Q&A Market Implications of Tax Reform

IN-D EPTH A NALYSIS OF TIMELY INVESTMENT TOPICS Q&A Market Implications of Tax Reform December 27, 2017 Investment Strategy Team Key Takeaways» The Tax Cuts and Jobs Act was signed into law on December 22, 2017, and it is the most extensive overhaul of the U.S. tax system since 1986.» Our initial, high-level review shows more economic stimulus and potentially stronger equity-market support than indicated in our current forecasts, which we made after the House passed its version of tax reform in November. What It May Mean for Investors» While it will take financial markets some additional time to digest the law s implications, some investment connotations are apparent. We recommend that investors looking to benefit from the new stimulus focus on cyclical equity sectors, which we already favor. The Tax Cuts and Jobs Act was signed into law on December 22, 2017, and it is the most extensive overhaul of the U.S. tax system since 1986. This report addresses in detail whether specific tax reform provisions are positive or negative across a variety of asset classes. However, we are continuing our analysis of the magnitude of the impacts, and we will publish revised year-end targets in another report early in the New Year. Equities: Major equity-market benefits (and headwinds) from tax reform What are the most important provisions of the new tax reform law for companies and equities? Which provisions impact earnings the most? In addition to the significant decrease in the tax rate from 35% to 21%, businesses may write off 100% of their capital expenditures (capex) for the next five years. In this recovery, while the consumer has largely pushed the economy ahead, corporations have been hesitant to make meaningful capital expenditures. We expect more capital spending as the economic recovery develops. 2017 Wells Fargo Investment Institute. All rights reserved. Page 1 of 8

Are there any negative provisions? Yes, we believe that there are a couple of negatives in the new tax law. First, full deductibility of interest expense is replaced by deductibility limited to 30% of earnings before interest, taxes, and depreciation. In addition, the unrepatriated past foreign earnings back to 1986 are taxable, and at a higher rate than we initially estimated. We estimate the extra 2018 tax liability at approximately $35 billion. How could tax reform create opportunities in 2018? We do see opportunities based on the new tax legislation. We believe that tax reform could extend the current cycle by a couple years more. Given that possibility, sectors that benefit from continued economic growth could offer more upside than previously thought. We also are anticipating more equity market volatility next year as the Federal Reserve (Fed) continues its rate hike cycle and investors wait for the anticipated increase in capex, consumer spending, and economic growth. In our view, pullbacks should be looked at as buying opportunities. There are many moving parts in the new legislation that are difficult to estimate quickly. Uncertainty often creates opportunity in the stock market. What can be said about tax reform s implications for the large-cap equity sectors? If we are correct, and corporations increase their capital expenditures, the Industrials sector would be one of the main beneficiaries. Typically, late in a cycle, this sector benefits as capex increases and the international economy improves. We continue to recommend that investors overweight the Industrials sector relative to its weighting in the S&P 500 Index. Other sectors that likely will benefit are Information Technology and Health Care. These sectors both contain corporations that have large amounts of earnings retained overseas. We do expect that some of these earnings held overseas will be repatriated. Overall, we continue to lean toward those sectors that are sensitive to the ebb and flow of the economy and that can benefit from a continuation of the recovery. In general, consumers also should benefit from the new tax code, and many will have more cash to spend. In addition to Industrials, we also are recommending overweight positions in the Financial, Health Care, and Consumer Discretionary sectors. Fixed Income: Tax reform impacts, from municipals to corporate securities What does tax reform mean for municipal securities? The limits on state and local tax deductions could have a significant impact for investors in high-tax locations. Even though individual tax rates will move lower (and the standard deduction will increase), we expect that the effective tax rates for highearning individuals in certain locations may increase. Individuals who reside in hightax states such as California, New Jersey, and New York appear to face the biggest potential impact. We expect an increase in effective tax rates (i.e., average tax rate after deductions and exclusions to income) for some individuals in these locations to fuel the demand for tax-exempt income inherent in most municipal securities. Lower corporate tax rates may offset some of this new demand for municipal securities. Banks and insurance companies likely will find the effective benefit of municipal securities has declined reducing their demand. 2017 Wells Fargo Investment Institute. All rights reserved. Page 2 of 8

What is the potential impact on the supply of municipal bonds? In the final tax package, private activity bonds still will qualify for exemption under most circumstances. Yet, advance refunding issues will no longer qualify for tax exemption going forward (existing bonds will be grandfathered). Without advance refunding issuance, we could see new municipal supply drop by up to 25% in 2018. In anticipation of the new tax policies next year, municipal issuance has spiked in recent weeks. We believe that this offers investors attractive valuation opportunities.. Will companies change the mix of their capital structures, now that their interest deductibility is limited? Yes, we likely will see some changes over time. A lower corporate tax rate and a cap on business interest payments that exceed 30 percent of adjusted taxable income deductions could impact lower-rated companies, specifically those that employ significant leverage. For companies that are in decent financial shape, a lower corporate tax rate is likely to be a positive, and has typically led to higher earnings and an increase in free cash flow. Companies that are lower on the credit spectrum, especially those that are significantly leveraged, may find that the cap on interest deductibility further strains their already challenged balance sheets. Are there now more advantages to working with active fixed-income managers? Yes. In our opinion, the changes and new dynamics of the new tax law may present additional advantages to working with active fixed-income managers. Professional money managers have teams that are dedicated to performing credit and market research. These teams thoroughly review bond covenants and the financials related to debt issuance (and loan issuance) deals. Managers also will analyze the impact of the new law on various taxable and municipal securities. Additionally, they will determine how their corresponding managed portfolios should be adjusted based on the perceived risks and opportunities created by the tax law, in relation to the objectives of the portfolios. Real Assets: The varying tax-reform impacts on Real Assets Does tax reform impact commodities? Only marginally. Commodities are global in nature, so we doubt that U.S.-specific tax reform will have much of an impact. If there is an impact, we see it leaning negatively for commodity prices in general. U.S. commodity producers, with lower overall tax bills, may find more production projects hitting return targets. This potential to add more supply, could, on the margin, hurt commodity prices. Does tax reform change our commodity outlook? No. We still see the commodity bear super-cycle as the main driver of the group in 2018. We maintain an underweight recommendation for commodities. Do real estate investment trusts (REITs) benefit from tax reform? Yes, U.S. tax reform looks to be marginally positive for REITs. REITs pass through the majority of their earnings to investors in the form of dividends, in exchange for no corporate tax rate. REITs generally should benefit from the proposed maximum pass-through tax rate on REIT dividends of 29.6% (37% top individual tax rate and 20% deduction). The maximum tax rate on REIT distributions previously was 39.6%. 2017 Wells Fargo Investment Institute. All rights reserved. Page 3 of 8

Are there any other tax law developments that benefit REITs? Other primary positives include: interest deductibility on real estate maintained, likekind exchanges on real property maintained, the home mortgage deduction being preserved (but reduced to $750,000 of mortgage debt), and reduced foreign withholding on capital gains distributions (35% to 21%). Does this change our outlook for REITs? No, the tax law does not change our outlook on REITs. We maintain an overweight to public real estate, which encompasses both domestic and international REITs. Master limited partnerships (MLPs) are pass-through entities as well. Will they experience the same benefits as REITs? U.S. tax reform does not look like it will benefit MLPs significantly. MLPs are pass through entities, like REITs. Yet, the earnings that are passed through reach investors in different forms. The majority of a REIT s earnings pass through comes to REIT investors in the form of income. The majority of an MLP s earnings pass through comes to investors in the form of a return of capital. Return of capital payouts are mostly tax deferred, which leads us to believe that MLPs will not benefit from U.S. tax reform to the degree that REITs will. Any there other potential consequences for MLPs? MLPs also may be at a disadvantage to comparable businesses that are structured as C-corporations (C-corps). C-corps, which are taxed at the corporate level, should benefit from lower taxes. We may even see an acceleration of MLPs transitioning to C-corps as this structure can provide the flexibility to diversify business operations, and it gives access to larger investment pools. Alternative Investments: Winners and losers in the alternatives space Does tax reform change carried interest taxation (capital gains versus ordinary income)? No, the tax law retains carried interest taxation at the capital gains rate. However, the tax law requires that the underlying investment be held for at least three years to qualify for the capital gains rate. Shorter holding periods would be treated as short-term capital gains (rather than being taxed as ordinary income). This three-year holding period may favor certain private capital strategies with typically longer-holding periods (such as buyouts and private infrastructure) over hedge funds or those private capital strategies with typically shorter-holding periods (such as distressed debt and direct lending). Does the tax reform law offer advantages to private capital over other alternative strategies, by virtue of the former as job creators? Yes, the tax reform law is more advantageous to private capital strategies, such as venture capital and growth equity. These strategies are expected to benefit from the preservation of the tax treatment of equity-based compensation, which is key to earlystage growth companies and also from the tax law s provisions that make it easier 2017 Wells Fargo Investment Institute. All rights reserved. Page 4 of 8

for employees of start-up companies to exercise their stock options. Do hedge funds or private capital qualify as pass-through entities that offer their owners the ability to deduct 20% of their income before paying taxes based on the individual rate? Yes, most hedge funds and private equity funds, as well as law, consulting, and accounting firms, are partnerships, which qualifies them as pass-through entities. The tax law includes a provision permitting non-corporate owners of certain partnerships, S-corporations, and sole proprietorships to claim a 20% deduction against qualifying business income. Are there any other issues to address? Yes, we believe that corporate tax-rate deductions are generally positive for existing private capital holdings. While corporate tax-rate reductions are generally positive for existing private capital holdings, they may lead to increased valuations. Lower interest deductions are expected to reduce the portion of debt used for private equity buyouts. In buoyant markets, reduced portfolio company debt likely would lower equity returns, while in down markets, reduced portfolio company debt would be expected to minimize losses. Certain private debt strategies involving lending to sponsored transactions may have lower transaction volume as a result. Furthermore, the repeal of advance refunding bonds may have a large impact on short-term funding for multi-asset portfolios (such as those held by endowments and foundations). What conclusions should investors draw? This law of nearly 1,100 pages is not quite the tax simplification that congressional leaders originally sought. There are many complex provisions, especially relating to international activities. Therefore, we will evaluate our market targets thoughtfully to reflect the effects of the most meaningful fiscal policy change in more than 30 years. But investors should keep in mind both our conclusions from above, as well as the political risks that remain for 2018 (discussed below). Tax reform should be a strong positive and may help to insulate financial markets from some political risks in 2018. Political developments may still create volatility. Some of that news may be positive for markets, particularly if the administration continues to deregulate the economy. Yet, there is room for disappointment if infrastructure improvement initiatives or financial deregulation fails in Congress. Possible immigration limitations and trade restrictions pose other negative risks. Investors also may face new uncertainties if inflation unexpectedly accelerates and raises questions about the pace of Fed interest-rate hikes. Some conclusions already are apparent, as discussed above: Tax reform favors an improving economy and our equity sector recommendations mostly align with that improvement outlook. Tax rate cuts and repatriation provisions favor the sectors we already list as our top picks including Industrials, Consumer Discretionary, Financials, and Health Care. Of the potential beneficiaries of tax reform, only Information Technology is not among our favorites (but is a neutral sector in our view). 2017 Wells Fargo Investment Institute. All rights reserved. Page 5 of 8

We continue to see strong support for municipal securities and observe advantages to working with active managers. Tax reform may encourage commodity producers to add to excess production. Meanwhile, REITs may benefit from new pass-through provisions, but MLPs may be at a disadvantage to firms structured as C-corporations. Among the alternative investment strategies, private capital strategies with typically longer-holding periods (such as buyouts and private infrastructure) may hold an advantage over hedge funds or those private capital strategies with typically shorter-holding periods (such as distressed debt and direct lending). 2017 Wells Fargo Investment Institute. All rights reserved. Page 6 of 8

Wells Fargo and its affiliates are not legal or tax advisors. Be sure to consult your own legal or tax advisor before taking any action that may involve tax consequences. Tax laws or regulations are subject to change at any time and can have a substantial impact on your individual situation. Risk Considerations Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio s vulnerability to any single economic, political or regulatory development affecting the sector. This can result in greater price volatility. Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars; increasing household debt levels that could limit consumer appetite for discretionary purchases; declining consumer acceptance of new product introductions; and geopolitical uncertainty that could impact consumer sentiment. Investing in financial services companies will subject a portfolio to adverse economic or regulatory occurrences affecting the sector. Some of the risks associated with investment in the health care sector include competition on branded products, sales erosion due to cheaper alternatives, research & development risk, government regulations and government approval of products anticipated to enter the market. Risks associated with investing in Industrials include the possibility of a worsening in the global economy, acquisition integration risk, operational issues, failure to introduce to market new and innovative products, further weakening in the oil market, potential price wars due to any excesses industry capacity, and a sustained rise in the dollar relative to other currencies. Technology and Internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market. Investments in fixed-income securities, including municipal securities, are subject to market, interest rate, credit, liquidity and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond s price. High yield fixed income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment grade fixed income securities. Municipal securities may also be subject to the alternative minimum tax and legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income. Real assets are subject to the risks associated with real estate, commodities, master limited partnerships, and other investments and may not be suitable for all investors. There are special risks associated with an investment in real estate, including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Investments in MLPs are subject to certain risks, including risks related to limited control and limited rights to vote, potential conflicts of interest, cash flow risks, dilution risks, limited liquidity and risks related to the general partner s right to force sales at undesirable times or prices. The change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash flows distributed by the MLP. An MLP is not required to make distributions and distributions may represent a return of capital as detailed in the K-1 delivered to the unitholder. Unlike regular dividends, a `return of capital' is typically tax-deferred for the unitholder of an MLP and each distribution may reduce the unitholder s cost-basis. There are special risks associated with an investment in real estate, including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Alternative investments, such as hedge funds and private equity funds are only available to persons who are accredited investors or qualified purchasers within the meaning of U.S. securities laws. Hedge funds and private equity funds trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. They employ aggressive investment techniques, including, among others, the use of arbitrage, short sales, leverage and derivatives. Strategies may, at times, be out of market favor for considerable periods which can result in adverse consequences for the investor. 2017 Wells Fargo Investment Institute. All rights reserved. Page 7 of 8

General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR 1217-03322 2017 Wells Fargo Investment Institute. All rights reserved. Page 8 of 8