Can Investors Continue to Profit from Corporate Margins? · Sources: Thomson Reuters Datastream and...

July 2011

Can Investors Continue to Profit from Corporate Margins?

A Publication of the BlackRock Investment Institute

Executive Summary

Corporate profit margins are at or near record levels in most markets, driven by several factors over the past three decades. Structural factors include the lower cost of debt, increased technological innovation, and the rising share of world output from emerging markets; cyclical factors include the recent series of consumption bubbles and drop in capital expenditures.

One risk to the sustainability of margin expansion that has recently come into focus is input prices, commodities in particular. Most discussion of the risk of higher input prices has been grounded in a single measurement in the US: the spread between the consumer price index (or CPI, which represents total sales of goods) and the producer price index (or PPI, which represents total cost of producing these goods). A closer look, however, reveals that margins are more closely correlated to economic activity than the CPI/PPI spread.

From an economic perspective, lower consumer, corporate, and government spending is the key risk to maintaining margin expansion, as it continues to dampen employment levels and hamper the global economic recovery.

How do margins relate to equity valuations? Bullish and bearish investors may disagree on how to measure earnings and, hence, whether margin expansion is likely to continue. Regardless of the perspective, historically, as long as margins do not drop substantially, current equity valuations seem to be in-line.

Corporate profit margins may be an important driver of equity performance. One interesting finding is how high-gross-margin firms have outperformed throughout the recession. Many of these firms target higher-income individuals who have tended to weather the recession better than lower-income individuals.

For fixed income investors, fluctuations in corporate margins will matter more for companies with higher fixed costs and those in the high-yield space. Margins may also be useful in differentiating firms dealing with cyclical challenges from those with more long-term troubles.

Table of Contents

Global Margins Hit Peak Levels ............. 3

Secular Drivers Boost Productivity ........ 3

Cyclical Drivers Keep Liquidity Afloat .... 4

Passing Phase or Long-Term Trend? ...... 4

The Impact of Input Costs ..................... 5

Double-Dip Recession Is the Key Risk ... 6

Corporate Spending Is a Catch-22 ........ 7

Fiscal Austerity Weighs on Corporate Profits .............................. 8

Implications for Investors ...................... 9

Uncovering Alpha Opportunities .......... 10

Continued Expansion or Shift to Retrenchment? .........................11

The opinions expressed are those of the BlackRock Investment Institute as of July 2011, and may change as subsequent conditions vary.

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Global Margins Hit Peak Levels

Corporate profit margins have been trending upward (on average) since the 1970s, and

are now at or close to record levels in most markets around the world (Figure 1). After-

tax margins may be at risk of mean reverting in the longer term — at least in theory —

as an above-average profit share often stimulates investment which, in turn, can dilute

these exceptional profit levels.

Then again, profits could expand for a considerable period of time, due to an influx of labor

or a positive productivity shock; one recent example here is the transfer of production

from developed economies to the emerging markets. The question now is whether margins

can be sustained or will rise further, and the consequent outlook for profits growth,

considering that margins are now above trend and that top-line growth is generally anemic.

Three factors in particular have

had enormous impacts on the global

economy, spurring productivity and

profit margin growth: lower cost of

debt, technological innovation, and the

rising share of world output driven

by emerging market economies.

Figure 1: Profit Margins of Global Equities

10

6

8

4

2

0

12/80 12/85 12/90 12/95 12/00 12/05 12/10

NET

PRO

FIT

MA

RGIN

(%)

Trend LineDatastream Total Market World Equity Index — Net Profit Margin

Sources: Thomson Reuters Datastream and Worldscope, as of 5/31/11.

Several key factors have driven margins in recent years, some of which are secular and

others cyclical. Secular effects are longer-term, macroeconomic factors. Cyclical effects

are shorter-term factors that emulate swings in the economic cycle.

Secular Drivers Boost Productivity

Three factors in particular have had enormous impacts on the global economy, spurring

productivity and profit margin growth: lower cost of debt, technological innovation, and

the rising share of world output driven by emerging market economies.

First, the cost of debt has dropped, on average, for firms around the world over the last

30 years. In 1975, a company rated AAA in the US would have paid roughly 9% for long-

term debt; today, it costs less than 5%. This drop in the cost of debt has been even more

significant for second- and third-tier companies. Long-dated Baa paper was yielding

nearly 11% in 1975; today it is less than 6%.1 Because the cost of capital is a key input for

most businesses’ cost structure (together with labor cost), this decrease has significantly

lowered total costs, which has helped boost margins.

1 Source: Bloomberg.


As developed market consumer

spending has been crimped by

declines in employment and

incomes, capital expenditures

are also down sharply around the

world and particularly in the US.

Second, despite being maligned due to the equity bubble bursting in 2000, the dot-com

era saw tremendous technological innovations that contributed to the goldilocks economy

of the 1990s. A high employment level, high growth rate, and low inflation provided the

ideal environment for information technology companies and dispelled the myth that

wage growth hinders profit growth. Productivity increases resulting from the New

Economy fanned out around the world.

Finally, shortly after the dot-com era came to a screeching halt, emerging economies’

share of world output began to accelerate. This upturn stemmed partly from China’s

accession to the World Trade Organization in 2001 and partly from the improved

competitiveness supplied by a wave of currency devaluations. As an example, China’s

rapid shift to a market economy introduced an enormous pool of low-cost labor to

manufacturers and quickly turned millions of workers into spenders.2

Cyclical Drivers Keep Liquidity Afloat

Cyclical drivers tend to be more short term in nature and also linked to national or global

economic cycles.

Key cyclical factors that have contributed to profit margins during the past three decades

are the recent series of consumption bubbles and current dearth of capital expenditures.

In turn, this has boosted corporate cashflows and savings during a period when consumers

and governments have been saving less.

Credit-led consumption bubbles around the world allowed spending to outpace income

and wages. This increase in demand (credit-led) relative to costs (wages-led) was a major

advantage for corporate profit margins. Demand was temporarily inflated while net savings

declined, illustrated by rising trade deficits in much of the developed markets. Savings-

free credit used to mean that consumer spending was growing faster than incomes. More

recently, it has meant that government spending has grown faster than taxes, which

has represented a net transfer from public dissaving to corporate savings and margins.

Regardless of the source, the effect on overall profit margins is the same — corporate

revenues have risen faster than costs, boosting profits higher.

As developed market consumer spending has been crimped by declines in employment

and incomes, capital expenditures are also down sharply around the world and particularly

in the US. This is due, in part, to uncertainty about the demand outlook and the regulatory

environment. Cost-cutting has also been an increasingly important focus for corporations

for the past few years. Coming out of the Great Recession, good corporate citizenship

has taken the form of underspending. A kind of pack behavior can be seen among CFOs

who seem bent on outdoing each other on cost-cutting, with little regard for longer-term

consequences. Similar to the catering theory of dividends, management has been rewarded

for its own brand of fiscal austerity.3 We believe this broad pattern of underspending is

likely to change only when it begins to result in missed opportunities, or at least the

perception of such.

Passing Phase or Long-Term Trend?

Are margins expected to revert to the mean in the near- to mid-term? Probably not, at

least within the next three years or so, unless there is a collapse in demand relative to

2 For more on China’s impact on the global economy, see BlackRock Investment Institute, “Can China’s Savers Save the World?” BlackRock Inc., New York (July 2011).

3 For more on the catering theory, see Malcolm Baker and Jeffrey Wurgler, “A Catering Theory of Dividends,” The Journal of Finance 59, no. 3 (June 2004).


wages. Rather than focusing on the sustainability of margins, the more incisive question

may be whether economic expansion and the current level of government transfer payments

are sustainable. Consider the key risk factors.

One of the most commonly cited threats to margins is that of rising input prices, commodities

prices in particular.

The Impact of Input Costs

A variety of factors have bid up commodities prices in recent times, including excess

global liquidity, genuine demand growth, and unexpected market shocks from natural

disasters and political events. The argument for lower margins is that, in an environment

of weak demand, profit margins are more likely to fall, as firms are unable to pass through

higher costs to end consumers. Intuitively, this sounds logical, and it may hold true in

some cases. For example, cost of equipment will likely be the larger increase to input

costs for some natural resource companies in the near- to mid-term, as output levels

increase along with demand for new equipment.

BlackRock’s research, however, suggests that non-labor input costs are generally not the

determining factor for corporate profit margin moves. A commonly used measure for

examining this issue looks at the spread between the consumer price index (CPI) and the

producer price index (PPI). Because these indexes are often used as proxies in the US for the

aggregate income from sales and the aggregate cost of production, respectively, many market

commentators conclude that changes in the spread should correlate closely with changes

in aggregate profit margins. Overall, we believe the data does not support this thesis.4

There are also challenges in using the CPI/PPI relationship as a tool for forecasting margins.

For instance, in the US, CPI outpaced PPI between 1982 and 2001, and nominal profit

gains reflected that growing spread. But the spread has broadly been kept in check since

2001, while nominal corporate profit levels have instead been quite volatile (Figure 2).

Here, the disinflationary nature of China’s entry into the global economy helped to constrain

price levels. When we look at how profit margins relate to changes in the CPI/PPI spread,

we find that margins have fluctuated widely since World War II, with movements that

appear unrelated to the growth in CPI and PPI.

BlackRock’s research suggests that

non-labor input costs are generally

not the determining factor for

corporate profit margin moves.

4 Sami Mesrour, “Rising Commodity Prices May Hamper the Recovery, but Not the Way You’re Thinking,” By The Numbers, BlackRock Inc., New York (June 2011).

Figure 2: CPI Minus PPI, Compared with Profit Margins and Equity Values

50

30

40

20

10

0

-10

’48 ’52 ’60’56 ’64 ’68 ’00’96 ’04’72 ’80’76 ’84 ’88 ’92 ’10

PERC

ENT

1,800

1,200

1,500

900

600

300

0

S&P

500

IND

EX A

ND

PRO

FIT

MAR

GIN

S (U

S$ B

ILLI

ON

S)

S&P 500 Index (right side)Nominal Profits for US Corporations (right side)CPI minus PPI (left side)

Sources: Bloomberg, Bureau of Economic Analysis, and BlackRock, as of 12/31/10.


Also, as economies develop and move to more value-added manufacturing, the raw

material input (as a percentage of total costs) should naturally decline, also lessening

the impact of the CPI/PPI spread.

Related to this obvious shortcoming with the CPI/PPI comparison is the fact that PPI

primarily focuses on the cost of materials and does a poor job capturing labor cost,

which is by far the largest component. Instead, the factor that appears to matter more

to profit margin movements is the overall performance of the underlying economy

(Figure 3). As economic conditions improve and unemployment declines, profit margins

generally increase.

All else equal, however, rising prices of imported commodities will reduce the wallet

share available for consumption of domestic goods, regardless of whether domestic

companies pass through rising import prices to consumers. Lower final demand results

in reduced revenues and lower margins. This risk also applies to rising imports of

manufactured goods, notably Chinese manufactured goods, which have shifted from

being a source of margin tailwind for developed market retailers to that of a headwind.

This risk is heightened when high overall debt levels undermine the ability of credit-

driven demand to offset import-driven costs.

A second recessionary period is not

BlackRock’s base case, but concerns

remain about the strength of the

global economic recovery, primarily

in the US, Europe, and Japan.

Figure 3: Profit Margins and the Employment Level

12

8

10

6

4

2

0

’48 ’52 ’60’56 ’64 ’68 ’00’96 ’04’72 ’80’76 ’84 ’88 ’92 ’10

UN

EMPL

OYM

ENT

RATE

(%)

0

5

10

15

20

25

PRE-

TAX

PRO

FIT

MA

RGIN

INV

ERTE

D (%

)

Pre-Tax Profit Margin, InvertedHeadline Unemployment Rate

Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, and BlackRock, as of 12/31/10.

Double-Dip Recession Is the Key Risk

Given that profit margin sustainability is more related to overall economic activity than it

is to input prices, what is the risk of an economic regime change from the current recovery?

A second recessionary period is not BlackRock’s base case, but concerns remain about

the strength of the global economic recovery, primarily in the US, Europe, and Japan. In the

US, for example, a significant concern is the manufacturing sector, which had been an

area of strength through the recovery but may have recently peaked. With 63% of the

expected operating income growth of the S&P 500 (excluding financials and utilities) coming

from just three firms, it is not difficult to make the case that profits may be peaking in

the US (Figure 4). This lack of breadth may be a cautionary sign. We have also seen

significant headwinds to labor market recovery that may be more structural than cyclical

in nature. And with roughly 70% of US GDP driven by personal consumption activity, the

employment outlook has profound implications for economic activity overall. Crude oil

prices may be a key variable here, as they could put consumption at further risk.


With 63% of the expected operating

income growth of the S&P 500

(excluding financials and utilities)

coming from just three firms, it is

not difficult to make the case that

profits may be peaking in the US.

Figure 4: Top 10 Earnings Forecasts for the S&P 500 (Excluding Financials and Utilities)

Source: Bloomberg, as of 6/8/11.

Company

Sector

Sales Growth

Share of Sales Growth

EBIT Growth ($US)

Share of EBIT Growth

Exxon Energy 48.72% 52.43% 40,708 43.36%

Apple Information technology 58.61% 9.28% 12,600 10.35%

Chevron Energy 41.48% 12.47% 16,938 9.08%

GE Industrials -1.65% -0.38% 10,138 5.34%

Pfizer Healthcare -1.83% -0.16% 8,763 3.90%

AT&T Telecomm. services 1.05% 0.19% 4,677 2.25%

Oracle Information technology 33.52% 0.88% 5,985 1.99%

ConocoPhillips Energy 32.18% 4.55% 6,913 1.88%

IBM Information technology 6.00% 0.95% 3,089 1.66%

Merck Healthcare 2.61% 0.10% 4,856 1.43%

Until significant employment increases place consumers on more sound footing and

encourage more spending, businesses will likely be hesitant to make the capital expenditure

investments needed to reignite the economic recovery.

In the US and some other developed markets, we often see a margin peak precede a trough

of unit wage growth. Wage growth in the developed world has been muted, and future

wage expectations have been curbed; in the emerging markets, inflation expectations

and realized inflation have risen modestly, acting as a speed bump to both consumer

spending and margins. Corporate sector spending is vital at this point in the economic cycle.

Corporate Spending Is a Catch-22

As consumers have struggled to deleverage over the past few years, the corporate sector

has aggressively termed out or retired significant amounts of debt, slashed costs, and

added efficiencies. The result: an enormous increase in cashflows, much of which remains

on corporate balance sheets. Today, many large corporations have higher cash or short-

term capital assets on their books than at any point in recent history.

Consider the effect of debt reduction alone. The net debt/equity ratio of global equities has

dropped precipitously over the past decade, from a peak of 148% in 2003 to 98% earlier

this year (Figure 5). Even some firms rated below investment-grade credit currently operate

with leverage levels close to historical lows. Combined with recent debt refinancings and solid

cashflow positions, the result has been very low levels of default for high-yield companies.

At the same time, momentum in the changes to credit ratings has shifted in favor of

corporations, with dramatic improvements to upgrade-to-downgrade ratios. The corporate

sector is thriving in an environment in which the economy overall is not. It may be that

corporate strength and resilience becomes a catalyst for a revitalized recovery, but

uncertainty presents a headwind to corporate action, and thus a key risk to the economic

recovery and sustainability of margins. Are governments likely to make up for the

spending slack?


Fiscal Austerity Weighs on Corporate Profits

The massive government debt levels accrued by many developed countries have reinvigorated

the debate on deficit spending. In response, many governments in Europe have embarked

on extraordinary fiscal tightening measures. An unintended consequence of the more

extreme measures is the potential for slower economic growth.

Over the past 30 years, eurozone countries have significantly outpaced the US in government

spending as a percentage of GDP, so there is a much larger opportunity to cut costs

(Figure 6). This is particularly the case for entitlement programs. That said, we believe

much of the fiscal tightening in Europe appears to have been conducted in a haphazard

and uncoordinated fashion, which will likely slow the recovery. The question now is, how

high is the austerity multiplier likely to climb?

Whether directly or indirectly

impacted by government spending

cuts, corporate profit margins

face considerable headwinds

from fiscal austerity.

Figure 5: Net Debt/Equity Ratio for Global Stocks

150

90

120

60

30

0

12/80 12/85 12/90 12/95 12/00 12/05 12/10

PERC

ENT

Datastream Total Market World Equity Index, Net Debt/Shareholders Equity

Sources: Thomson Reuters Datastream and Worldscope, as of 5/31/11.

Figure 6: Government Spending as a Percent of GDP

40

50

30

45

55

35

’70 ’74 ’78 ’82 ’86 ’90 ’94 ’02 ’06’98 ’12

PERC

ENT

OECD — TotalEuro area (15 countries)US

Source: OECD, as of 06/11. Forecasted data begin 05/11.


lf margins can remain high, for

whatever underlying reason, then

current equity valuations appear

reasonably priced.

In the US, government transfer payments have been rising steadily, due to secular trends

(including the aging population) as well as cyclical ones (for example, the high unemployment

rate during the financial crisis). In the 1960s, entitlement programs (such as Social Security)

accounted for roughly 7% of disposable income for US consumers, but today such transfer

payments represent nearly 20% of this income. Between 1970 and 2000, the growth rate

of transfer payments accounted for roughly 13% of the growth in disposable income. Since

2000, however, transfer payments have accounted for more than 25% of the growth in

disposable income.5 So not only is the share of income larger, but the rate of growth has

also increased. It’s clear that this form of government spending has had an important

role in maintaining the consumption rate, effectively underwriting a growing share of

personal income.

Widespread reform to the major entitlement programs is highly unlikely in the current political

climate. Over the longer term, this issue is a pending train wreck; if there is no pick-up in

real wages, it appears that the US consumer is living on borrowed time. When the US is

no longer able to fund its long-term deficits at 3%, some type of reform will be unavoidable,

resulting in a sharp reduction in purchasing power for the US consumer. It also follows

that significant reductions in the fiscal deficit, unless matched by increases in wage levels

and/or rises in private sector credit levels, likely will lead to a reduction in top-line growth.

In any case, reduced government deficits paired with a tapped-out consumer equal lower

corporate savings and an adjustment in the external account to allow national accounts

to balance. A reduction in corporate savings levels would mean lower profit margins,

unless employment costs are cut further (in turn depressing consumption demand).

Whether directly or indirectly impacted by government spending cuts, corporate profit

margins face considerable headwinds from fiscal austerity.

Implications for Investors

While the relationship among these economic variables seems straightforward, what’s

less clear is the degree of the multipliers and the timing involved. Assuming investors had

confidence in their forecasting abilities here, what implications do we see for portfolios?

To the extent that investors take margin changes into account as part of their decision

making, consider any potential impact on valuations. BlackRock believes that current

equity valuations are fairly reasonable; depending on the market, some may even be

relatively cheap. Where will they go from here?

A bearish investor might view current price/earnings ratios as unsustainable because

margins are unsustainably high and likely to revert to the mean. To that end, a more

relevant measure would take into account earnings throughout the economic cycle;

that is, cyclically adjusted earnings, which look relatively expensive.

A bullish investor, however, might not expect significant margin compression in the near

term, so may be more likely to view current earnings as sustainable. On a trailing- or forward-

earnings basis, most valuations — developed markets in particular — look reasonably

valued. Committed bulls hold that the transfer of manufacturing activity to emerging

markets will defer the mean reversion of profit margins for a considerable time period.

The bottom line: lf margins can remain high, for whatever underlying reason, then

current equity valuations appear reasonably priced.

5 Sources: Bloomberg and the Bureau of Economic Analysis.


Uncovering Alpha Opportunities

After considering valuations, the next logical question is whether information on margins

can be used to add returns. Changes in profit margins involve a range of inputs and

outputs, many of which are difficult to forecast. This reduces the likelihood that margin

trends, in isolation, are an effective tool for forecasting market returns. The evidence is

conclusive: Of the eight post-war peaks in the S&P 500, only two correlate with peaks in

corporate margins (Figure 7).

In a sense, like high-earning

individuals in developed markets,

it could be argued that high-gross-

margin firms have been getting

“richer” over the past few decades.

Figure 7: S&P 500 Peaks and Corporate Margins Peaks

80%

40

60

20

50

70

30

45

65

25

55

75

35

’55 ’60 ’65 ’70 ’75 ’80 ’85 ’90 ’95 ’00 ’05 ’11

RecessionsS&P 500 Stocks with Improving Pre-tax Margins Stock Market Peaks

Sources: National Bureau of Economic Research, corporate reports, and Empirical Research Partners, as of 3/31/11. Excluding financials and utilities; trailing 12-month pre-tax margins measured versus the prior year.

That said, we find that persistence of high gross margins may be one useful driver of returns.

BlackRock’s research has found that firms displaying persistently high levels of gross margins

have tended to outperform peers with lower-gross-margin characteristics and the market as a

whole. In a sense, like high-earning individuals in developed markets, it could be argued

that high-gross-margin firms have been getting “richer” over the past few decades.

Many of these high-gross-margin companies primarily target sales to high-end consumers,

who have proven themselves quite resilient during recessions. Several of these companies

have developed some degree of sustainable competitive advantage; for instance, luxury

goods maker Coach and specialty foods retailer Whole Foods Markets. On the other

hand, Hanesbrands and Costco have had relatively low gross margins.

Less obvious examples include auto-parts firms Amerigon and Gentex, which produce

auto components such as seat warmers and rearview mirror dimmers that are found in

luxury cars. At the opposite end of this spectrum is Cooper Tires, again with relatively

low gross margins.


Corporate profits in much of the

developed world — the US in particular

— may be at risk of some pull-back in

the mid- to long-term. This has less to

do with relatively high historical levels

than it does the unwinding of forces

that have driven profit margins higher

during the past three decades.

It is also worth noting that these high-gross-margin companies — some of which are

referred to as wide-moat businesses — have variable net margin histories. This reflects

differing levels of sales and general administration expenses.

Not surprisingly, this situation at the firm level is reflected at the individual level. Many

developed economies (the US in particular) have radically bifurcated over the past couple

of decades, with the process advancing more rapidly in the wake of the financial crisis.

As much of the middle- and lower-income consumer segments have suffered badly from

weak labor and housing markets, high-end consumers have proven more resilient, with

a disproportionate degree of the wealth rebound supported by governmental efforts

targeted at propping up asset prices.

While most discussion of profit margins focuses on equity markets, corporate margin

strength obviously also holds significant implications for fixed income investors. BlackRock’s

view is that sustainability of margin levels is important in the analysis of higher-leveraged

companies and tends to matter less with high-quality credits, unless the firm’s business

model is called into question. In general, the greater the level of operating leverage (i.e.,

higher fixed costs), the more important are margins and consequent free cashflow potential.

Firms with higher fixed costs, such as in the manufacturing sector, may also be more

impacted by margin fluctuations. Fixed income analysts also try to determine whether

a deterioration in margins is due to temporary factors (such as the length of a firm’s

contract cycle) or more secular factors involving a change in the firm’s business model.

What is clear, though, is that across the capital structure, margins may be an important

consideration when judging a company’s investment prospects.

Continued Expansion or Shift to Retrenchment?

Corporate profits in much of the developed world — the US in particular — may be at risk

of some pull-back in the mid- to long-term. This has less to do with relatively high historical

levels than it does with the unwinding of forces that have driven profit margins higher during

the past three decades. Inflated liquidity levels may drag down economic growth for some

time to come. In particular, lower consumer, corporate, and government spending may

weigh on economic growth prospects and, consequently, dampen prospects for profit

margins. If corporate profit margins were to compress, due to lower spending, this suggests

that equity valuations are less compelling, as sustainable earnings would be lower.

Fiscal austerity and the resulting impact on consumer spending power may limit margin

expansion somewhat, particularly at firms that cater to consumers dependent on government

transfer payments for spending capital. Some firms that cater to higher-income consumers

have managed to sustain and expand profit margins in a way that many industry peers have

not. While profit margins may not be the most vital metric for making equity or fixed

income investment decisions, they are another piece of a complex puzzle that can

help illuminate a firm’s prospects.

This paper is part of a series prepared by the BlackRock Investment Institute and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 2011 and may change as subsequent conditions vary. The information and opinions contained in this paper are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.

This material is being distributed/issued in Australia and New Zealand by BlackRock Financial Management, Inc. (“BFM”), which is a United States domiciled entity. In Australia, BFM is exempted under Australian CO 03/1100 from the requirement to hold an Australian Financial Services License and is regulated by the Securities and Exchange Commission under US laws which differ from Australian laws. In Canada, this material is intended for permitted clients only. BFM believes that the information in this document is correct at the time of compilation, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BFM, its officers, employees or agents. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. In Latin America this material is intended for Institutional and Professional Clients only. This material is solely for educational purposes only and does not constitute an offer or a solicitation to sell or a solicitation of an offer to buy any shares of any fund (nor shall any such shares be offered or sold to any person) in any jurisdiction within Latin America in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that they have not been registered with the securities regulator of Brazil, Chile, Colombia, Mexico and Peru or any other securities regulator in any Latin American country and no such securities regulators have confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Any companies listed are not necessarily held in any BlackRock accounts.

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Can Investors Continue to Profit from Corporate Margins? · Sources: Thomson Reuters Datastream and...

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