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Exhibit 76: Emerging Market Currency Valuation Despite the recent rally, emerging market currencies remain undervalued against the US dollar. Average Deviation from Fair Value vs. US Dollar (%) 20 4 EM Currencies Overvalued on Average 2b 2008 2008 2010 2011 2012 2013, 2014 =. 2015 2016 Data through November 30, 2016. Note: Average of Goldman Sachs Dynamic Equilibrium Exchange Rate, 5-year moving average, and Fundamental Equilibrium Exchange Rate misalignments of currencies in the JP Morgan Government Bond Index—Emerging Markets Global Diversified. Source: Investment Strategy Group, Bloomberg, Datastream, Goldman Sachs Global Investment Research, Peterson Institute for International Economics. Exhibit 77: Estimated Duration of US Bond Market The bond market's sensitivity to rising rates is the highest on record. Duration (Years) 7s 9 4 1989 1994 1999 2004 2009 2014 Data through December 31, 2016. Note: Based on the Barclays US Aggregate Bond Index. Source: Investment Strategy Group, Bloomberg. the same time, the recovery in commodity prices, recent firming in global growth and potential for expansionary fiscal policy are shifting the focus from deflation to reflation. This shift in perspective arrives at a time when the market’s vulnerability to rising rates is the highest on record (see Exhibit 77). Losses from these long-duration positions in response to higher rates could beget more bond sales, creating a vicious cycle. That yields are still extremely low by historical standards does little to assuage these fears. Consider that 10-year government bond yields in all G-7 countries have been higher at least 90% of the time since 1958. Given all the above, For now, we remain tactically positioned to benefit from further renminbi weakness given our long- standing concerns about China’s economic vulnerabilities and the likelihood of looser policy, policy mistakes and capital outflows. we believe the ascent of interest rates remains in its infancy. Still, it is important to differentiate between a normalization of interest rates and a disorderly backup. While we expect higher interest rates over the coming years, secular headwinds—like aging demographics and slower productivity growth— suggest the terminal point of that increase will be lower than the historical average. This fact is not lost on the Federal Reserve, which has reduced its estimate of the long-run equilibrium nominal rate—the rate consistent with full employment and stable inflation in the medium term—from 4.25% to 3% over recent years. With a lower interest rate target to reach, the Federal Reserve is likely to proceed slowly, particularly given uncertainty around its estimate of the economy’s equilibrium rate and lingering international risks. Even if the Federal Reserve were to raise rates three times in 2017, that pace would still be less than half of the historical median tightening pace.** Thus far in this cycle, the Federal Reserve has raised rates only once per year. Against this backdrop, we recommend investors favor credit over duration risk Outlook | Investment Strategy Group 65 HOUSE_OVERSIGHT_014598