1. Russ Koesterich iShares® Chief Investment Strategist
2011 Investment Outlook
Russ Koesterich
iShares® Chief Investment Strategist
You’ve made it through the turmoil of the last couple of years, and you probably feel you’ve got some pretty good strategies in place for watching and playing the market. But do you really have a deep understanding of the fundamental forces driving the economy?
Without that knowledge and insight, chances are you’ll miss the signposts leading into the next major market shift. At BlackRock, our focus is on these market fundamentals, and specifically on how inflation affects the market and investors. We’d like to share with you some of our recent observations and how we see them playing out in the short- to mid-term.
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

2. Year ahead: 2011 Scenarios Economic decoupling Double dip Inflation
Return to Goldilocks

3. Base case for 2011: Continued economic rebound
ISM Survey Pricing & New Orders
ISM Non-Manufacturing Survey 80 65 70 60 60 55 50
ISM Index 50
ISM Non-Manufacturing 45 40 40 30 35 20 30
1/00
4/01
7/02
10/03
1/05
4/06
7/07
10/08
1/10
1/00
4/01
7/02
10/03
1/05
4/06
7/07
10/08
1/10
ISM New Orders
Source: Bloomberg.

4. Chinese Manufacturing Index Ifo Pan Germany Business Climate Index
Base case continued: Other developed markets also rebound and emerging markets engineer “soft landing”
Chinese Manufacturing Index
Ifo Pan Germany Business Climate Index 70
110 65
105 60
100 55
New Orders PMI SA 50
Ifo Index 95 45 90 40 85 35 30 80
1/05
9/05
5/06
1/07
9/07
5/08
1/09
9/09
5/10
1/05
7/05
1/06
7/06
1/07
7/07
1/08
7/08
1/09
7/09
1/10
7/10
Source: Bloomberg.

5. More good news: Low rates/inflation allow for multiple expansion
Rates and Equity Multiples
10-Year Yield
Average P/E
Median P/E
P/E > Average
Observations
Below Average (< 6%)
20.27
18.98
86%
152
Average (6% to 9%)
16.32
16.28
47%
240
Above Average (> 9%)
10.28
10.01 2% 92
Inflation and Equity Multiples
Average P/E
CPI YoY Less than 1%
15.62
CPI YoY 1% to 3%
19.24
CPI YoY 3% to 5%
16.95
CPI YoY 5% to 7%
13.18
CPI YoY 7% to 9%
10.34
CPI YoY Above 9%
8.77
Source: Bloomberg, as of 11/30/10.

6. Not all good—continued consumer deleveraging a headwind
Household vs. Federal Debt Growth 40 30 20
Debt Growth (%) 10
-10
-20
3/52
3/61
3/70
3/79
3/88
3/97
3/06
Growth Household Debt
Growth Federal Debt
Source: Bloomberg.

7. What could go wrong? So this is the place we find ourselves.
Inflation/core consumer prices are stable; the Fed acted in time and although there’s some volatility the rate is likely to remain on an even keel
But the national debt is high and increasing
And historical trends (i.e., the Presidency) point to a potentially inflationary period on the horizon
Why does it matter, and maybe more to the point, what investments make sense for you and your clients in this fiscal environment? How does inflation affect actual stock prices, here and now?

8. Inflation is the major near-term risk in emerging markets
Global Inflation Sample 2000 to Present 20 15 10
CPI YoY (%) 5 -5
1/00
2/01
3/02
4/03
5/04
6/05
7/06
8/07
9/08
10/09
11/10 US
Japan
China
Brazil
Europe
Source: Bloomberg.

9. US consumer increasingly dependent on transfer payments
Transfer Payments as a % of Disposable Income
23%
21%
19%
17%
15%
Transfer Payments/Disposable Income
13%
11% 9% 7% 5%
1/59
1/66
1/73
1/80
1/87
1/94
1/01
1/08
US consumers now get more than $0.20 in every dollar of disposable income from the Federal government
Source: Bloomberg.

10. Deficits are not going away
US Treasury Federal Budget Yearly Deficit or Surplus Fiscal 1962 to Present
400
200
-200
-400
Annual Deficit or Surplus ($ Billions)
-600
-800
-1,000
-1,200
-1,400
-1,600
1962
1968
1974
1980
1986
1992
1998
2004
2010
With the Bush tax cut extension and additional stimulus, the fiscal deficit is likely to eclipse 2009’s record $1.415 trillion
Source: Bloomberg.

11. Even in the absence of inflation, deficits will push rates higher
US Deficits and Real Interest Rates 1962 to Present 10 8 6 4 2
Real 10-Year Interest Rates (%)
-12
-10 -8 -6 -4 -2 2 4 -2 -4 -6
Deficit as % GDP
Historically, for every 1% of GDP rise in the deficit, real interest rates rise by 25–50 bps
Source: Bloomberg.

12. Look ahead: 2011 Scenarios Investment Strategies
Economic decoupling: Probability 55%
Double dip: Probability 25%
Inflation: Probability 10%
Return to Goldilocks: Probability 10%
Investment Strategies
Overweight equities versus bonds
Within equities, favor exporters and energy while underweighting US consumer
Within bonds, favor corporates over treasuries
This information should not be construed as research, investment advice or a recommendation regarding any security in particular. This information is strictly for illustrative and educational purposes and is subject to change.

13. Long term: Who is the biggest sovereign risk?
Government Debt/Revenue 2009 50
100
150
200
250
300
350
400
Spain
France
Germany
United Kingdom
Portugal
Italy
Ireland
Greece
US (Federal Government)
Debt/Revenue (%)
Sources: Eurostat, CBO, Morgan Stanley Research.

14. Questions?

15. Appendix

16. Government debt: Who is the biggest risk?
Advanced Economies Gross Financing Needs: 2010 (in % of GDP, unless otherwise specified)
Maturing
Deficit
Gross
Gross Debt
Average Maturity
Debt
Financing
2009
(years)
Needs
Australia
2.0
-5.0
7.0
15.5
4.8
Belgium
20.8
-5.1
25.9
97.3
5.4
Canada
15.9
-5.3
21.2
82.5
5.6
France
16.9
-8.2
25.1
77.4
6.5
Germany
10.2
-5.7
15.9
72.5
6.0
Greece
13.4
-8.1
21.5
115.1
7.4
Ireland
7.7
-12.2
19.9
64.5
6.7
Italy
21.2
-5.2
26.4
115.8
6.7
Japan
54.2
-9.8
64.0
217.7
5.2
Portugal
13.0
-8.8
21.8
77.1
6.2
Spain
10.3
-10.4
20.7
55.2
6.7
Sweden
6.8
-3.3
10.1
40.9
6.0
United Kingdom
8.6
-11.4 20
68.2
12.8
United States
21.2
-11.0
32.2
83.2
4.4
US has shortest maturity, second highest maturing debt and second highest gross financing needs
Sources: April 2010 IMF World Economic Outlook; Bloomberg and IMF staff estimates for maturing debt and average maturities.

17. Spot Gold vs. US Money Supply (M2) 1959 to Present
Commodity run should continue, absent a “hard landing” in emerging markets
Spot Gold vs. US Money Supply (M2) to Present
4.0
3.5
3.0
2.5
2.0
Change Gold/Change M2
1.5
1.0
0.5
0.0
3/59
3/65
3/71
3/77
3/83
3/89
3/95
3/01
3/07
Gold does not look as frothy when compared against the growth in the money supply
Source: Bloomberg.

18. Surge in government spending and record deficits are supporting gold—this is likely to continue
Federal Spending vs. Gold/M2 Ratio
4.0
3.5
3.0
2.5
Change Gold/Change M2
2.0
1.5
1.0
0.5
0.0
-20%
-10% 0%
10%
20%
30%
40%
Annual Change Federal Spending
Based on changes in money supply and federal spending, increase in gold prices looks more reasonable
Source: Bloomberg.

19. Not FDIC Insured • No Bank Guarantee • May Lose Value
The information included in this material has been taken from trade and other sources considered reliable. No representation is made that this information is complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date and are subject to change. This information should not be construed as research, investment advice or a recommendation regarding any security in particular. No part of this material may be reproduced in any manner without the prior written permission of BlackRock, Inc.
Russ Koesterich is an affiliate of BlackRock Fund Distribution Company and BlackRock Execution Services, which are subsidiaries of BlackRock, Inc.
©2011 BlackRock Institutional Trust Company, N.A. All rights reserved. iShares® is a registered trademark of BlackRock Institutional Trust Company, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. iSg CM05-1/11
Not FDIC Insured • No Bank Guarantee • May Lose Value

20. Thank you