Q2 | 2016 MARKET PERSPECTIVESQ2 | 2016 MARKET PERSPECTIVES Reasonable equity valuations Source:...

Matthew F. BeaudrySenior Investment Director, Capital Markets

MARKET PERSPECTIVES

Q2 | 2016

2For dealer use only. Not for public distribution.

EO246 301451 6/16

Q2 | 2016 MARKET PERSPECTIVES

Table of Contents

• Global economic growth: Persistent but moderate

• Equities: Elongated cycles have created opportunities

• Fixed income: Opportunities exist outside of traditional benchmarks

GLOBAL ECONOMIC GROWTH: PERSISTENT BUT MODERATE


EO246 301451 6/16


Global economic growth: Persistent but moderate

Source: World Bank, 6/7/16.

Real GDP YoY

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Global United States European Union Japan Latin America

2014 2015 2016 Estimated


EO246 301451 6/16


China: Still a wild card

Source: National Bureau of Statistics of China.

Yuan relative to U.S. dollar

0

20

40

60

80

100

120

140

160

180

0.13

0.14

0.14

0.15

0.15

0.16

0.16

0.17

0.17

2010

2011

2012

2013

2014

2015

2016

0

2

4

6

8

10

12

14

16

18

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

China GDP %

CNH to USD

China corporate debt

as percentage of GDP


EO246 301451 6/16


Earnings and profit margins rolling over

Source: Bloomberg, 6/30/16.

0%

2%

4%

6%

8%

10%

12%

$0

$20

$40

$60

$80

$100

$120

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Recession Earnings Profit margins


EO246 301451 6/16


Housing market strength: Rising home sales and building permits

* Sources: Bloomberg, Fannie Mae, as of 6/30/16.

** Source: Bloomberg, as of 4/30/16.

4800

5000

5200

5400

5600

5800

6000

6200

Ma

r-1

2Ju

n-1

2S

ep

-12

De

c-1

2M

ar-

13

Ju

n-1

3S

ep

-13

De

c-1

3M

ar-

14

Jun-1

4S

ep

-14

De

c-1

4M

ar-

15

Ju

n-1

5S

ep

-15

De

c-1

5M

ar-

16

Ju

n-1

6

Thousands of homes

Ju

n-6

8

Ju

n-7

2

Ju

n-7

6

Ju

n-8

0

Ju

n-8

4

Ju

n-8

8

Ju

n-9

2

Ju

n-9

6

Ju

n-0

0

Ju

n-0

4

Ju

n-0

8

Ju

n-1

2

0

500

1000

1500

2000

2500

3000Thousands of building permits* **

Ma

y-1

6


EO246 301451 6/16


Consumer balance sheets are liquid and strong

Sources: Bloomberg, Bureau of Economic Analysis, 12/31/15.

$0

$2

$4

$6

$8

$10

$12

$14

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

Th

ou

sa

nd

s

Th

ou

sa

nd

s

U.S. households net worth U.S. personal consumption expenditures

U.S. households net worth and U.S. personal consumption expenditures

Trilli

on

s

Bill

ions


EO246 301451 6/16


-25

-20

-15

-10

-5

0

5

10

15

20

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Recession LEI YOY Index Yield curve*

Leading Economic Indicators Index and yield curve not signaling recession

* Yield curve represents yield difference between the 10-year and 2-year bend.

Sources: Conference Board, Bloomberg.

2016

EQUITIES: ELONGATED CYCLES HAVE CREATED OPPORTUNITIES


EO246 301451 6/16


Reasonable equity valuations

Source: Bloomberg, 6/30/16. Represented by the S&P 500 Index.

Past performance is not indicative of future results.

0

10

20

30

40

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Average

Price/earnings ratio

0

2

4

6

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Average

Price/book ratio

0

5

10

15

20

25

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Average

Price/cash flow

0

0.5

1

1.5

2

2.5

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Average

Price/sales ratio


EO246 301451 6/16


Greater dispersion of valuations by quintile

Sources: Bloomberg, Putnam, 6/30/16. Represented by the S&P 500 Index.

Price to earnings by quintile

25x

55x

25x

20x

15x

9x

Average 1st quintile 2nd quintile 3rd quintile 4th quintile 5th quintile


EO246 301451 6/16


Cyclicality to growth and value

Source: http://indexcalculator.russell.com/ICStep4Series.aspx, 6/30/16.

Past performance is not indicative of future results.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

20

16

YT

D

Hu

nd

red

s

Performance difference between Russell 1000 Growth Index and Russell 1000 Value Index

Growth outperforms

Value outperforms


EO246 301451 6/16


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Reaching extremes in growth vs. valueAnnualized trailing 10-year relative total return: Russell 1000 Growth–Russell 1000 Value

Source: Strategas, 6/30/16.

Growth

outperforms

Value

outperforms

2016

Extreme growth performance

Extreme value performance

Average

+2 StDev

-2 StDev


EO246 301451 6/16


0.8

1.0

1.2

1.4

1.6

1.8

1990 1995 2000 2005 2010 2015

Dividend growers priced attractively

Sources: Strategas, Putnam, as of 6/30/16. Represented by the Russell 1000 Index.

Dividend yield is cheap

Dividend growth is cheap

+1 StDev

-1 StDev

Average


EO246 301451 6/16


Dividend growers outperform over the long termAnnualized total return (%) for years 1972–2016

Source: Copyright 2016 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. Represented by the S&P 500 Index.

See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo/.

9.81%

7.33%

2.38%

-0.55%

Dividend growers No change Non-payers Dividend cutters


EO246 301451 6/16


-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

20

16

YT

D

Cyclicality to domestic and international equities

Source: Putnam, 6/30/16.

U.S. outperformance

International outperformance

Performance difference between S&P and EAFE


EO246 301451 6/16


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2000

2002

2004

2006

2008

2010

2012

2014

2016

Valuations are attractive outside the United States


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2000

2002

2004

2006

2008

2010

2012

2014

2016

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2000

2002

2004

2006

2008

2010

2012

2014

2016

Europe Japan

Price/Cash flow relative to the U.S.

Emerging Markets


EO246 301451 6/16


Optimal allocation to international stocks

Sources: Putnam, Morningstar. S&P 500 Index used to measure U.S. stocks; MSCI EAFE used to measure foreign stocks. Data from 1970 to 2016.

Ab

so

lute

vo

latilit

y (

%)

13

14

15

16

17

18

% U.S stocks 100 90 80 70 60 50 40 30 20 10 0

% Foreign 0 10 20 30 40 50 60 70 80 90 100


EO246 301451 6/16


International allocations for sample U.S. retirement plans

Source: Pensions & Investments magazine, 2015.

$1.9B

$6.3B

$10.9B

$2.7B

$10.7B

$28.9B

37%

30%

30%

30%

30%

29%

Alaska Electrical Pension Fund

District of Columbia

Merck

Air Products and Chemicals Inc.

Louisiana State Employees Retirement System

Connecticut Retirement Plans and Trust Fund


EO246 301451 6/16


Expected equity market returns

Sources: Ned Davis Research, Bloomberg. Represented by the S&P 500 Index.

Disclosure: Copyright 2016 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved.

See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo/.

2.27

14.34

2.01

2.18

0.37

7.75

?

Past 5 years Going forward?

PE expansion

Current dividend yield

Consensus earnings growth

Other

PE expansion

Earnings growth

Dividend yield

12.4

?


EO246 301451 6/16


Volatility has increased: Where do we go from here?

Sources: Bloomberg, Chicago Board of Exchange Volatility Index, 6/30/16.

Last price

0

10

20

30

40

50

60

70

80

90

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016


EO246 301451 6/16


The bright side of investor pessimism

Notes: AAII Sentiment Survey may be positive for stocks.

Bull markets are born in pessimism, grow in skepticism.

10%

20%

30%

40%

50%

60%

70%

80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Bullish sentiment (Right axis) S&P 500 fwd. 52-week return (Left axis) Average

38.5%

FIXED INCOME: OPPORTUNITIES OUTSIDE OF THE TRADITIONAL BENCHMARKS


EO246 301451 6/16


FOMC dual mandates achieved: Moderate inflation and “full” employment

Source: Bloomberg, 3/31/16 and 6/30/16.

Core inflation YOY

0%

1%

2%

3%

4%

5%

6%

1985

1988

1990

1993

1995

1998

2000

2003

2006

2008

2011

2013

Hu

nd

red

s

U.S. Core PCE U.S. Core CPI

U.S. unemployment rate

0%

2%

4%

6%

8%

10%

12%

1985

1988

1990

1993

1995

1998

2000

2003

2006

2008

2011

2013

Recession U.S. unemployment rate

2016

2016


EO246 301451 6/16


Interest-rate risk is unprecedented given the low level of rates

Sources: Barclays, Putnam, as of 6/30/16.

This chart uses yield to worst as the representation of yield, and modified adjusted duration as the representation of duration.

Barclays Global Aggregate Index: historical yield vs. duration

0

2

4

6

8

10

0

2

4

6

8

10

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Du

ratio

n (y

ea

rs)

Yie

ld (

%)

Yield Duration


EO246 301451 6/16


Price sensitivity of various bond maturities

Source: Barclays, as of 6/30/16.

Percentage change in bond price

0.0% 0.90% 1.90% 2.83%4.77%

9.20%

22.21%

0.0% -0.90% -1.90%-2.83% -4.77%

-9.20%

-22.21%

Money Market 1 year 2 years 3 years 5 years 10 years 30 years

When rates fall 100 bps

When rates rise 100 bps


EO246 301451 6/16


We believe attractive opportunities exist outside of the indexCurrent spreads relative to historical period

Sources: Barclays, Bloomberg, Putnam, as of 6/30/16.

Data is provided for informational use only. Past performance is no guarantee of future results. All spreads are in basis points and measure option-adjusted yield spread relative to

comparable maturity U.S. Treasuries with the exception of non-agency RMBS and mezzanine CMBS, which are loss-adjusted spreads to swaps calculated using Putnam’s

projected assumptions on defaults and severities, and agency IO, which is calculated using assumptions derived from Putnam’s proprietary prepayment model. Agencies are

represented by Barclays U.S. Agency Index. Agency MBS are represented by Barclays U.S. Mortgage Backed Securities Index. Investment-grade corporates are represented by

Barclays U.S. Corporate Index. High yield is represented by JPMorgan Developed High Yield Index. CMBS is represented by both agency and non-agency CMBS that are eligible

for inclusion in the Barclays U.S. Aggregate Bond Index; mezzanine CMBS is represented by the same index using the AA, A, and BBB components. Average OAS for Mezzanine

CMBS is for the 2000–2007 time period. Emerging-market debt is represented by the Barclays EM Hard Currency Aggregate Index. Non-agency RMBS is estimated using average

market level of a sample of below-investment-grade securities backed by various types of non-agency mortgage collateral (excluding prime securities). Mezzanine CMBS is

estimated from an average spread among baskets of Putnam-monitored new issue and seasoned mezzanine securities, as well as a synthetic (CMBX) index. Agency IO is

estimated from a basket of Putnam-monitored interest-only (IO) and inverse IO securities. Option-adjusted spread (OAS) measures the yield over duration equivalent Treasuries for

securities with different embedded options.

In the index

We believe opportunities in the heavily traded

benchmark sectors are scarce

Outside the index

Non-benchmark strategies may be compelling,

but they require specialized research


EO246 301451 6/16


High-yield spreads and default cycle

Spreads have come in from all-time highs; defaults continue to remain low

* Current default rate includes distressed exchanges.

Sources: JPMorgan, High Yield Market Monitor, 6/30/16; Putnam Investments.

Current spread:

664 bps

20-yr median spread:

561 bps

Current default rate*:

4.9%

Average default rate:

3.6%

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%Default rate* Spread to worst 20-year median spread

Global high yield spreads vs. default rates 1/31/87–5/31/16

“Go-Go” years

Bull market

S&L debacle Subprime debacle

Bull market

Rolling calamities

Spre

adsD

efa

ult


EO246 301451 6/16


Muni supply is declining amid strong demand

Source: JP Morgan, as of 6/30/16.

* YTD. Source: Bond Buyer, as of 6/30/16.

$ M

illio

ns

New money supply

All muni fund flows

-5-4-3-2-101234

Fe

b-1

0

Apr-

10

Ju

n-1

0

Aug

-10

Oct-

10

Dec-1

0

Fe

b-1

1

Apr-

11

Ju

n-1

1

Aug

-11

Oct-

11

Dec-1

1

Fe

b-1

2

Apr-

12

Ju

n-1

2

Aug

-12

Oct-

12

Dec-1

2

Fe

b-1

3

Apr-

13

Ju

n-1

3

Aug

-13

Oct-

13

Dec-1

3

Fe

b-1

4

Apr-

14

Ju

n-1

4

Aug

-14

Oct-

14

Dec-1

4

Fe

b-1

5

Apr-

15

Ju

n-1

5

Aug

-15

Oct-

15

Dec-1

5

Fe

b-1

6

Apr-

16

Ju

n-1

6

0

50

100

150

200

250

300

Mill

ion

s (

$)


EO246 301451 6/16


Summary

• Global and domestic recession are unlikely for 2016

• Elongated cycles have created opportunities in equities

• Fixed Income: Opportunities outside of traditional benchmarks

APPENDIX


EO246 301451 6/16


Job vs. wage growth


U.S. employees on nonfarm payrolls, net change MoM

-1000

-800

-600

-400

-200

0

200

400

600

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1


EO246 301451 6/16


Wage growth follows job growth


U.S. unemployment rate (%)4%

5%

6%

7%

8%

9%

10%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Recession Wage growth Unemployment


EO246 301451 6/16


Dividends matter: Especially in low-return environments

Source: Strategas, 12/31/15 and 2/29/16.

Dividend contribution to total return

0%

20%

40%

60%

80%

100%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

% of S&P 500 stocks with dividend

yields greater than the 10-year U.S.

Treasury yield

0%

10%

20%

30%

40%

50%

60%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2015


EO246 301451 6/16


High correlation: Earnings and equity markets


0

100

200

300

400

500

600

700

1989

1992

1995

1998

2001

2004

2007

2010

2013

Last price Trailing 12M earnings per share

S&P 500

2016


EO246 301451 6/16


-5

5

15

25

35

45

55

1675

1725

1775

1825

1875

1925

1975

2025

2075

2125

12

/1/1

5

12

/22

/15

1/1

2/1

6

2/2

/16

2/2

3/1

6

3/1

5/1

6

4/5

/16

4/2

6/1

6

5/1

7/1

6

6/7

/16

6/2

8/1

6

S&P 500 WTI oil prices

Oil’s correlation with the equity market

Short term

0

20

40

60

80

100

120

140

160

0

500

1000

1500

2000

2500

6/1

6/0

6

6/1

6/0

7

6/1

6/0

8

6/1

6/0

9

6/1

6/1

0

6/1

6/1

1

6/1

6/1

2

6/1

6/1

3

6/1

6/1

4

6/1

6/1

5

6/1

6/1

6

S&P 500 WTI oil prices

Long term

6/3

0/1

6


EO246 301451 6/16


Oil prices impact oil rig counts2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

MoM % change in rig count MoM % change in oil price


EO246 301451 6/16


GDP growth less than 3% for a decade:Slower growth is still growth

Source: U.S. Bureau of Economic Analysis.

-4

-2

0

2

4

6

8

1980 1985 1990 1995 2000 2005 2010 2015

Percent change from preceding period in real gross domestic product

< 3% growth


EO246 301451 6/16


CapEx still weak


-40%

-30%

-20%

-10%

0%

10%

20%

30%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Hu

nd

red

s

Capital goods new orders: Nondefense ex aircraft YoY


EO246 301451 6/16


ISM non-manufacturing

1997

2001

2005

2009

2013

30%

40%

50%

60%

70%

Indications of strength or weakness?

The Non-Manufacturing Index is a composite index of four indicators with equal weights: business activity, new orders, employment, and supplier deliveries. An

index reading above 50% indicates an expansion and below 50% indicates a decline in the non-manufacturing economy. For Supplier Deliveries Index, above

50% indicates slower deliveries and below 50% indicates faster deliveries.

Sources: Bloomberg, Institute for Supply Management, 6/30/16.

ISM manufacturing

2016

2016

30%

40%

50%

60%

70%

1997

2001

2005

2009

2013


EO246 301451 6/16


Brexit adds to uncertainty

Source: Bloomberg, as of 6/30/16.

0

0.5

1

1.5

2

2.5

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

British pound relative to U.S. dollar


EO246 301451 6/16


70%

80%

90%

100%

110%

120%

AAA Muni/U.S. Treasury ratiosMunis relatively rich vs. U.S. Treasuries, especially in the long end

Sources: MMD, Bloomberg, and Putnam, as of 6/30/16.

10-year AAA Muni/U.S. Treasury ratio

80%

90%

100%

110%

120%

130%30-year AAA Muni/U.S. Treasury ratio


EO246 301451 6/16


-10

-5

0

5

10

15

20

25

Barclays Municipal Bond Index Barclays Municipal Bond Index rolling 3-year return

Municipal bonds have provided a steady stream of returns over time

• Municipal bonds have provided durable returns over time

– In 28 of the past 33 calendar years, municipal bonds have provided positive total returns

• The tax equivalent yield of municipal bonds is attractive relative to other fixed income

asset classes

Calendar-year returns (%)


EO246 301451 6/16


Morningstar HY Muni category average vs. selectfixed income indexes

All data as of 6/30/16.

* Distribution yield or yield to worst for indexes. Morningstar 12-month yield.

** Tax-adjusted yield (Federal 39.6% + Medicare 3.8%).

*** Morningstar HY Muni category average 12-month yield.

† Option-adjusted duration (years) or modified duration.

†† Adjusts taxable equivalent yield to match duration of Morningstar HY Muni category average.

Sources: Barclays, Putnam, JPM.

Category/index Yield (%)*

Tax-adjusted

yield (%)**

Average

rating

Duration

(years)†

Duration-

adjusted T/E

yield (%)††

Morningstar HY Muni category

average 12-month yield***3.92 6.93 BB 6.51 6.93

10-year U.S. Treasury 1.49 1.49 AAA 9.20 1.05

JPM HY Index (taxable) 7.11 7.11 BB- 4.75 9.74

Barclays Corp Index (taxable) 2.88 2.88 A3 7.49 2.50


EO246 301451 6/16


50

100

150

200

Munis vs. U.S. Treasuries

Sources: MMD, Bloomberg, Putnam, as of 6/30/16.

30-year AAA Municipal/30-year UST ratios(%)

Muni/Treasury ratios Averages Standard deviation

6/30/16

Since

1994

Since

2004

Since

2009

Since

1994

Since

2004

Since

2009

5 years 82% 82% 88% 86% 14% 17% 16%

10 years 87 88 93 95 11 12 10

30 years 88 96 102 106 13 14 11


EO246 301451 6/16


0%

5%

10%

15%

20%

25%

30%Russell 1000 Value Russell 1000 Growth

Value would benefit from financials and energy strength


Allocations will vary over time.

Sector weightings


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88

90

92

94

96

98

100

102

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Ju

n-1

6

0

20

40

60

80

100

120

140

160

180

1967

1974

1981

1988

1995

2002

2009

2016

U.S. dollar cycles


$ $Short termLong term


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0

1

2

3

4

5

6

7

8

2009 2010 2011 2012 2013 2014 2015

Credit spreads tighten


Barclays U.S. Corporate High Yield Average less 10-year Treasury


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An unloved bull marketNet flows into mutual funds + ETFs ($BN)

Sources: Strategas, ICI, 12/31/15.

Equity

Year Domestic International Bond Money market

2009 3.3 65.3 417.2 (539.2)

2010 (34.4) 98.2 262.0 (524.7)

2011 (86.0) 28.3 163.7 (124.0)

2012 (78.2) 58.3 358.5 (0.3)

2013 122.2 204.2 (59.0) 15.2

2014 81.4 132.0 94.5 6.3

2015 (105.5) 203.5 29.2 21.4

2016 YTD (42.4) 4.8 87.6 (47.1)

Total (139.8) 798.7 1,354.0 (1,192.8)


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The views and opinions expressed are those of Matthew F. Beaudry, Senior Investment Director, Putnam Investments, June 2016, are subject

to change with market conditions and are not meant as investment advice.

All information is historical and not indicative of future results. Indexes are unmanaged and used as a broad measure of market performance.

It is not possible to invest directly in an index.

Putnam Retail Management

putnam.com

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