in the

Currency confidence comeback chart. Speculative bets on

euro depreciation are the smallest since 2009. Spreads on

selected peripheral government bonds such as Italy’s look

a bit complacent to us, given the risks reforms won’t be

carried out or watered down.

“ Sovereign risk premiums for political risks and reform implementation are still not sufficient, especially for Italy.”

Scott Thiel — Deputy Chief Investment Officer of

BlackRock Global Fundamental Fixed Income

BII0617U/E-169622-471642

14 POLITICS NOT QUITE AS USUAL

FOR INSTITUTIONAL, PROFESSIONAL, WHOLESALE AND QUALIFIED INVESTORS/CLIENTS. FOR PUBLIC DISTRIBUTION IN U.S.

Not created equalBlackRock Sovereign Risk Index for Europe, April 2017

BSR

I sco

re

DE

Fiscal space

NL UK IE BE FR ES IT PT GR

-1.25

-1

-.75

-.50

-.25

0

.25

.50

.75

Overall

Willingness to payExternal financeFinancial sector

Sources: BlackRock Investment Institute, May 2017. Notes: The data are based on the BlackRock Sovereign Risk Index (BSRI). The BSRI draws on a pool of more than 30 measures spanning financial data, surveys and political insights, and provides investors with a framework for tracking sovereign credit risk in 60 countries.

Window of opportunityWe believe policymakers now have the best chance

for reform in decades. The two largest countries and

long-time drivers of integration, Germany and France,

are poised to have pro-European, newly legitimized

governments. The region’s growth outlook is the brightest

since the financial crisis. Dealing with Brexit, migration

and the new U.S. administration is pushing the EU toward

a united front. Merkel pointedly said Europe must take its

fate in its own hands after trans-Atlantic meetings in May.

Pursuing deeper integration could involve a defense

union, greater fiscal and tax coordination, and lifting of

services barriers. We see progress on the Capital Markets

Union and European Banking Union as indications of

policymakers’ resolve. Bottom line: We see a window of

opportunity for the EU to complete the single market.

Forged in crisesPeople only accept change when they are faced with

necessity, and only recognize necessity when a crisis is

upon them, EU architect Jean Monnet once noted. We see

the populist uprising and other strains as both a wake-up

call and opportunity for the EU to improve its governance

and responsiveness to the economic ills of citizens.

Europe’s recent history of integration is one of big steps

taken only when forced by a crisis, as epitomized by the

eurozone’s repeated summits and emergency decisions

during the debt crisis. This has fortified the region’s

ability to respond to countries running into economic and

financial troubles. The ECB can intervene in asset markets

to limit fragmentation and it now oversees banking

regulation. The European Stability Mechanism provides

a financial firewall by providing emergency loans to

countries in need. That makes the eurozone well equipped

to handle crises in all but the largest economies.

Current account deficits have been curtailed, but structural

imbalances remain and eurozone economic convergence

has stalled or reversed in some cases. Wide North-South

differences in fiscal dynamics and economic fundamentals

exist, as illustrated by our BlackRock Sovereign Risk Index.

See the Not created equal chart.

Europe is now discussing its future shape while trying

to manage differences in policy, economic growth and

development among its members. Macron has revived

debate of a central eurozone budget and the long-taboo

subject of fiscal transfers. This would mean countries

pooling some revenue and having a eurozone finance

minister, with funds used for investments and counter-

cyclical spending such as unemployment insurance.

The ambitious proposal has its challenges, including how

the democratic oversight would be managed. It also faces

deep hostility in parts of the German political world. Berlin

has promised to keep an open mind and is open to treaty

changes, although these are tough as every country has to

ratify them. Dealing with economic migrants and refugees

is another big challenge. Recent immigrants need to be

integrated into the workforce. For now, a deal with Turkey

has helped stem the inflow of new asylum seekers, but any

collapse in this arrangement could strain EU solidarity.

“ Don’t underestimate the potential for the Macron-Merkel relationship to be a driving force toward reforms and faster EU integration down the line. It could lead to positive surprises for equities.”

Zehrid Osmani — Co-Manager of Pan European

portfolios, BlackRock’s Fundamental Active Equity

Click to view interactive data

BII0617U/E-169622-471642

BLACKROCK INVESTMENT INSTITUTE 15

FOR INSTITUTIONAL, PROFESSIONAL, WHOLESALE AND QUALIFIED INVESTORS/CLIENTS. FOR PUBLIC DISTRIBUTION IN U.S.

The former UK Chancellor of the Exchequer shares his thoughts on Brexit negotiations.

Bracing for BrexitThe UK faces a big test in negotiating the terms of its exit

from the EU. The key risk we see: The UK exits without

making a deal or agreeing on an implementation phase by

the deadline of March 30, 2019.

Prime Minister Theresa May called a June snap election

with the aim to enlarge her Conservative Party’s majority.

This should give her government a freer hand to negotiate

a smoother Brexit process with the EU and steer a deal

through parliament. A narrowing of the polls just ahead

of the June election — perhaps partly reflecting the anti-

establishment currents running through politics today

— threatened this plan. A small majority, one similar to the

pre-election balance, would raise the risk that Brexit talks

fall hostage to euroskeptics.

Some UK officials scoff at reported EU demands of a €60-

100 billion divorce bill, and say that no deal is better than

a bad deal. Most of us feel a “no deal” appears unlikely,

given the potential economic damage it could cause on

both sides. Exporters might suddenly face tariffs and

customs checks, for example. Any market fright of a “no

deal” outcome would likely send sterling even lower.

How likely is a “no deal” Brexit?

There’s a material prospect of no deal.

To get a deal that will satisfy the UK

government, the House of Commons,

EU members and their respective

parliaments plus the European Parliament

— that’s going to be a major challenge.

It’s very easy to see how it would be possible to end

up with no deal. One of the stumbling blocks will be

determining any transition agreement. Whether it’s

determining enforcement, the role of the European Court

of Justice, the applicability of free movement, it’s going to

be quite complicated.

If you listen clearly to the EU about a transition period, it

does not want a special third regime for the UK and does

not want to spend a huge amount of time on this.

Our base case: an outline agreement starting with a two-

to three-year implementation phase. We see the UK and

EU limiting customs barriers. UK exporters would keep

tariff-free access, with some non-tariff barriers in services.

The UK would likely lose its “passporting” ability to sell

financial services across the EU. Financial firms are already

preparing, and are moving some activity to EU financial

centers. We do see a possibility of a negotiated agreement

involving close regulatory cooperation and perhaps

financial joint-supervision, something the UK Treasury and

Bank of England (BoE) have long resisted. And job losses

may not be as large as initially feared, with shifts likely to

take several years. The range of outcomes is wide.

We see the BoE looking through any short-term Brexit

impact unless fears of a “no deal” and a significantly weaker

currency drive a sustained inflation surge. The UK jobs

market remains strong, with the unemployment rate at

four-decade lows. We see the British pound struggling

to strengthen beyond $1.30. The BoE is likely to remain

accommodative, we believe, given signs of weakness in

consumer spending and the clear vulnerabilities Brexit

poses to the medium-term outlook.

What’s the middle ground and what would “no deal” mean?

The UK government is going to have to accept some EU

conditions. This is a deal that the UK needs more than

Europe does. The Europeans are playing quite hard ball

knowing the UK needs an interim agreement. It would be

pretty bad for the UK to crash out of the EU without any

follow-up agreement. The government would do things to

minimize the impact. It would still be quite a jolt to not have

any trade or security arrangements with our neighbors.

Assuming May leads the negotiations, can she strike a

working relationship with Macron and Merkel?

It’s very important. It would help to have the same cast of

characters and no major elections in France and Germany

over this critical period. These three leaders will need to

get to know each other. Some of the recent language has

been heated. There should be more constructive dialogue

to build trust and less playing to the galleries at home.

George OsborneSenior Advisor, BlackRock Investment Institute

BII0617U/E-169622-471642

This material is prepared by BlackRock and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2017 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. This material is intended for information purposes only and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.

In the U.S., this material is intended for public distribution. In the EU issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. This material is for distribution to Professional Clients (as defined by the FCA Rules) and Qualified Investors and should not be relied upon by any other persons. For qualified investors in Switzerland, this material shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended. In Singapore, this is issued by BlackRock (Singapore) Limited (Co.registration no. 200010143N) for use only with accredited/institutional investors as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore. In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In Korea, this material is for Professional Investors only. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) for Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28/F, No. 95, Tun Hwa South Road, Section 2, Taipei 106, Taiwan. Tel: (02)23261600. In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230 523 (BIMAL). This material is not a securities recommendation or an offer or solicitation with respect to the purchase or sale of any securities in any jurisdiction. The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should therefore assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. BIMAL, its officers, employees and agents believe that the information in this material and the sources on which it is based (which may be sourced from third parties) are correct as at the date of publication. While every care has been taken in the preparation of this material, no warranty of accuracy or reliability is given and no responsibility for the information is accepted by BIMAL, its officers, employees or agents. Any investment is subject to investment risk, including delays on the payment of withdrawal proceeds and the loss of income or the principal invested. While any forecasts, estimates and opinions in this material are made on a reasonable basis, actual future results and operations may differ materially from the forecasts, estimates and opinions set out in this material. No guarantee as to the repayment of capital or the performance of any product or rate of return referred to in this material is made by BIMAL or any entity in the BlackRock group of companies. For other APAC Countries, This material is issued for Institutional Investors only (or professional/sophisticated/qualified investors, as such term may apply in local jurisdictions) and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. In Canada, this material is intended for permitted clients only. In Latin America and Iberia, this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator of Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

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Lit. No. BII-POLITICS-0617 8663A-US1-0517

BlackRock Investment Institute

The BlackRock Investment Institute (BII) provides connectivity between BlackRock’s portfolio managers, originates

economic and markets research, develops investment views for clients, and publishes insights. Our goals are to help

our portfolio managers become even better investors and to produce thought-provoking investment content for

clients and policymakers.

BLACKROCK VICE CHAIRMANPhilipp Hildebrand

GLOBAL CHIEF INVESTMENT STRATEGIST Richard Turnill

HEAD OF ECONOMIC AND MARKETS RESEARCHJean Boivin

EXECUTIVE EDITORJack Reerink

BII0617U/E-169622-471642