Summer freeze. Fund Manager Survey Global

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1 Investment Strategy Investment Strategy Global 2 July 211 Summer freeze No capitulation in sentiment Our July Fund Manager Survey finds investor sentiment frozen by the lack of macro clarity. With no capitulation in investor sentiment, the FMS has yet to provide a contrarian buy signal for risk assets. In July the consensus remains overweight equities, commodities, tech & energy and underweight bonds, banks and utilities. The consensus wants to avoid Europe, banks & indebted assets but is more sanguine on growth, China and commodities. Gary Baker, CFA >> European Equity Strategist MLI (UK) gary.baker@baml.com Michael Hartnett Chief Global Equity Strategist MLPF&S michael.hartnett@baml.com Notes on the Survey Survey period 8 th to 14 th July 211. Unauthorized redistribution of this report is prohibited. This report is intended for susan.mccabe@bankofamerica.com. China boosts global growth expectations Global growth expectations are much lower than 6 months ago, but edged higher in July to 19%. China growth expectations rose more sharply, while global inflation expectations moderated. S&P5 at 11 = QE3 Neither the macro nor asset prices are currently weak enough to warrant a new QE3 program: 4% of investors do not expect QE3. When asked what level of the S&P5 would cause the Fed to announce QE3, investors answered 11. Cash balances dip Cash balances fell to 4.1% from 4.2%, indicating wary inactivity, rather than panic. Our Risk & Liquidity index was unchanged. But the number of panellists fearing credit default surged and 64% see EU sovereign debt as the dominant tail risk. Out of Europe into Japan & EM Asset allocators modestly added to equity and commodity positions in July, at the expense of fixed income. Within equities, there was a big reduction in Eurozone exposure and rotation to Japan and Emerging Markets. Sector positions offer contrarian opportunities Health care overtook tech as the world s most popular sector. July rotation was into energy, industrials, staples, while big underweight positions in global utilities and banks were maintained. Contrarians should note that extreme sector underweights have been established in EU & US banks and utilities, while the extreme overweights are in US tech & EM consumer stocks. An overall total of 265 panellists with $792bn AUM participated in the survey. 196 participants with $631bn AUM responded to the Global FMS questions. Only participants in the survey can receive the full data but only for the relevant month in which they participate. Investors/clients are encouraged to sign up to participate in the Survey. This can be done by contacting Gary Baker, Michael Hartnett or your BofA Merrill Lynch sales representative. Notes to Readers Source for all tables and charts: BofA Merrill Lynch Fund Manager Survey, Datastream. c58da9b71df662c >> Employed by a non-us affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 19 to 21. Link to Definitions on page

2 2 July 211 The fieldwork took place between Friday 8 th, and Thursday 14 th July 211. Table 1: Markets during fieldwork periods % change in 8 th 14 th Jul 3 rd 9 th Jun 6 th 12 th May World Equities Dow Jones US 1y Bond (bps) Commodities (CRB) Crude Oil-WTI Trade Weighted Dollar CBOE VIX (level) Kicking the Fed call down to 213 Expectations for timing of the first Fed rate were are again pushed back, in the face of sharp revisions to inflation expectations over the last few months. Q1 212 remains the most favoured timing option for investors but the biggest relative change we have seen is in favour of not before Q1 213, with 21% of fund managers favouring this option. The bottom line is that investors agree with Fed rhetoric that it will be on hold for an extended period of time with only a net 6% of panellists expecting a rate hike this year, down from 14% in June and 69% as recently as April. Chart 1: When do you think the Fed will first raise interest rates? Jul-11 Jun-11 When will FED raise the rates? Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Q4 212 Not before Q1 213 Risks and returns Chart 2: What do you consider the biggest 'tail risk': Table 2: What do you consider the biggest 'tail risk': % saying Jul Jun Municipal default in US 5 9 EU sovereign debt funding Chinese real estate market 7 11 Commodity price inflation 6 9 Premature fiscal tightening Other 5 11 DK/NA 3 4 Within the list of tail risks, EU peripheral sovereign debt funding crisis has maintained the top place for the third consecutive month with 64% of fund managers ranking this as the biggest risk, up from 43% last month. EU sovereign debt funding Premature fiscal tightening Chinese real estate market Commodity price inflation Other Municipal default in US Jun-11 Jul Other tail risks (as submitted by participants): Excessive monetary tightening, US fiscal debt limit negotiations, BoE short termism and incompetence, Sovereign debt contagion (US and Europe), Major Equity market correction on risk aversion for no economic reason, Policy for nuclear power stations by Japan's government, Lack of political decision to face the crisis, Dollar crisis (and sterling!) Oil price triggering a recession, US debt ceiling. 2

3 2 July 211 New question this month: S&P & QE3 This month we ask a new question on how low fund managers think the S&P 5 would need to fall before the Fed announced another round of QE. 4% of investors do not expect QE3 at all, but those who do on average see 11 as the trigger level (15-2% below current). Table 3: At what level of the S&P 5 would you expect US Fed to announce a QE3 program? % saying Jul Jun May Below Not expecting QE3 4 DK/NA 12 Weighted average (ex Not expecting QE3 & DK/NA ) 199 Chart 3: At what level of the S&P 5 would you expect the US Fed to announce a QE3 program? (NEW QUESTION THIS MONTH) At what level of the S&P 5 would you expect the US Fed to announce a QE3 program? Jul Below 11 Not Expecting QE3 DK / NA Looking also at changes in Global PMs expectations for economic growth and allocation to equities, current readings remain above levels that last year triggered QE2. Chart 4: Global fund managers outlook on global economic growth QE1 QE Jackson Hole 2-2 O- N- D- J- F- M- A- M- J- J- A- S- O- N- D- J- F- M- A- M- J- J- A- S Net % say ing strong economy Chart 5: Global asset allocators net overweight on Equities QE1 QE Jackson 2 Hole 1 O- N- D- J- F- M- A- M- J- J- A- S- O- N- D- J- F- M- A- M- J- J- A- S Net % ov erw eight Equities 3

4 2 July 211 Growth, inflation and policy Growth and inflation trends are captured in a Monetary Stance composite we calculate by combining investor views on monetary conditions and how they view the outlook for inflation. Chart 6: Monetary Stance Composite Regional FMS REGIONAL SUMMARY - INFLATION & MONETARY STANCE COMPOSITE Any reading above 5 indicates concern on inflationary outlook and suggests monetary policy is too stimulative Monetary stance composites have been easing for the past few months across regions and eased further this month. Readings are still all in the expansionary zone but Eurozone and Japan are closing in to neutral. Current readings are: US 6 (from 73 last month); Eurozone 55 (from 64) and Japan 55 (from 58) EUROZONE 5 US JAPAN Chart 7: Growth Expectations Composite Global FMS GLOBAL SUMMARY - ECON & PROFIT EXPECTATIONS COMPOSITE The composite growth indicator (CGI) links the outlook for economic activity with expectations for corporate profit growth CGI gained rose for the second month in a row something of an excitement for second derivative watchers. Although the direction has changed, readings here are still low and far below compared the highs seen just a few months ago GROWTH COMPOSITE Chart 8: Growth Expectations Composite Regional FMS REGIONAL SUMMARY - ECON & PROFIT EXPECTATIONS COMPOSITE In line with the global CGI, regional views on growth have improved in the US and Japan. Europe is the odd one out, as the EU debt crisis has shaken confidence once again for the region By numbers, US growth expectations rose to 6 from 56, Japan 88 from 86 but the Eurozone is well into concretionary territory falling to 41 from 44 in June (lowest reading since April 9) EUROZONE 5 US JAPAN

5 2 July 211 Chart 9: Fund Managers Growth Expectations & OECD Leading Indicator Expectations for global real economic growth, which track closely to OECD LI, are showing signs of stabilisation with the second up-month. The reading went up to a net 19% vs. net 1% in May but the level is still quite low. If positive momentum continues OECD LI, which is reported with almost 2m of lag, to change direction as well G7 OECD Lead Indic (%6m) Net % Stronger Economy(R.H.SCALE) -15 Chart 1: Profit expectations 1 1 Corporate profit expectations saw the first positive MoM change after 5 months. Still, expectations remain relatively low at a net 11% (from 7% last month) esp. compared with a net 51% seen as early as Feb Net % Expecting Global Profit Oulook to Improve -8 HIGH 88 15/3/2,LOW /1/8,LAST 11 Source: DATASTREAM Views on market liquidity conditions have been deteriorating since the record high seen in March this year. This month s reading of a net positive 2% is down from a net 35% last month and is the lowest since September last year. Chart 11: How would you rate liquidity conditions (e.g. depth of markets, narrowness of bidoffer spreads, ease of execution etc) at this time? Oct-7 Net % Rate Liquidity Conditions as Positive Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 5

6 2 July 211 Chart 12: What would you most like to see companies doing with cash flow? 8 8 With little movement at the macro level, preferences for the use of surplus corporate cash flow were virtually unchanged too. Capex went down to 41% from 43% last month, maintaining the most popular status. Preference for cash return to shareholders was virtually unchanged at 35% and preference for balance sheet improvement went up to 18% from 16% last month % of FMs want cash returned to shareholders % of FMs want increased capex % of FMs want balance sheet improvement Separately, in evaluating the current situation on capex, pay out ratio and leverage, the message from investors is a straightforward one of regarding payouts as too low and company balance sheets as under-geared. A net 42% view companies as under leveraged and a net 32% say pay-out to shareholders is too low. A message echoing their views on preferences for utilising surplus cash. Chart 13: Corporate investments and payout ratios PAYOUT RATIOS and COMPANY INVESTMENTS * To track how managers think we are progressing through the economic cycle, we have expressed their answers to the question as if positioned on a circle. We have positioned mid-cycle at 36 O / O, late cycle at 9 O, recession at 18 O and early cycle at 27 O, and calculated an overall position from those four locations. The business cycle has been virtually unmoved on the month and remains just beyond the middle of the mid-cycle phase. 89% of FMs now view the global economy in mid to late cycle. This time last year, investors believed we were in early phase of the mid-cycle Net % Payout Too Low Net % Co Underinvesting(R.H.SCALE) Chart 14: At this time, in which phase of the economic cycle would you say the global economy is? (in Degrees*) Feb-1 Apr-1 Mar-1 Jan-1 Dec-9 Nov-9 Oct-9 Jul-1 Sep-1 Nov-1 Jan-11 Aug-1 Dec-1 Jun-1 May-1 Feb-11 Apr-11 Mar-11 (36 / ) May-11 Jul-11 M i d C y c l e Jan-7 Feb-7 Jul-7 May-7 Apr-7 Aug-7 Nov-7 Early Cycle (27 ) Late Cycle (9 ) R e c e s (18 ) s Sep-9 i o Aug-9 n Jun-9 Feb-9 Oct-8 Jul-9 Mar-9 Jan-9 May-9 Apr-9 Dec-8 Nov-8 Sep-8 Dec-7 Jan-8 Feb-8 May-8 Jun-8 Mar-8 Apr-8 Jul-8 Aug-8 6

7 2 July 211 Inflation and interest rates Inflation expectations saw further easing this month after a sharp fall last month as commodity prices have eased over recent months. The current reading stands at a net 28% expecting higher inflation down from 38% last month. Note that FM s inflation expectations fell a net -1% last July before Fed started talking about QE2. Chart 15: Inflation expectations and ISM Prices Paid ISM Prices Paid Net % Expecting Higher Inflation(R.H.SCALE) -1 Inflation risk and growth revisions are reflected in lower expectations for both long and short term rates. Chart 16: Expectations for long and short-term interest rates The number of panellists who expect long term rates to rise has fallen to 59% (down from 68% in June). This is explained by low levels of growth optimism. However, expectations for higher short term rates also fell (to a net 72% from 76% last month) as inflation expectations have eased over the last 4m However, a net 13% expect the yield curve to flatten vs. 27% last month, suggesting moves in the long end will be driving views on YC expectations Net % Expecting Short-Term Rates to be Higher in 12 Months Net % Expecting Long-Term Rates to be Higher in 12 Months

8 2 July 211 Chart 17 presents an overall view of Risk & Liquidity, combining readings on risk appetite, investor time-horizons and cash weightings. Risk Appetite Chart 17: The FMS Risk & Liquidity Composite Indicator GLOBAL SUMMARY: RISK & LIQUIDITY COMPOSITE The Risk and Liquidity indicator remained unchanged at 38, below its long run average of 4. This reading is low, but not at an extreme i.e. no sign of capitulations Chart 18 poses two questions to hedge fund panellists: what is the current ratio of your gross assets relative to your capital, and what is your current net exposure to the equity market (long minus short as % of capital). The overall picture from Hedge funds is positive to neutral on risk taking. They have again raised gearing levels over the month, but at the same time they have marginally lowered their exposure to equities over the month. The weighted average gearing ratio rose back to 1.5, after a fall to.27 last month (was 1.53 in May). However net exposure to equities was down to 31% from 35% last month (recent high 39% in Feb 11) RISK & LIQUIDITY SUMMARY AVERAGE Chart 18: Hedge Fund positioning Jun-6 Sep-6 Dec-6 Mar-7 Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Weighted Average Ratio Weighted Net % Exposure (RHS) Chart 19: Global Investors Net Overweight Cash and their Mean Cash Balance Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun FMS questions on cash positions address both global investors and asset allocators With risk aversion virtually unchanged, global investors average cash balances were only marginally down to 4.1% from 4.2%. The current reading is in the middle of the range for our contrarian sell or a buy signal levels of 3.5% to 4.5% Net % Overweight Cash Average Cash Balance %(R.H.SCALE)

9 2 July 211 In charts 2-22 we plot the performance of each asset class relative to a synthetic asset allocation benchmark comprising: 6% global equities, 3% global bonds and 1% US cash. The base currency is USD. We also feature two lines labelled potentially over-owned and potentially under-owned. These lines are derived from the fund manager positioning data (based on the available history) and reflect the average stance plus/minus one standard deviation. Asset allocation: modest moves The moderate move in asset allocation reflects PMs views on stable and low growth. After last month s reading of close-to-long-run-average for asset classes, there was a modest bounce back for equities and commodities while allocation to bonds and cash were lowered a few notches. Chart 2: Cash* PM s cash allocation was little changed over the month. The percentage of investors OW cash dropped to a net 15% OW from 18% in June Net % Oweight Cash Potentially Underowned Cash vs 6-3-1(R.H.SCALE) Potentially Overowned 9 Equity weightings were raised modestly in line with a moderately more positive growth outlook, to net a net 35%OW from 27% in June. Chart 21: Equities* Net % Oweight Equities Potentially Underowned Equities vs 6-3-1(R.H.SCALE) Potentially Overowned 8 Chart 22: Bonds* Bonds allocations were cut to a net 45% UW from a net 35% UW in June, mostly to fund the rise in Equities position Net % Oweight Bonds Potentially Underowned Bonds vs 6-3-1(R.H.SCALE) Potentially Overowned 6 9

10 2 July 211 Chart 23: Commodities Along with equities, PMs have also raised their exposure to commodities after 2 months of cuts. Currently a net 13% of PMs are OW vs. % OW in June Net % AA Overweight Commodities Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Relative Valuation Chart 24: Equity market valuation vs. bond market valuation 8 8 Equities are seen again as more undervalued in July, while the view of bonds as overvaluation remains unabated A net 25% see equities are undervalued vs. 16% in June. At the same time views on bond overvaluation have virtually remained unchanged with a net 58% saying they are overvalued Net % Think Global Equities are Overvalued Net % Think Bonds are Overvalued -6 1

11 2 July 211 Global fund mangers have maintained their neutral stance on cyclicals/defensives this month, raising weights in both blocks (see chart 27) The biggest gainers this month are Energy, Discretionary and Industrials while Tech and Utilities lost a few points. Pharma overtook Technology s top place. Table 4: Changes in global sector positioning MoM Chg Discretionary 1 Energy 1 Industrials 9 Staples 8 Materials 4 Pharma 4 Insurance 2 Banks 1 Telecoms Utilities -1 Tech -3 Table 5: Changes in global sector valuation MoM Chg Pharma 2 Telecoms 2 Utilities 2 Banks 1 Energy 1 Discretionary Industrials Materials Staples Insurance -2 Tech -6 Global sectors Chart 25: Current Sector Positioning Banks U tilities Discretionary Insurance Materials Telecoms Industrials Staples Pharma Tech Energy <= underweight // overweight => Chart 26: Sector Valuation Assessment Pharma Undervalued Banks Tech Insurance Energy Telecoms Staples Discretionary Utilities Materials Overvalued Industrials <= undervalued // overvalued => Chart 27: Global sector weights Cyclical sector weights minus Defensive sectors More cyclicals More defensives Chart 28: Global Sector Positions vs Valuations << overvalued / undervalued >> Banks Utilities Sectors seen as overvalued, and managers underweight Insurance Discretionary Materials Sectors seen as undervalued, and managers overweight Telecoms Staples Industrials Tech Pharma Energy <<underweight / owerweight >> Source: BofA Merrill Lynch Fund Manager Survey 11

12 2 July 211 Charts show a longer-term perspective on FMS sector positioning. They provide a map (or Rorschach picture, for those so inclined) looking at movement in sector positioning/valuation over the course of a full market cycle starting in 22/3 Sector changes through time As interesting sector charts this month we have selected the two most favoured defensive sectors, Pharma and Staples as well as Energy (biggest MoM) and Banks (least popular sector). Staples current position is highest since March 9, but the sector does not tend to at these levels for long. However looking at the position/valuation through the cycle, valuation perception today is much lower than previously the sector was this popular. Pharma saw a further increase in positioning and is now the most favoured sector. In a similar way to staples, this is the highest reading since March 9 and Pharma is now is viewed as the most undervalued sector. Banks maintain their status as least favoured for the third consecutive month. Over the last 4 years, there have been only 4 months when Banks were not in the bottom 3 favoured sectors. Energy was the largest gainer in positioning this month, despite being perceived as overvalued. The past 3 months are the first time the sector has been viewed as overvalued. Chart 29: Sector Valuation vs. Positioning Trail: Global Staples Chart 3: Sector Valuation vs. Positioning Trail: Global Pharma Overvalued >> Dec 3 Apr 9 Mar 3 June 9 Dec 6 Dec 5 Dec 1 Mar Dec 9 Dec 4 Oct 7 11 Apr 11 Jun 11 Mar 9 Jul 11 Oct 2 Dec 8 << Undervalued / Overvalued >> Dec May 9 Oct 9 Mar 3 Apr 9 Dec 6 Mar 9 Oct 2 Dec 1 Mar 11 July 11 Dec 9 Jun 11 Dec 7 Apr 11 May 11 Dec 4 Dec 5 Dec << Underweight / Overweight >> << Underweight / Overweight >> Source: BofA Merrill Lynch Fund Manager Survey Chart 31: Sector Valuation vs. Positioning Trail: Global Energy Source: BofA Merrill Lynch Fund Manager Survey Chart 32: Sector Valuation vs. Positioning Trail: Global Banks << Undervalued / Overvalued >> Dec 8 May 11 Jul 11 Jun 11 Dec 9 Dec 4 Oct 2 Dec 5 Apr 11 Dec 7 Mar 11 Apr 9 Dec 6 Dec 1 << Undervalued / Overvalued >> Mar 9 Dec 9 Oct 9 Dec 1 May 11-5 Jun 11 Dec 8 Dec 7 Apr 9 Mar 3 Apr 11 Jan 11 Dec 5 Mar 11 Dec 4 Dec 3 Dec Dec 3-2 Feb << Underweight / Overweight >> << Underweight / Overweight >> Source: BofA Merrill Lynch Fund Manager Survey Source: BofA Merrill Lynch Fund Manager Survey 12

13 2 July 211 Sector Positions by Region Chart 33: U.S. Chart 34: Europe Utilities Banks Telecom Staples Insurance Pharma Materials Industrials Discretionary Energy Tech Insurance Food & Beverages Telecoms Personal & HH Goods Construction Media Travel & Leisure Financial Services Retail Real Estate Utilities Banks Oil & Gas Basic Resources Technology Industrial Gds & Srvc Automobiles & Parts Healthcare/Pharma Chemicals <= underweight // overweight => Source: BofA Merrill Lynch Regional Fund Manager Survey Chart 35: Japan <= underweight // overweight => Source: BofA Merrill Lynch Regional Fund Manager Survey Chart 36: UK* (*for illustration purpose only low response rate) U tilities Pharma Autos Insurance Media Banks Staples Retail Technology Energy Materials Telecoms Industrials Real Estate Technology Food & Beverages Retail Construction Banks Utilities Travel & Leisure Telecoms Media Chemicals Basic Resources Oil & Gas Insurance Pers & HH Goods Healthcare/Pharma Ind Gds & Srvc Financial Services <= underweight // overweight => Source: BofA Merrill Lynch Regional Fund Manager Survey Chart 37: Pacific ex Japan <= underweight // overweight => Source: BofA Merrill Lynch Regional Fund Manager Survey Chart 38: GEM Pharma Staples Autos Retail Telecoms Energy Discretionary Technology Staples Materials Industrials Banks Industrials Healthcare Energy Financials Utilities Telecoms Media Insurance Utilities Technology Materials <= underweight // overweight => Source: BofA Merrill Lynch Regional Fund Manager Survey <= underweight // overweight => Source: BofA Merrill Lynch Regional Fund Manager Survey 13

14 2 July 211 GEM positioning has been raised to a net 33% OW from 23% OW in June and remains the most popular region. The reading is now just above long run average of net 27% OW. Equities: regional allocation In line with the regional growth outlook, all regions gained in popularity except for the Eurozone: asset allocators have raised weightings in Japan, GEM, the US and the UK while reducing weights for Eurozone. In terms of order of preference, GEM and the US top the list, while Eurozone and the UK rank at the bottom. Chart 39: Global Emerging Markets Equities Net % Oweight GEM Potentially Underowned GEM Relative to World(R.H.SCALE) Potentially Overowned US net position rose marginally to a net 23%OW from 2% OW in June. US is the only regional allocation with higher than +1 std deviation reading. Chart 4: U.S. Equities Net % Overweight US Potentially Underowned US Relative to World(R.H.SCALE) Potentially Overowned 9 In line with the strong outlook for Japanese growth in the regional survey, Global asset allocators raised their allocation to a net 2%OW from net 22%UWlast month. This is the biggest positive MoM change for the region in the last 8 years. Chart 41: Japanese Equities Net % Oweight Japan Potentially Underowned Japan Relative to World(R.H.SCALE) Potentially Overowned 9 14

15 2 July 211 The Eurozone is the epicentre of pessimism this month and positioning was cut further to 22% UW from 15% UW last month. It is the most disliked region globally and the only region with a reading more than -1 standard deviation below average. Chart 42: Eurozone Equities Net % Oweight Eurozone Potentially Underowned Eurozone Rel. to World(R.H.SCALE) Potentially Overowned 85 Chart 43: UK Equities 2 12 UK gained in popularity this month rising to a net 13% UW from a net 21%UW On Charts above, in addition to the asset class or equity region relative we have featured two lines labelled potentially overowned and potentially underowned. These lines are derived from the fund manager positioning data (based on the available history) and reflect the average stance plus/minus one standard deviation Net % Oweight UK Potentially Underowned UK Relative to World(R.H.SCALE) Potentially Overowned 9 15

16 2 July 211 Chart 44: Net % saying currency overvalued 8 Overvalued 6 Yen 4 Euro 2 U$ Yen -2 Currency valuation Chart 45: Perception of USD valuation & Trade Weighted GEM U$ -6 GEM -8 Undervalued % say US$ Overvalued Trade Weighted USD(R.H.SCALE) Chart 46: Perception of JPY valuation & Trade Weighted There was finally a noticeable move down in the view on Yen over valuation, and the Euro also continued lose its OV. Other currencies views were little moved The Yen s valuations fell to a net 52% OV from a net 63% OV (vs. a recent high of 72% OV in Sep 1), although it is still seen as the most overvalued currency % say Yen Overvalued Trade Weighted Yen(R.H.SCALE) Chart 47: Perception of EUR valuation & Trade Weighted 8 11 Euro over-valuation continued to slip, with current a reading of a net 38%OV from 49% OV in June and net 6% OV in May Meanwhile both the GEM currency bloc and the USD are seen as undervalued by a net 43% % say Euro Overvalued Trade Weighted Euro(R.H.SCALE) 16

17 2 July 211 Chart 48: Perception of GEM Currencies Valuation Net % say GEM Currencies ov erv alued Oct-4 Feb-5 Jun-5 Oct-5 Feb-6 Jun-6 Oct-6 Feb-7 Jun-7 Oct-7 Feb-8 Jun-8 Oct-8 Feb-9 Jun-9 Oct-9 Feb-1 Jun-1 Oct-1 Feb-11 Jun-11 Chart 49: Gold Valuation Hitherto immune to gold-fever, PMs now embrace rising gold prices: only a net 17% now see gold overvalued vs. 37% in June Net % say Gold ov erv alued May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 May-11 Jul-11 Oil valuation also saw considerable down move as only a net 8% see Oil as overvalued vs. 23% last month. This is consistent with the FMs long standing view of the correct oil price range being $9-1. Chart 5: Oil Valuation Net % say Oil ov erv alued May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 May-11 Jul-11 17

18 2 July 211 Global survey demographic data Table 6: Position / Institution / Approach to Global Equity Strategy Jul Jun May Apr Structure of the panel by position Chief Investment Officer Asset Allocator / Strategist / Economist Portfolio Manager Other Structure of the panel by expertise Global Specialists Regional Specialists With A Global View Total # of Respondents to Global Question Which of the Following Best Describes the Type of Money You are Running? Institutional Fund Hedge Fund Retail Fund Other What Do You Estimate to be the Total Current Value of Assets Under Your Direct Control? Up to $25mn Around $5mn Around $1bn Around $2.5bn Around $5bn Around $7.5bn Around $1bn or more No Funds Under Direct Control Total (USDbn) What best describes your investment time horizon at this moment? (Global Respondents) 3 months or less months months months or more Weighted average Don't know Additional information on how the survey works TNS begins fieldwork on the day the U.S. payroll data is released. Fieldwork continues through the following week and is closed on the following Thursday. TNS sends a link containing the unprocessed results to its survey panellists on Friday. All bona fide institutional fund managers are welcome to participate in the panel. Link to Definitions Macro Click here for definitions of commonly used terms. 18

19 2 July 211 Important Disclosures FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst s assessment of a stock s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 1% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the -12 month total return expectation for a stock and the firm s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst s view of the potential price appreciation (depreciation). Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster* Buy 1% 7% Neutral % 3% Underperform N/A 2% * Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock s coverage cluster is included in the most recent BofA Merrill Lynch Comment referencing the stock. Due to the nature of strategic analysis, the issuers or securities recommended or discussed in this report are not continuously followed. Accordingly, investors must regard this report as providing stand-alone analysis and should not expect continuing analysis or additional reports relating to such issuers and/or securities. BofA Merrill Lynch Research personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking revenues. 19

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