Bank of America Global Cross Asset Strategy memo referencing Trump election market impacts

Global Cross Asset Strategy —- Year Ahead Bankof America The Trump inflection ape ce Investment Strategy 30 November 2016 Corrected Key takeaways ee « Market response to Trump is logical but moves have been frontloaded. We now see USD & rates only modestly higher next year. James Barty >> « We see higher growth and inflation, notably in Japan. We go long NKY, stay long EM sail — AX) & selective yield in equity/ credit. Te alboncOee leon « Risk is an overshoot so we stay long USD/ short rates, adding a CNH put and short See Team Page for Full List of Contributors 10Y real rates. CNH a hedge vs trade risk. Trump extends some trends, starts others In the three weeks since Donald Trump’s election victory global markets have seen some dramatic moves. Som1e of those moves are extending trends that had already started — higher yields, higher USD, rotation from long to short duration. Others are new — JPY lower, NKY higher, EM lower. The key question is how much more they can go? Growth/inflation higher in 17/18 - modest fiscal boost Our economists think the fiscal impact of Trump will be modest at 0.5% on growth in H2 next year. Fiscal stimulus elsewhere also to be modest but it is taking the pressure off monetary policy. Growth was already improving so any fiscal stimulus helps. Our economists have both growth and inflation higher into 2017 and 2018. Inflection point in markets but much discounted already Market moves at turning points are often violent. The task of investors is to work out how much is already discounted. Our fixed income strategists have 10Y US yields at 2.65bp and bunds at 65bp at end 2017, also EUR/USD at 1.02 so moves look frontloaded to us. That suggests their implications for other markets should fade. Evolution not revolution - long NKY, short 10Y real rates If that is the case then we do not want to make wholesale changes to our strategy. We make two key changes today, adding long NKY (Japan strategist targets 20k) and short 10Y real rates trades. The former is part of our strategy to be pro-growth and we think it complements our long EM Asia trade being affected differently by USD strength. The hunt for yield is dead, long live the hunt for yield If yields only rise modestly next year then the hunt for yield will live on. We keep a yield basket in European equities, AT1s and spread in Euro/US credit. We go outright long European Healthcare by lifting our Food & Beverage short, which has dropped sharply. Overshoot in rates, USD and trade key risks - add CNH put The world would look very different if the US 10Y blew through 3% and the USD went on a tear, so we stay long USD and short rates. We add a CNH put vs USD as a hedge against an escalation of trade tensions under the new Trump administration. >> 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. This document is intended for BofA Merrill Lynch institutional investors only. It may not be distributed to BofA Merrill Lynch Financial Advisors, retail clients or retail prospects. BofA Merrill Lynch does and seeks to do business with issuers 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 26 to 27. Analyst Certification on page 25. 11691609 Timestamp: 30 November 2016 12:00AM EST Unauthorized redistribution of this report is prohibited. This report is intended for [email protected] HOUSE_OVERSIGHT_014432