Can Investors Continue to Profit from Corporate Margins?...Corporate profit margins are at or near...

July 2011

Can Investors Continue to Profit from Corporate Margins?

A Publication of the BlackRock Investment Institute

Executive Summary

Corporate profit margins are at or near record levels in most markets, driven by several factors over the past three decades. Structural factors include the lower cost of debt, increased technological innovation, and the rising share of world output from emerging markets; cyclical factors include the recent series of consumption bubbles and drop in capital expenditures.

One risk to the sustainability of margin expansion that has recently come into focus is input prices, commodities in particular. Most discussion of the risk of higher input prices has been grounded in a single measurement in the US: the spread between the consumer price index (or CPI, which represents total sales of goods) and the producer price index (or PPI, which represents total cost of producing these goods). A closer look, however, reveals that margins are more closely correlated to economic activity than the CPI/PPI spread.

From an economic perspective, lower consumer, corporate, and government spending is the key risk to maintaining margin expansion, as it continues to dampen employment levels and hamper the global economic recovery.

How do margins relate to equity valuations? Bullish and bearish investors may disagree on how to measure earnings and, hence, whether margin expansion is likely to continue. Regardless of the perspective, historically, as long as margins do not drop substantially, current equity valuations seem to be in-line.

Corporate profit margins may be an important driver of equity performance. One interesting finding is how high-gross-margin firms have outperformed throughout the recession. Many of these firms target higher-income individuals who have tended to weather the recession better than lower-income individuals.

For fixed income investors, fluctuations in corporate margins will matter more for companies with higher fixed costs and those in the high-yield space. Margins may also be useful in differentiating firms dealing with cyclical challenges from those with more long-term troubles.

Table of Contents

Global Margins Hit Peak Levels 3

Secular Drivers Boost Productivity 3

Cyclical Drivers Keep Liquidity Afloat 4

Passing Phase or Long-Term Trend? 4

The Impact of Input Costs 5

Double-Dip Recession Is the Key Risk 6

Corporate Spending Is a Catch-22 7

Fiscal Austerity Weighs on Corporate Profits 8

Implications for Investors 9

Uncovering Alpha Opportunities 10

Continued Expansion or Shift to Retrenchment? 11

The opinions expressed are those of the BlackRock Investment Institute as of July 2011, and may change as subsequent conditions vary.

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Global Margins Hit Peak Levels

Corporate profit margins have been trending upward (on average) since the 1970s,

and are now at or close to record levels in most markets around the world (Figure 1).

After-tax margins may be at risk of mean reverting in the longer term – at least in

theory – as an above-average profit share often stimulates investment which, in turn,

can dilute these exceptional profit levels.

Then again, profits could expand for a considerable period of time, due to an influx of

labour or a positive productivity shock; one recent example here is the transfer of

production from developed economies to the emerging markets. The question now is

whether margins can be sustained or will rise further, and the consequent outlook

for profits growth, considering that margins are now above trend and that top-line growth

is generally anaemic.

Three factors in particular have

had enormous impacts on the

global economy, spurring

productivity and profit margin

growth: lower cost of debt,

technological innovation, and the

rising share of world output driven

by emerging market economies.

Figure 1: Profit Margins of Global Equities

10

6

8

4

2

0

12/80 12/85 12/90 12/95 12/00 12/05 12/10

NET

PRO

FIT

MA

RGIN

(%)

Trend LineDatastream Total Market World Equity Index — Net Profit Margin

Sources: Thomson Reuters Datastream and Worldscope, as of 31.5.2011.

Several key factors have driven margins in recent years, some of which are secular

and others cyclical. Secular effects are longer-term, macroeconomic factors. Cyclical

effects are shorter-term factors that emulate swings in the economic cycle.

Secular Drivers Boost Productivity

Three factors in particular have had enormous impacts on the global economy,

spurring productivity and profit margin growth: lower cost of debt, technological

innovation, and the rising share of world output driven by emerging market economies.

First, the cost of debt has dropped, on average, for firms around the world over the

last 30 years. In 1975, a company rated AAA in the US would have paid roughly 9% for

long-term debt; today, it costs less than 5%. This drop in the cost of debt has been

even more significant for second- and third-tier companies. Long-dated Baa paper

was yielding nearly 11% in 1975; today it is less than 6%.1 Because the cost of capital

is a key input for most businesses’ cost structure (together with labour cost), this

decrease has significantly lowered total costs, which has helped boost margins.

1 Source: Bloomberg.


As developed market consumer

spending has been crimped by

declines in employment and

incomes, capital expenditures

are also down sharply around the

world and particularly in the US.

Second, despite being maligned due to the equity bubble bursting in 2000, the

dot-com era saw tremendous technological innovations that contributed to the

goldilocks economy of the 1990s. A high employment level, high growth rate, and low

inflation provided the ideal environment for information technology companies and

dispelled the myth that wage growth hinders profit growth. Productivity increases

resulting from the New Economy fanned out around the world.

Finally, shortly after the dot-com era came to a screeching halt, emerging economies’

share of world output began to accelerate. This upturn stemmed partly from China’s

accession to the World Trade Organization in 2001 and partly from the improved

competitiveness supplied by a wave of currency devaluations. As an example, China’s

rapid shift to a market economy introduced an enormous pool of low-cost labour to

manufacturers and quickly turned millions of workers into spenders.2

Cyclical Drivers Keep Liquidity Afloat

Cyclical drivers tend to be more short term in nature and also linked to national or

global economic cycles.

Key cyclical factors that have contributed to profit margins during the past three

decades are the recent series of consumption bubbles and current dearth of capital

expenditures. In turn, this has boosted corporate cashflows and savings during a period

when consumers and governments have been saving less.

Credit-led consumption bubbles around the world allowed spending to outpace

income and wages. This increase in demand (credit-led) relative to costs (wages-led)

was a major advantage for corporate profit margins. Demand was temporarily inflated

while net savings declined, illustrated by rising trade deficits in much of the developed

markets. Savings-free credit used to mean that consumer spending was growing faster

than incomes. More recently, it has meant that government spending has grown faster

than taxes, which has represented a net transfer from public dissaving to corporate

savings and margins. Regardless of the source, the effect on overall profit margins is

the same – corporate revenues have risen faster than costs, boosting profits higher.

As developed market consumer spending has been crimped by declines in

employment and incomes, capital expenditures are also down sharply around the world

and particularly in the US. This is due, in part, to uncertainty about the demand outlook

and the regulatory environment. Cost-cutting has also been an increasingly important

focus for corporations for the past few years. Coming out of the Great Recession,

good corporate citizenship has taken the form of underspending. A kind of pack

behaviour can be seen among CFOs who seem bent on outdoing each other on cost-

cutting, with little regard for longer-term consequences. Similar to the catering theory of

dividends, management has been rewarded for its own brand of fiscal austerity.3 We

believe this broad pattern of underspending is likely to change only when it begins to

result in missed opportunities, or at least the perception of such.

Passing Phase or Long-Term Trend?

Are margins expected to revert to the mean in the near- to mid-term? Probably not, at

least within the next three years or so, unless there is a collapse in demand relative

2 For more on China’s impact on the global economy, see BlackRock Investment Institute, “Can China’s Savers Save the World?” BlackRock Inc., New York (July 2011).

3 For more on the catering theory, see Malcolm Baker and Jeffrey Wurgler, “A Catering Theory of Dividends,” The Journal of Finance 59, no. 3 (June 2004).


to wages. Rather than focusing on the sustainability of margins, the more incisive

question may be whether economic expansion and the current level of government

transfer payments are sustainable. Consider the key risk factors.

One of the most commonly cited threats to margins is that of rising input prices,

commodities prices in particular.

The Impact of Input Costs

A variety of factors have bid up commodities prices in recent times, including excess

global liquidity, genuine demand growth, and unexpected market shocks from natural

disasters and political events. The argument for lower margins is that, in an

environment of weak demand, profit margins are more likely to fall, as firms are unable

to pass through higher costs to end consumers. Intuitively, this sounds logical, and it

may hold true in some cases. For example, cost of equipment will likely be the larger

increase to input costs for some natural resource companies in the near- to mid-term,

as output levels increase along with demand for new equipment.

BlackRock’s research, however, suggests that non-labour input costs are generally not

the determining factor for corporate profit margin moves. A commonly used measure

for examining this issue looks at the spread between the consumer price index (CPI)

and the producer price index (PPI). Because these indexes are often used as proxies in

the US for the aggregate income from sales and the aggregate cost of production,

respectively, many market commentators conclude that changes in the spread should

correlate closely with changes in aggregate profit margins. Overall, we believe the data

does not support this thesis.4

There are also challenges in using the CPI/PPI relationship as a tool for forecasting

margins. For instance, in the US, CPI outpaced PPI between 1982 and 2001, and

nominal profit gains reflected that growing spread. But the spread has broadly been

kept in check since 2001, while nominal corporate profit levels have instead been

quite volatile (Figure 2). Here, the disinflationary nature of China’s entry into the global

economy helped to constrain price levels. When we look at how profit margins relate to

changes in the CPI/PPI spread, we find that margins have fluctuated widely since

World War II, with movements that appear unrelated to the growth in CPI and PPI.

BlackRock’s research suggests that

non-labour input costs are generally

not the determining factor for

corporate profit margin moves.

4 Sami Mesrour, “Rising Commodity Prices May Hamper the Recovery, but Not the Way You’re Thinking,” By The Numbers, BlackRock Inc., New York (June 2011).

Figure 2: CPI Minus PPI, Compared with Profit Margins and Equity Values

50

30

40

20

10

0

-10

’48 ’52 ’60’56 ’64 ’68 ’00’96 ’04’72 ’80’76 ’84 ’88 ’92 ’10

PERC

ENT

1,800

1,200

1,500

900

600

300

0

S&P

500

IND

EX A

ND

PRO

FIT

MAR

GIN

S (U

S$ B

ILLI

ON

S)

S&P 500 Index (right side)Nominal Profits for US Corporations (right side)CPI minus PPI (left side)

Sources: Bloomberg, Bureau of Economic Analysis, and BlackRock, as of 31.12.2010.


Also, as economies develop and move to more value-added manufacturing, the raw

material input (as a percentage of total costs) should naturally decline, also lessening

the impact of the CPI/PPI spread.

Related to this obvious shortcoming with the CPI/PPI comparison is the fact that PPI

primarily focuses on the cost of materials and does a poor job capturing labour cost,

which is by far the largest component. Instead, the factor that appears to matter

more to profit margin movements is the overall performance of the underlying

economy (Figure 3). As economic conditions improve and unemployment declines,

profit margins generally increase.

All else equal, however, rising prices of imported commodities will reduce the wallet

share available for consumption of domestic goods, regardless of whether domestic

companies pass through rising import prices to consumers. Lower final demand

results in reduced revenues and lower margins. This risk also applies to rising imports

of manufactured goods, notably Chinese manufactured goods, which have shifted

from being a source of margin tailwind for developed market retailers to that of a

headwind. This risk is heightened when high overall debt levels undermine the ability

of credit-driven demand to offset import-driven costs.

A second recessionary period is not

BlackRock’s base case, but concerns

remain about the strength of the

global economic recovery, primarily

in the US, Europe, and Japan.

Figure 3: Profit Margins and the Employment Level

12

8

10

6

4

2

0

’48 ’52 ’60’56 ’64 ’68 ’00’96 ’04’72 ’80’76 ’84 ’88 ’92 ’10

UN

EMPL

OYM

ENT

RATE

(%)

0

5

10

15

20

25

PRE-

TAX

PRO

FIT

MA

RGIN

INV

ERTE

D (%

)

Pre-Tax Profit Margin, InvertedHeadline Unemployment Rate

Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, and BlackRock, as of 31.12.2010.

Double-Dip Recession Is the Key Risk

Given that profit margin sustainability is more related to overall economic activity

than it is to input prices, what is the risk of an economic regime change from the current

recovery? A second recessionary period is not BlackRock’s base case, but concerns

remain about the strength of the global economic recovery, primarily in the US, Europe,

and Japan. In the US, for example, a significant concern is the manufacturing sector,

which had been an area of strength through the recovery but may have recently

peaked. With 63% of the expected operating income growth of the S&P 500 (excluding

financials and utilities) coming from just three firms, it is not difficult to make the case

that profits may be peaking in the US (Figure 4). This lack of breadth may be a

cautionary sign. We have also seen significant headwinds to labour market recovery

that may be more structural than cyclical in nature. And with roughly 70% of US GDP

driven by personal consumption activity, the employment outlook has profound

implications for economic activity overall. Crude oil prices may be a key variable here,

as they could put consumption at further risk.


With 63% of the expected operating

income growth of the S&P 500

(excluding financials and utilities)

coming from just three firms, it is

not difficult to make the case that

profits may be peaking in the US.

Figure 4: Top 10 Earnings Forecasts for the S&P 500 (Excluding Financials and Utilities)

Source: Bloomberg, as of 8.6.2011.

Company

Sector

Sales Growth

Share of Sales Growth

EBIT Growth ($US)

Share of EBIT Growth

Exxon Energy 48.72% 52.43% 40,708 43.36%

Apple Information technology 58.61% 9.28% 12,600 10.35%

Chevron Energy 41.48% 12.47% 16,938 9.08%

GE Industrials -1.65% -0.38% 10,138 5.34%

Pfizer Healthcare -1.83% -0.16% 8,763 3.90%

AT&T Telecomm. services 1.05% 0.19% 4,677 2.25%

Oracle Information technology 33.52% 0.88% 5,985 1.99%

ConocoPhillips Energy 32.18% 4.55% 6,913 1.88%

IBM Information technology 6.00% 0.95% 3,089 1.66%

Merck Healthcare 2.61% 0.10% 4,856 1.43%

Until significant employment increases place consumers on more sound footing and

encourage more spending, businesses will likely be hesitant to make the capital

expenditure investments needed to reignite the economic recovery.

In the US and some other developed markets, we often see a margin peak precede a

trough of unit wage growth. Wage growth in the developed world has been muted, and

future wage expectations have been curbed; in the emerging markets, inflation

expectations and realised inflation have risen modestly, acting as a speed bump to

both consumer spending and margins. Corporate sector spending is vital at this point in

the economic cycle.

Corporate Spending Is a Catch-22

As consumers have struggled to deleverage over the past few years, the corporate

sector has aggressively termed out or retired significant amounts of debt, slashed costs,

and added efficiencies. The result: an enormous increase in cashflows, much of which

remains on corporate balance sheets. Today, many large corporations have higher cash

or short-term capital assets on their books than at any point in recent history.

Consider the effect of debt reduction alone. The net debt/equity ratio of global equities

has dropped precipitously over the past decade, from a peak of 148% in 2003 to 98%

earlier this year (Figure 5). Even some firms rated below investment-grade credit currently

operate with leverage levels close to historical lows. Combined with recent debt

refinancings and solid cashflow positions, the result has been very low levels of default

for high-yield companies.

At the same time, momentum in the changes to credit ratings has shifted in favour of

corporations, with dramatic improvements to upgrade-to-downgrade ratios. The

corporate sector is thriving in an environment in which the economy overall is not. It

may be that corporate strength and resilience becomes a catalyst for a revitalized

recovery, but uncertainty presents a headwind to corporate action, and thus a key risk

to the economic recovery and sustainability of margins. Are governments likely to

make up for the spending slack?


Fiscal Austerity Weighs on Corporate Profits

The massive government debt levels accrued by many developed countries have

reinvigorated the debate on deficit spending. In response, many governments in Europe

have embarked on extraordinary fiscal tightening measures. An unintended consequence

of the more extreme measures is the potential for slower economic growth.

Over the past 30 years, eurozone countries have significantly outpaced the US in

government spending as a percentage of GDP, so there is a much larger opportunity to

cut costs (Figure 6). This is particularly the case for entitlement programs. That said,

we believe much of the fiscal tightening in Europe appears to have been conducted in

a haphazard and uncoordinated fashion, which will likely slow the recovery. The

question now is, how high is the austerity multiplier likely to climb?

Whether directly or indirectly

impacted by government spending

cuts, corporate profit margins

face considerable headwinds

from fiscal austerity.

Figure 5: Net Debt/Equity Ratio for Global Stocks

150

90

120

60

30

0

12/80 12/85 12/90 12/95 12/00 12/05 12/10

PERC

ENT

Datastream Total Market World Equity Index, Net Debt/Shareholders Equity

Sources: Thomson Reuters Datastream and Worldscope, as of 31.5.2011.

Figure 6: Government Spending as a Percent of GDP

40

50

30

45

55

35

’70 ’74 ’78 ’82 ’86 ’90 ’94 ’02 ’06’98 ’12

PERC

ENT

OECD — TotalEuro area (15 countries)US

Source: OECD, as of June 2011. Forecasted data begin May 2011.

In the US, government transfer payments have been rising steadily, due to secular

trends (including the aging population) as well as cyclical ones (for example, the high

unemployment rate during the financial crisis). In the 1960s, entitlement programs (such


lf margins can remain high, for

whatever underlying reason, then

current equity valuations appear

reasonably priced.

as Social Security) accounted for roughly 7% of disposable income for US consumers, but

today such transfer payments represent nearly 20% of this income. Between 1970 and

2000, the growth rate of transfer payments accounted for roughly 13% of the growth in

disposable income. Since 2000, however, transfer payments have accounted for more

than 25% of the growth in disposable income.5 So not only is the share of income

larger, but the rate of growth has also increased. It’s clear that this form of

government spending has had an important role in maintaining the consumption rate,

effectively underwriting a growing share of personal income.

Widespread reform to the major entitlement programs is highly unlikely in the current

political climate. Over the longer term, this issue is a pending train wreck; if there is

no pick-up in real wages, it appears that the US consumer is living on borrowed time.

When the US is no longer able to fund its long-term deficits at 3%, some type of reform

will be unavoidable, resulting in a sharp reduction in purchasing power for the US

consumer. It also follows that significant reductions in the fiscal deficit, unless matched

by increases in wage levels and/or rises in private sector credit levels, likely will lead to

a reduction in top-line growth. In any case, reduced government deficits paired with a

tapped-out consumer equal lower corporate savings and an adjustment in the external

account to allow national accounts to balance. A reduction in corporate savings levels

would mean lower profit margins, unless employment costs are cut further (in turn

depressing consumption demand).

Whether directly or indirectly impacted by government spending cuts, corporate profit

margins face considerable headwinds from fiscal austerity.

Implications for Investors

While the relationship among these economic variables seems straightforward,

what’s less clear is the degree of the multipliers and the timing involved. Assuming

investors had confidence in their forecasting abilities here, what implications do we

see for portfolios?

To the extent that investors take margin changes into account as part of their

decision making, consider any potential impact on valuations. BlackRock believes that

current equity valuations are fairly reasonable; depending on the market, some may

even be relatively cheap. Where will they go from here?

A bearish investor might view current price/earnings ratios as unsustainable because

margins are unsustainably high and likely to revert to the mean. To that end, a more

relevant measure would take into account earnings throughout the economic cycle;

that is, cyclically adjusted earnings, which look relatively expensive.

A bullish investor, however, might not expect significant margin compression in the

near term, so may be more likely to view current earnings as sustainable. On a

trailing- or forward-earnings basis, most valuations – developed markets in particular

– look reasonably valued. Committed bulls hold that the transfer of manufacturing

activity to emerging markets will defer the mean reversion of profit margins for a

considerable time period.

The bottom line: lf margins can remain high, for whatever underlying reason, then

current equity valuations appear reasonably priced.

5 Sources: Bloomberg and the Bureau of Economic Analysis.


Uncovering Alpha Opportunities

After considering valuations, the next logical question is whether information on

margins can be used to add returns. Changes in profit margins involve a range of

inputs and outputs, many of which are difficult to forecast. This reduces the likelihood

that margin trends, in isolation, are an effective tool for forecasting market returns.

The evidence is conclusive: Of the eight post-war peaks in the S&P 500, only two

correlate with peaks in corporate margins (Figure 7).

In a sense, like high-earning

individuals in developed markets,

it could be argued that high-gross-

margin firms have been getting

“richer” over the past few decades.

Figure 7: S&P 500 Peaks and Corporate Margins Peaks

80%

40

60

20

50

70

30

45

65

25

55

75

35

’55 ’60 ’65 ’70 ’75 ’80 ’85 ’90 ’95 ’00 ’05 ’11

RecessionsS&P 500 Stocks with Improving Pre-tax Margins Stock Market Peaks

Sources: National Bureau of Economic Research, corporate reports, and Empirical Research Partners, as of 31.3.2011. Excluding financials and utilities; trailing 12-month pre-tax margins measured versus the prior year.

That said, we find that persistence of high gross margins may be one useful driver of

returns. BlackRock’s research has found that firms displaying persistently high levels of

gross margins have tended to outperform peers with lower-gross-margin characteristics

and the market as a whole. In a sense, like high-earning individuals in developed

markets, it could be argued that high-gross-margin firms have been getting “richer”

over the past few decades.

Many of these high-gross-margin companies primarily target sales to high-end

consumers, who have proven themselves quite resilient during recessions. Several of

these companies have developed some degree of sustainable competitive

advantage; for instance, luxury goods maker Coach and specialty foods retailer

Whole Foods Markets. On the other hand, Hanesbrands and Costco have had

relatively low gross margins.

Less obvious examples include auto-parts firms Amerigon and Gentex, which produce

auto components such as seat warmers and rearview mirror dimmers that are found

in luxury cars. At the opposite end of this spectrum is Cooper Tires, again with

relatively low gross margins.


Corporate profits in much of the

developed world – the US in

particular – may be at risk of some

pull-back in the mid- to long-term.

This has less to do with relatively

high historical levels than it does

the unwinding of forces that have

driven profit margins higher during

the past three decades.

It is also worth noting that these high-gross-margin companies – some of which are

referred to as wide-moat businesses – have variable net margin histories. This

reflects differing levels of sales and general administration expenses.

Not surprisingly, this situation at the firm level is reflected at the individual level.

Many developed economies (the US in particular) have radically bifurcated over the

past couple of decades, with the process advancing more rapidly in the wake of the

financial crisis. As much of the middle- and lower-income consumer segments have

suffered badly from weak labour and housing markets, high-end consumers have

proven more resilient, with a disproportionate degree of the wealth rebound

supported by governmental efforts targeted at propping up asset prices.

While most discussion of profit margins focuses on equity markets, corporate margin

strength obviously also holds significant implications for fixed income investors.

BlackRock’s view is that sustainability of margin levels is important in the analysis of

higher-leveraged companies and tends to matter less with high-quality credits, unless

the firm’s business model is called into question. In general, the greater the level of

operating leverage (i.e., higher fixed costs), the more important are margins and

consequent free cashflow potential.

Firms with higher fixed costs, such as in the manufacturing sector, may also be more

impacted by margin fluctuations. Fixed income analysts also try to determine whether

a deterioration in margins is due to temporary factors (such as the length of a firm’s

contract cycle) or more secular factors involving a change in the firm’s business

model. What is clear, though, is that across the capital structure, margins may be an

important consideration when judging a company’s investment prospects.

Continued Expansion or Shift to Retrenchment?

Corporate profits in much of the developed world – the US in particular – may be at

risk of some pull-back in the mid- to long-term. This has less to do with relatively high

historical levels than it does with the unwinding of forces that have driven profit margins

higher during the past three decades. Inflated liquidity levels may drag down economic

growth for some time to come. In particular, lower consumer, corporate, and

government spending may weigh on economic growth prospects and, consequently,

dampen prospects for profit margins. If corporate profit margins were to compress, due

to lower spending, this suggests that equity valuations are less compelling, as

sustainable earnings would be lower.

Fiscal austerity and the resulting impact on consumer spending power may limit

margin expansion somewhat, particularly at firms that cater to consumers dependent on

government transfer payments for spending capital. Some firms that cater to higher-

income consumers have managed to sustain and expand profit margins in a way that

many industry peers have not. While profit margins may not be the most vital metric

for making equity or fixed income investment decisions, they are another piece of a

complex puzzle that can help illuminate a firm’s prospects.

This paper is part of a series prepared by the BlackRock Investment Institute 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 July 2011 and may change as subsequent conditions vary. The information and opinions contained in this paper 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.

This paper 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 paper is at the sole discretion of the reader.

This material is being distributed/issued in Australia and New Zealand by BlackRock Financial Management, Inc. (“BFM”), which is a United States domiciled entity. In Australia, BFM is exempted under Australian CO 03/1100 from the requirement to hold an Australian Financial Services License and is regulated by the Securities and Exchange Commission under US laws which differ from Australian laws. In Canada, this material is intended for permitted clients only. BFM believes that the information in this document is correct at the time of compilation, but 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 BFM, its officers, employees or agents. 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. In Latin America this material is intended for Institutional and Professional Clients only. This material is solely for educational purposes only and does not constitute an offer or a 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 within Latin America 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 they have not been registered with the securities regulator of Brazil, Chile, Colombia, Mexico and Peru or any other securities regulator in any Latin American country and no such securities regulators have confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America.

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. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Any companies listed are not necessarily held in any BlackRock accounts.

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