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Global Market Outlook Michelle Gibley, CFA Charles Schwab & Co., Inc. April 2017 Join the social media conversation #cofpa17 Uncertainty high Source: The GEPU (Global Economic Policy Uncertainty) Index is a PPP-adjusted (purchasing power adjustment) GDP-weighted average of national EPU indices for 16 countries: Australia, Brazil, Canada, China, France, Germany, India, Ireland, Italy, Japan, Russia, S. Korea, Spain, U.K. and U.S. Each national EPU index reflects the relative frequency of owncountry newspaper articles that contain a trio of terms pertaining to the economy (E), policy (P) and uncertainty (U). Source: FactSet, "Measuring Economic Policy Uncertainty" by Scott Baker, Nicholas Bloom and Steven J. Davis, www.PolicyUncertainty.com. As of 2/28/2017. 2 Public Charles Schwab Yet sentiment is also elevated Consumer Confidence Index - United States NFIB Small Business Optimism Index - United States Ifo Business Climate Index - Germany Business Sentiment Index - France 120 100 80 60 40 20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: FactSet, Conference Board, National Federation of Independent Business, Ifo National Institute of Research, Bank of France, as of 3/29/2017. 3 Public Charles Schwab It’s the Economy! 4 Public Charles Schwab It’s the economy… Stocks tracking better than expected data MSCI ACWI - Index (year-over-year % change) (Left) Citigroup Economic Surprise Index for G10 countries (Right) 30 60 25 50 20 40 15 30 10 20 5 10 0 -5 0 -10 -10 -15 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17Mar-17 -20 Source: Bloomberg data as of 3/29/2017. 5 Public Charles Schwab It’s the economy… Global growth turnaround Global Leading Indicator - (index monthly change) 0.15 0.10 Rising for 12 straight months 0.05 0.00 - 0.05 - 0.10 - 0.15 2013 2014 2015 2016 2017 Source: FactSet, OECD, as of 4/11/2017. *Index is OECD plus Major Non-member Economies (Brazil, China, India, Indonesia, Russia, and S. Africa). 6 Public Charles Schwab It’s the economy… Global growth may be accelerating Global Composite PMI (Index) Global Services PMI (Index) Global Manufacturing PMI (Index) 56 55 54 53 52 51 50 49 Jan- 13 Jan- 14 Jan- 15 Jan- 16 Source: FactSet, Markit Economics, as of 4/5/2017. 7 Public Charles Schwab It’s the economy… Eurozone surprising naysayers Eurozone Composite PMI (Index) Eurozone Services PMI (Index) Eurozone Manufacturing PMI (Index) 58 56 54 52 50 48 46 44 Jan- 13 Jan- 14 Jan- 15 Jan- 16 Source: FactSet, Markit Economics, as of 4/5/2017. 8 Public Charles Schwab It’s the economy… Emerging Markets have benefitted from global growth upturn Emerging Market Composite PMI (Index) Emerging Market Services PMI (Index) Emerging Market Manufacturing PMI (Index) 54 53 52 51 50 49 48 Apr- 14 Jul- 14 Oct- 14 Jan- 15 Apr- 15 Jul- 15 Oct- 15 Jan- 16 Apr- 16 Jul- 16 Oct- 16 Jan- 17 Source: FactSet, Markit Economics, as of 3/29/2017. 9 Public Charles Schwab It’s the economy… Pricing power return stabilizing China’s GDP Producer price index, year-over-year % change - China (Left) Nominal GDP, year-over-year % change - China (Right) 20 30 15 25 10 20 5 15 0 10 -5 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 5 Source: Charles Schwab, FactSet, China National Bureau of Statistics, 3/29/2017. 10 Public Charles Schwab It’s the economy… Price improvements boosting Chinese corporate profits Industrial profits - China (year-over-year % change) (Left) PPI - China (year-over-year % change) (Right) 35 10 30 8 25 6 20 4 15 2 10 0 5 -2 0 -4 -5 -6 -10 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 -8 Source: Charles Schwab, FactSet, China National Bureau of Statistics, 3/29/2017. 11 Public Charles Schwab Monetary vs. Fiscal Stimulus 12 Public Charles Schwab Monetary policy divergence Source: FactSet., BoJ=Bank of Japan. ECB=European Central Bank, as of 02/28/2017. 13 Public Charles Schwab Monetary policy divergence boosted dollar Source: FactSet, as of 3/21/2017. 14 Public Charles Schwab Monetary policy no longer only game in town Source: Schwab Center for Financial Research. 15 Public Charles Schwab Tax cuts could boost S&P 500 EPS Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2017(c) Ned Davis Research, Inc. All rights reserved.). 16 Public Charles Schwab Sales and Earnings could expand 17 Public Charles Schwab Deflation threat has subsided CPI - Japan (year-over-year % change) CPI - Eurozone (year-over-year % change) CPI - U.S. (year-over-year % change) 6 5 4 3 2 1 0 -1 -2 -3 -4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: FactSet, U.S. Dept. of Labor, Eurostat, Japan Ministry of Internal Affairs and Communications, as of 4/11/2017. 18 Public Charles Schwab Nominal growth may return to 20-yr average Source: Charles Schwab, Bloomberg data as of 2/8/2017. 19 Public Charles Schwab Faster nominal growth could boost sales Source: Charles Schwab, Bloomberg IMF data as of 11/18/2016. Nominal GDP for 2016 and 2017 are IMF forecasts from the October 2016 World Economic Outlook 20 Public Charles Schwab Bank stocks globally following yield curves STOXX Europe 600 Banks - (Index) (Left) Yield curve (German government 10 yr less 2 yr yield) Correlation: 0.90 (Right) 200 1.40 190 1.30 1.20 180 1.10 170 1.00 160 0.90 150 0.80 140 0.70 130 0.60 120 0.50 110 Jan-16 Apr-16 Jul-16 Oct-16 0.40 Jan-17 Japan Nikkei Banks - Price Index (Left) Yield curve (Japanese go vernment 10 yr less 2 yr yield) - Japan (Right) Correlation: 0.87 2,000 0.45 1,900 0.40 1,800 0.35 1,700 0.30 1,600 0.25 1,500 0.20 1,400 0.15 1,300 0.10 1,200 0.05 1,100 1,000 21 Public Jan-16 Apr-16 Jul-16 Oct-16 Source: FactSet, Deutsche Bundesbank, Japan Ministry of Finance, as of 3/29/2017. Jan-17 0.00 Charles Schwab Earnings expected to rebound Source: Ned Davis, MSCI, consensus forecasts as of 4/3/2017. MSCI EAFE Index = Developed international, MSCI EM index = EM. 22 Public Charles Schwab Returns can attract money Source: Charles Schwab, Bloomberg data as of 3/21/2017. 23 Public Charles Schwab Trade may surprise positively 24 Public Charles Schwab The value of trade has fallen… IMF World Export Value of Goods (billions US dollars) $1,700 $1,600 $1,500 $1,400 $1,300 $1,200 $1,100 $1,000 $900 $800 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: FactSet, International Monetary Fund, as of 3/29/2017. 25 Public Charles Schwab But trade volume hit a record high IMF World Export Value of Goods (billions US dollars) (Left) CPB World Export Volume (index) (Right) $1,800 120 $1,600 110 $1,400 100 $1,200 90 $1,000 80 $800 70 $600 $400 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 60 Source: FactSet, International Monetary Fund, Netherlands Central Planning Bureau, as of 3/29/2017. 26 Public Charles Schwab Trade may surprise naysayers in 2017 Source: FactSet, International Monetary Fund, as of 3/29/2017. 27 Public Charles Schwab Protectionist rhetoric may be unrealized Source: Charles Schwab, IMF data as of 12/02/2016. *Year 2017 is an IMF forecast of the annual rate based on most recent data available. 28 Public Charles Schwab Volatility may return 29 Public Charles Schwab European elections pose a risk Date Country What’s at stake April 23 and May France 7, 2017 The Presidential race is up for grabs. The far-right National Front (FN) party’s candidate, Marine Le Pen, supports exiting the EU and euro. Main contenders: Macron (centrist), Fillon (right), Hamon (left), and Melenchon (far left). Sept. 24, 2017 While Merkel’s popularity has fallen and the anti-immigration Alternative for Germany (AfD) party gained some parliamentary seats last year, a mainstream coalition is likely to prevail. Germany Mid-to-late 2017 Italy possible Elections aren’t due until 2018, but the current government is unstable. The anti-euro Five Star Movement (M5S) polls close to the ruling Democratic Party (PD). Source: Charles Schwab, as of 4/11/2017. 30 Public Charles Schwab Stocks have slid ahead of key votes Source: Charles Schwab, Bloomberg data as of 3/27/2017. 31 Public Charles Schwab Brexit: UK faltered after entering EU in 1973 Source: Charles Schwab, UK Office for National Statistics data as of 3/29/2017. 32 Public Charles Schwab Brexit: consumers currently pulling back Source: Charles Schwab, UK Office for National Statistics data as of 3/29/2017. 33 Public Charles Schwab As good as it gets? Difficult to surprise when bar is high MSCI ACWI - Index (year-over-year % change) (Left) Citigroup Economic Surprise Index for G10 countries (Right) 30 60 25 50 20 40 15 30 10 20 5 10 0 -5 0 -10 -10 -15 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17Mar-17 -20 Source: Bloomberg data as of 3/29/2017. 34 Public Charles Schwab Where in the world do we favor most? 35 Public Charles Schwab Where to invest? Japan tends to perform like the financial sector Source: Charles Schwab, MSCI data as of 1/12/2017. Past performance is no guarantee of future results. Indexes measure cumulative total return in US dollars since start of 2006. 36 Public Charles Schwab Where to invest? Canada tends to act like the energy sector Source: Charles Schwab, MSCI data as of 1/12/2017. Past performance is no guarantee of future results. Indexes measure cumulative total return in US dollars since start of 1999. 37 Public Charles Schwab Where to invest? The U.S. tends to act like the technology sector Source: Charles Schwab, MSCI data as of 1/12/2017. Past performance is no guarantee of future results. Indexes measure cumulative total return in US dollars since start of 2006. 38 Public Charles Schwab Where to invest? Emerging market cycle Source: Charles Schwab, MSCI data as of 1/12/2017. Emerging Market stocks = MSCI Emerging Market Index, Developed Market stocks = MSCI World Index. Past performance is no guarantee of future results. 39 Public Charles Schwab Can EM decouple from the dollar? MSCI Emerging Markets - Price Index (Left) Broad Trade-Weighted Dollar Index - Inverse (Right) Correlation: -0.73 1,150 95 1,100 100 1,050 105 1,000 110 950 900 115 850 120 800 125 750 130 700 650 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 135 Source: FactSet, MSCI, as of 3/29/2017. 40 Public Charles Schwab Key takeaways on our outlook ▪ It’s the economy! ▪ Sales and earnings likely rebounding ▪ Volatility could return ▪ Sectors can outweigh country of origin in international performance 41 Public Charles Schwab Questions? 42 Public Charles Schwab Thank you Disclosures The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. We believe the information obtained from third-party sources to be reliable, but neither Schwab nor its affiliates guarantee its accuracy, timeliness, or completeness. Opinions and estimates herein are as of the date of the material and are subject to change without notice at any time in reaction to shifting market conditions. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, political instability, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. Investing in sectors may involve a greater degree of risk than investments with broader diversification. Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly. Diversification strategies do not ensure a profit and do not protect against losses in declining markets. All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. 44 @2017 Charles Schwab & Co., Inc. All rights reserved. Member SIPC (0417-XHF1) Charles Schwab Definitions The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). Consumer Confidence Index is an index that measures consumer confidence. Consumer Price Index (CPI) is an index that measures the weighted average of prices of a basket of consumer goods and services, weighted according to their importance. France Business Sentiment Index is a survey of 4,000 businesses in industry. Indicator normalized around 100. The GEPU (Global Economic Policy Uncertainty) Index is a PPP-adjusted (purchasing power adjustment) GDP-weighted average of national EPU indices for 16 countries: Australia, Brazil, Canada, China, France, Germany, India, Ireland, Italy, Japan, Russia, S. Korea, Spain, U.K. and U.S. Each national EPU index reflects the relative frequency of owncountry newspaper articles that contain a trio of terms pertaining to the economy (E), policy (P) and uncertainty (U). Global Leading Economic Index (Global Leading Indicators) is an index that is a composite average of leading indicators and is designed to signal peaks and troughs in the business cycle. The Global PMI is an economic indicator measuring business conditions in 32 of the world’s top economies accounting for over 85% of global GDP. It reflects changes in global output, employment, new business orders, backlogs and prices. Composite index includes the manufacturing sector and services sector. Gross Domestic Product (GDP) is a quarterly report released by the U.S. Bureau of Economic Analysis that is an aggregate measure of total economic production for a country, representing the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (exports are added, imports are subtracted). Ifo Business Climate Index is a leading indicator for economic activity in Germany. The National Federation of Independent Business (NFIB) Small Business Optimism Index is compiled monthly by surveying its members on the following 10 issues: outlook for expansion, outlook for business conditions six months from now, actual earnings changes over the past three months versus the prior three months, job openings, hiring plans, sales expectations, expected credit conditions, inventory satisfaction, inventory plans and capital expenditure plans. Producer Price Index (PPI) is an index that measures the weighted average of prices in the selling prices received by domestic producers for their output. The Purchasing Managers Index (PMI) is an economic indicator measuring business conditions in either manufacturing, services, or both (composite) sectors, and is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The purpose of the PMI is to provide information about current business conditions to company decision makers, analysts and purchasing managers. Trade Weighted U.S. Dollar Index is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners. Broad currency index includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia. The U.S. Dollar Index is a measure of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies which include the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. The Yield Curve is the spread or difference between long term and short term interest rates. 45 @2017 Charles Schwab & Co., Inc. All rights reserved. Member SIPC (0417-XHF1) Charles Schwab Definitions The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries*. With 2,484 constituents, the index covers approximately 85% of the global investable equity opportunity set. The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets (EM) countries*. With 832 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Canada Index is designed to measure the performance of the large and mid cap segments of the Canada market. With 93 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Canada. The MSCI France Index is designed to measure the performance of the large and mid cap segments of the French market. With 76 constituents, the index covers about 85% of the equity universe in France. The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese markets. With 314 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. With 110 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK. The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 622 constituents, the index covers approximately 85% of the free floatadjusted market capitalization in the US. The MSCI World Index captures large and mid cap representation across 23 Developed Markets (DM) countries*. With 1,634 constituents, the index covers approximately 85% of the free floatadjusted market capitalization in each country. The MSCI World Energy Index is designed to capture the large and mid cap segments across 23 Developed Markets (DM) countries. All securities in the index are classified in the Energy sector as per the Global Industry Classification Standard (GICS®). The MSCI World Financials Index is designed to capture the large and mid cap segments across 23 Developed Markets (DM) countries. All securities in the index are classified in the Financials sector as per the Global Industry Classification Standard (GICS®). The MSCI World Information Technology Index is designed to capture the large and mid cap segments across 23 Developed Markets (DM) countries. All securities in the index are classified in the Information Technology sector as per the Global Industry Classification Standard (GICS®). The S&P 500 Composite Index is a market capitalization-weighted index of 500 of the most widely-held U.S. companies in the industrial, transportation, utility, and financial sectors. The STOXX Europe 600 Banks Index is an index derived from the STOXX Europe 600, which tracks 600 publicly-traded companies representing large mid and small cap companies across 17 countries of the European region, and is designed to track the European banking sector. The Nikkei Banks Index is an index derived from the Nikkei 255, which is a price weighted index of the top-rated 225 Japanese companies listed in the First Section of the Tokyo Stock exchange, and is designed to track the Japanese banking sector. 46 @2017 Charles Schwab & Co., Inc. All rights reserved. Member SIPC (0417-XHF1) Charles Schwab