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X Asset Strategy: Long growth, short bonds, long USD but the hunt for yield lives on Clearly markets are different and will continue to be so under President elect Trump BUT not everything will change. The disinflationary forces triggered by the GFC have not gone away but the decision to focus on fiscal stimulus, not just in the US but also Japan and to a lesser extent the UK, is a welcome shift taking some of the burden away from monetary policy. It means rates should be higher for any given amount of growth. But higher does not mean a return to pre GFC levels of rates, which we need to bear in mind when setting our strategy. Indeed, our strategists 10Y forecasts are US 2.65%, Euro 0.65% and Japan 0% for end 2017. Similarly on trade, for all the rhetoric of the President-elect again we do not think he wants to trigger trade wars that would damage US growth. That means we should not necessarily drop our pro-EM bias. So we think of it as an evolution rather than a revolution in the way our strategy is structured. We wanted to be exposed to growth, we tweak that by adding a NKY long to replace our US energy long. We continue to have yield in the portfolio where we can find it, which is through a mixture of equities and credit (AT1’s, European yield basket, Xover v Main and US long date industrial spreads). Even more than before we want to be protected against a stronger USD and higher rates, hence the addition of the 10Y real yield trade, and trade tensions which we have tried to cover through our CNH put. Nov 8" accelerates some trends, starts other Before the US election we said that the tectonic plates were starting to shift, with bond yields having troughed and starting to head higher. We thought there were signs too that global growth might be shifting up a gear. So we wanted to have defensive positions in bond markets, be long the USD and be long growth where we could. The election of Donald Trump has arguably turned this gradual shifting of plates into a full blown earthquake for global financial markets. The key questions for investors as we look ahead to 2017 are how big an earthquake and how much the moves that have happened since November 8" are likely to be extended into next year vs how much we have frontloaded them already in 2016. Chart 1: USD/JPY has surged post-Trump Chart 2: As have bond yields 125 2.9 120 2.3 —==JPY/USD —— 10y UST yield 115 2.1 110 1.9 105 17 100 1.5 95 1.3 i=) iw WwW oO co ite} ite} ite} ite} ite} ie) co ite} Ww Ww Ww ico} io} Ko) Ko) Ko} Ko) io} Ko} Ko) io} SSR ERE EERE ES SSR eRe ER EES Source: Bloomberg Source: Bloomberg 4 Global Cross Asset Strategy - Year Ahead | 30 November 2016 Bankof America Merrill Lynch HOUSE_OVERSIGHT_014435