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

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

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.

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.

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.

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.

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?

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.

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.

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 2011 deficit is likely to eclipse 2009’s record $1.415 trillion Source: Bloomberg.

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.

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.

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.

Questions?

Appendix

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.

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) 1959 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.

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.

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-1579-0111 3415-CM05-1/11 Not FDIC Insured • No Bank Guarantee • May Lose Value

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