The first-quarter rally was impressive, but not persuasive. Economic uncertainty may resurface in the second quarter. The potential for missteps by policymakers remains a significant risk.

1. Q2 2013 » Putnam Perspectives
Capital Markets Outlook
Putnam’s outlook
Arrows in the table indicate the change
from the previous quarter.
Underweight
Smallunderweight
Neutral
Smalloverweight
Overweight
Asset class
EQUITY
U.S. large cap l
U.S. small cap l
U.S. value l
U.S. growth l
Europe l
Japan l
Emerging markets l
FIXEDINCOME
U.S. government l
U.S. tax exempt l
U.S. investment-grade corporates l
U.S. mortgage-backed l
U.S. floating-rate bank loans l
U.S. high yield l
Non-U.S. developed country l
Emerging markets l
COMMODITIES l
CASH l
CURRENCY SNAPSHOT
Dollar vs. yen: Dollar
Dollar vs. euro: Neutral (from favor euro last quarter)
Dollar vs. pound: Neutral
The first-quarter rally was
impressive, but not persuasive
The year began with a flourish in stocks, which
soared more than 10% on a mix of fundamen-
tals and optimism. While the past three years
have started with rallies, the 2013 version
seems more meaningful because both the
Dow Jones Industrial Average and the S&P
500 Index set new records above levels they
had last reached before the 2008 crisis. Small
caps also rose, and Japan’s stock market
surged as well. While Europe did not keep
pace, its more modest gains overcame the
turmoil of the deadlocked Italian elections
and the tortuous road to a banking sector
rescue in Cyprus.
We view this advance somewhat skepti-
cally, because the behavior of other asset
classes has not confirmed it as a typical bull
market (Figure 1). In the U.S. market, defen-
sive stocks with stable cash flows led cyclicals
more geared to economic growth. Commodi-
ties had flat results. Stocks in emerging
markets generally lost ground, with only a
handful of countries posting gains. A bull
market usually has broader support.
An alternative view of this rally would
attribute it to the positive but less-lasting
effects of activist central banks around the
world that have subdued three great global
macro risks. The U.S. economy has avoided
a double-dip recession. The eurozone has
remained intact. And worries about China’s
export economy have eased.
Key takeaways
• The first-quarter rally was impressive, but not persuasive.
• Economic uncertainty may resurface in the second quarter.
• The potential for missteps by policymakers remains a
significant risk.
Jason R. Vaillancourt, CFA
Co-Head of Global Asset Allocation

2. 2
Q2 2013 | Capital Markets Outlook
From this perspective, the first-quarter rally can be
seen as the later innings of global macro risk-normal-
ization rather than the beginning of a new upswing in
earnings. This view is more consistent with the expansion
of stock price multiples in the first quarter. While valua-
tions remain reasonable, further price appreciation would
be more convincing if it came with the support of greater
earnings and revenues.
Earnings reports due out in April will be very important.
The markets will need to see that the improvement in the
global growth environment reflects more than optimism,
and that better economic performance is translating into
rising earnings.
Economic uncertainty may resurface
in the second quarter
While the U.S. economy merits a degree of optimism,
as the recovering housing sector has supported
improvement in the labor market and consumer spending,
we question the outlook for the balance of 2013. A key
indicator in our research reveals that expectations are
getting ahead of themselves. The Economic Surprise
Index measures the difference between forecasts of
several types of economic data and the eventual reports
of that data (Figure 2).
We do not expect smooth sailing on the horizon.
Although first-quarter GDP may have expanded at a 3%
annual rate, up from the previous quarter’s 0.4% pace, the
economy may hit an air pocket in the second quarter.
Figure 1. Q1 U.S. stock rally lacks
participation from other risk assets.
90
95
100
105
110
SP GSCI Industrial Metals TR Index
SP 500 Index
European Periphery Equities/Core Equities
U.S. Cyclicals/U.S. Defensives
2/131/13 3/13
Relative weakness in cyclical stocks,
European peripheral markets, and
commodities cast doubt on the
stock market rally.
Source: Bloomberg. Past performance is not indicative of future
results. Each index is numerically rebased to equal 100 as of 12/31/12.
SP GSCI Industrial Metals Total Return Index reflects the industrial
metals components of the SP GSCI Index. European Periphery
Equities/Core Equities reflects the ratio of the performance of stocks
in Italy and Spain to the performance of stocks in Germany and France,
with each country represented by Equal Weighted Primary Indices:
FTSEMIB (Italy), IBEX (Spain), DAX (Germany), and CAC (France).
U.S. Cyclicals/U.S. Defensives reflects the ratio of the performance of
stocks in equal-weighted SP GICS sectors, with Cyclicals comprising
the consumer discretionary, financials, technology, industrials, mate-
rials, and energy sectors, and Defensives comprising the consumer
staples, health-care, telecom, and utilities sectors.
The full effect of the federal fiscal consolidation now
underway — the higher payroll taxes that went into effect
at the beginning of the year, and the spending cuts that
began in March — will not be clear in economic reports
until well into the second quarter. We forecast that federal
fiscal consolidation will likely reduce 2013 GDP by about
half of one percent. That would not cause a recession, but
could undermine growth in corporate earnings. Also, as
the calendar moves into the spring months, the seasonal
adjustment factors applied to the data become more
challenging. Uneven economic data could easily prompt
greater market volatility than we saw in the first quarter.
Also, we remain concerned about Washington’s
failure to reach budget agreements, even if the stock
market shrugged off this problem in the first quarter.
Both parties expected to negotiate a smarter approach
to spending cuts than through the sequester, but it did
not happen, and there appears to be no progress on a
long-term plan to bring spending and revenues in line.
Late in March, Congress quietly extended the continuing
resolution that keeps the federal government operating,
but this set the stage for a battle over the debt ceiling this
summer. A similar showdown in 2011 led to a downgrade
of U.S. debt.

3. PUTNAM INVESTMENTS | putnam.com
3
The potential for missteps by policymakers
remains a significant risk
The market context continues to be framed by accommo-
dative central bank policy in many regions, which means
that, while macro risks have abated, markets remain
vulnerable to simple human error.
The Fed is likely to soon find itself suffering from
winner’s curse. In its December minutes, the Federal
Open Market Committee (FOMC) moved the condition-
ality of the zero-interest-rate policy from a fixed time
horizon — to keep rates low until 2015 — to one that
depends on incoming economic data. The key target
set by the Fed — an unemployment rate of 6.5%, with
contained inflation — has triggered a debate about when
and how policy will normalize. Aside from interest rates,
the end of the Fed’s Large-Scale Asset Purchase program
constitutes a bigger challenge, as a number of variables
surround the end of asset purchases, such as timing, pace,
and contingencies. Members of the FOMC are already
floating ideas in public speeches. The sensitivity of this
communication strategy will almost surely elevate
both interest-rate and stock market volatility from
recent low levels.
Outside the United States, European authorities also
play an important role in keeping market volatility at bay.
The recent handling of the Cyprus bailout prompted yet
another set of “unique circumstances,” renewing concerns
about the consistency and predictability of eurozone poli-
cies. The credibility of the ECB’s guarantee to protect the
euro and sovereign credit markets needs to be maintained.
Meanwhile, Italy’s political paralysis demonstrates
the risks involved with austerity policies. When imposed
upon a nation by external authorities, and with a harsh
adjustment period, austerity can provoke a backlash. In
Europe, it could damage popular support for the common
currency. Also, in Asia, the bold moves by the Bank of
Japan to reflate the nation’s economy and reinvigorate
exports have done wonders for Japanese stocks, but the
depreciation of the yen can provoke conflicts in global
trading relationships. In addition, geopolitical saber-
rattling on the Korean peninsula is another source of
global instability, along with the conflicts simmering
in the Middle East.
Figure 2. Economic Surprise Index suggests
optimism is ahead of fundamentals.
97
98
99
100
101
102
103
Output
Outlook
Surprise Index
1/11 6/1212/116/11 12/12 4/13
The U.S. Economic Surprise
Index has been lifted by
outlook data, not by actual
output.
Source: Bloomberg is the source of actual and consensus
values, and the calculation of the Surprise Index is a Putnam
methodology. Past performance is not indicative of future
results. The Outlook component comprises Chicago
Purchasing Managers Index, Philadelphia Business Outlook
Survey, The Conference Board Consumer Confidence,
University of Michigan Consumer Confidence Index,
ISM Manufacturing Index, ISM Services Index, and The
Conference Board U.S. Leading Indicators. The Output
component comprises Advance GDP, industrial production,
and U.S. census housing starts.

4. 4
Q2 2013 | Capital Markets Outlook
Asset class views
Equity
U.S. equity Domestic equities continued their advance
in the first quarter, as investors, relieved that a worst-
case fiscal cliff scenario was averted, welcomed 2013
with renewed enthusiasm. Stocks advanced with few
meaningful pullbacks and limited volatility. The SP 500
Index and Dow Jones Industrial Average both closed the
quarter at record highs, with the Dow marking its best
first-quarter return in 15 years. Despite the overall strength
of the rally, the leading sectors were defensive ones,
including consumer staples and health care. This may be
an indication that investors, while willing to return to equi-
ties, remain cautious and skeptical about the prospects for
U.S. economic growth.
With respect to corporate earnings growth, we are
seeing some stabilization in estimates, which had been
trending downward in each of the past seven quarters.
The 2012 fourth quarter also brought some positive
revenue surprises for the first time in three quarters. While
investors have lower expectations for revenue trends,
we believe there is potential for mid- to high-single-digit
earnings growth in 2013.
In light of the U.S. market’s extended advance,
opportunities have narrowed for equity investors today.
In contrast to a year ago, when stocks in many sectors
were offering considerable valuation dislocations,
these anomalies have largely healed themselves. At the
same time, we are past the early stages of an economic
recovery, in which cyclical sectors rebound from their
lows with considerable earnings growth rates. Investment
opportunities become less obvious as growth rates
converge, correlations decline, and valuations are more
similar across the market. Despite — or perhaps because
of — the greater stock selection challenges, we remain
constructive in our outlook for U.S. equity investment
opportunities.
Non-U.S. equity One of the most pronounced areas
of strength among non-U.S. equities has been Japanese
stocks, which have climbed approximately 50% in the
past six months. With the yen depreciating versus the
U.S. dollar by approximately 20% in the same time frame,
Japanese equities have been among the world’s best
performers in U.S.-dollar terms.
Importantly, a variety of Japanese companies may
have become far more competitive in light of the yen’s
pronounced decline versus a range of currencies, from the
U.S. dollar to the South Korean won. Market share gains,
expanding profit margins, and significant earnings growth
potential may all now be within reach of Japanese compa-
nies, which implies a potentially long runway for growth
for selected stocks in this market.
China-related stocks performed well for a portion of
the fourth quarter, but they have pulled back somewhat
in the first quarter of 2013 as business conditions have
moderated. There is a debate over whether the source of
the slowdown is largely seasonal or secular, but in either
case, we may well see continued volatility in China’s
growth pattern, which could amplify fluctuations in China-
related investments. On balance, Chinese equities are less
attractive now than elsewhere in the emerging markets,
including Brazil and Southeast Asia, we believe.
Figure 3. The sequester is having an impact
on the economy.
U.S. GDP as of Q4 2012 (updated 1/31/13)
Sources: Congressional Budget Office and Bureau of Economic Analysis.
The federal sequester will take a
small bite from GDP during 2013,
but is unlikely to cause a recession.
$15.8 trillion
Sequester represents less than 1% of U.S. GDP
Defense: $42.7 billion
Non-defense — discretionary: $28.7B
Non-defense — Medicare: $9.9B
Non-defense — other: $4.0B

5. PUTNAM INVESTMENTS | putnam.com
5
MARKET TRENDS
Index name (returns in USD) Q1 13
12 months
ended
3/31/13
EQUITY INDEXES
Dow Jones Industrial Average 11.93% 13.37%
SP 500 10.61 13.96
Nasdaq Composite 6.25 3.72
MSCI World (ND) 7.74 11.86
MSCI EAFE (ND) 5.15 11.27
MSCI Europe (ND) 2.71 10.56
MSCI Emerging Markets (ND) -1.84 1.73
Tokyo Topix 8.72 8.68
Russell 1000 10.96 14.43
Russell 2000 12.39 16.30
Russell 3000 Growth 9.82 10.42
Russell 3000 Value 12.26 18.71
FIXED INCOME INDEXES
Barclays U.S. Aggregate Bond -0.12 3.77
Barclays 10-Year Bellwether -0.31 6.20
Barclays Government Bond -0.16 3.01
Barclays MBS -0.05 1.97
Barclays Municipal Bond 0.29 5.25
BofA ML 3-Month T-bill 0.02 0.12
CG World Government Bond ex-U.S. -3.83 -2.16
JPMorgan Developed High Yield 3.13 13.12
JPMorgan Global High Yield 3.01 13.06
JPMorgan Emerging Markets Global
Diversified -2.26 10.11
SP LSTA Loan 2.11 7.91
COMMODITIES
SP GSCI 0.55 -4.96
It is not possible to invest directly in an index. Past performance is not
indicative of future results.
European stocks have lagged so far this year,
particularly European financials. In the second half
of 2012, European stocks led many other markets, partly
as a result of expectations that Europe was turning a
corner on its debt-related issues. But while the region has
generally stabilized due to the creation of a framework
that allows policymakers to manage Europe’s debt,
politics have shown their potential to upset nearly any
fiscal balancing act.
In the second quarter, areas of concern for non-U.S.
equities include debt problems bringing down European
markets; suspicions that the Chinese property market is
too frothy; and fears that Japan could slide backward into
its longtime deflationary slump. But despite these issues,
we see a variety of scenarios in which markets could rise
materially from current levels. Particularly against the
backdrop of continued low — and not necessarily abso-
lutely flat — long-term interest rates, we see the potential
for substantially higher price-to-earnings multiples in
broad areas of non-U.S. equity markets.
Fixed income
The first quarter marked a continuation of the rally in
so-called spread sectors of the bond markets. By way of
background, on January 1, Congress passed last-minute
legislation to avoid the across-the-board tax hikes asso-
ciated with the fiscal cliff, although no compromise was
reached to modify the approximately 2% sequestration
spending cuts that began in March. Our own estimates
anticipate a negative impact on GDP, but overall we’re
forecasting growth in line or slightly above that of 2012.
Outside the United States, Europe reclaimed headlines
after Italy’s elections failed to produce a majority govern-
ment and Cyprus’s banking system, teetering on the brink
of collapse, agreed to a substantial restructuring and EU
bailout. These events were generally understood to be
negative developments on the world stage, but we believe
the muted market reaction is telling.
As recently as a year ago, such developments would
have been much more likely to spark a widespread selloff,
with a concurrent flight to U.S. Treasuries — a pattern
markets experienced many times during the past few
years. The fact that investors have remained more focused
on longer-term opportunities rather than the short-term
news cycle suggests to us that they are much more
attuned to the potential opportunity costs of remaining
on the sidelines.

6. 6
Q2 2013 | Capital Markets Outlook
To that end, we’ve seen significant outflows from
cash investments in recent months as investors have
moved back into equities and continued to allocate to
fixed-income spread sectors, many of which have been
experiencing substantial inflows for some time. We
believe this type of environment — one in which declining
interest rates are not the primary driver of returns and the
risk-on/risk-off trade does not overshadow fundamentals
in the market — provides an abundance of opportunities
for active managers. We believe our holistic, bottom-up
approach to securities, sectors, rates, and currencies
positions Putnam well for the market environment that
we now see unfolding.
Tax exempt Within the tax-exempt market, we
continue to favor essential service revenue bonds over
local general obligation bonds. The BBB-rated segment
of the curve continues to offer attractive relative value
opportunities, in our analysis, and in terms of maturities,
we find 10 to 15 years to be the optimal part of the yield
curve in today’s environment. For several months now,
we have maintained a slightly higher than normal cash
weighting in our portfolios, which has helped to offset
some of the recent interest-rate volatility. We anticipate
maintaining that stance through the spring, which tends to
be a seasonally slower period for new issuance, and which
will allow us a greater degree of flexibility as issuance
picks back up in the summer months, as historically has
been the case.
Overall, we maintain our constructive outlook for
municipal bonds, though we believe that returns in 2013
will be less about price appreciation and more about
coupon income in the tax-exempt market. While spreads
are much narrower than they were at their peak, they
remain attractive, in our opinion. Technical factors in
the market also have been positive — specifically, higher
refunding activity and strong investor demand — and we
believe that technicals should remain supportive in 2013.
Commodities
One of the biggest issues in commodity investing over
the past several years has been the strong correlation
between stocks and the overall commodity asset class.
At times, it has seemed like having a separate opinion
on commodities was not even worthwhile because the
two asset classes moved in tandem. We started to see
a degradation of this relationship in 2012, and the first
quarter of 2013 confirms it more convincingly.
With momentum a signal in our commodity fore-
casting process, the more constructive view we had going
into 2013 has now diminished considerably. We have an
overall neutral view of the asset class, with a slight posi-
tive expectation only for the energy sector. An overall
positive global economy indicator is now cancelled out by
weak emerging-market stock performance and implied
demand for resources.
Even in gold, which we had favored for some time, we
advocate a neutral position. Over the past several years,
gold has been seen as a great downside market hedge
and a safe-haven asset. But that negative market correla-
tion has become the exception. Just as there was a long
period of popularity in gold investing driving prices up
prior to 2012, we continue to see the reverse trend. We no
longer advocate for a position in precious metals relative
to any other commodity sectors.
Currency
With several central banks in developed markets now
pursuing highly accommodative monetary policies, it is
likely that several currencies could weaken.
The Fed’s easy monetary policy would normally lead
to a weaker U.S. dollar against most currencies. However,
continued improvement in the U.S. labor market is likely
to keep currency markets concerned about the timing
for ending or tapering off asset purchase programs and
providing support to the dollar against the euro, the
pound sterling, and the yen.

7. PUTNAM INVESTMENTS | putnam.com
7
The euro also appears poised for weakness, we believe.
Since 2012, the ECB has helped to mitigate the risk of a
eurozone breakup and lowered the euro risk premium.
However, the deadlocked Italian elections, the Cyprus
bailout, and weaker economic data have reminded the
markets that European problems have not been solved.
The British pound sterling is among the stronger major
currencies, but we still favor a slightly short position. The
currency is likely to underperform higher-yielding and
higher-credit-quality currencies like the Australian dollar
and the Scandinavian currencies.
Although the Japanese yen has declined significantly
in a relatively short time, we expect continued weakness.
At the start of the second quarter, the Bank of Japan
announced a massive easing policy, significantly exceeding
the market’s already-lofty expectations. This should be
viewed as shock and awe, and should keep the yen as
primary funding currency for the foreseeable future.
We anticipate strength from the Australian dollar. The
uncertainty surrounding China’s economy has abated
to some extent. Furthermore, the actions of the Fed, the
Bank of Japan, and the ECB should be supportive of risk
assets, including the Australian dollar.
TheBarclaysGovernmentBondIndexisanunmanagedindexofU.S.Treasuryand
governmentagencybonds.
TheBarclaysMunicipalBondIndexisanunmanagedindexoflong-termfixed-rate
investment-gradetax-exemptbonds.
TheBarclays10-YearU.S.TreasuryBellwetherIndexisanunmanagedindexofU.S.
Treasurybondswith10years’maturity.
TheBarclaysU.S.AggregateBondIndexisanunmanagedindexusedasageneral
measureofU.S.fixed-incomesecurities.
TheBarclaysU.S.Mortgage-BackedSecurities(MBS)Indexcoversagency
mortgage-backedpass-throughsecurities(bothfixed-rateandhybridARM)issuedby
GinnieMae(GNMA),FannieMae(FNMA),andFreddieMac(FHLMC).
TheBofAMerrillLynchU.S.3-MonthTreasuryBillIndexconsistsofU.S.Treasurybills
maturingin90days.
TheCitigroupNon-U.S.WorldGovernmentBondIndexisanunmanagedindex
generallyconsideredtoberepresentativeoftheworldbondmarketexcludingthe
UnitedStates.
TheDowJonesIndustrialAverageIndex(DJIA)isanunmanagedindexcomposed
of30blue-chipstockswhoseonebindingsimilarityistheirhugeness—eachhassales
peryearthatexceed$7bil­­lion.TheDJIAhasbeenprice-weightedsinceitsinception
onMay26,1896,reflectslarge-capcompaniesrepresentativeofU.S.industry,and
historicallyhasmovedintandemwithothermajormarketindexessuchastheSP500.
TheJPMorganDevelopedHighYieldIndexisanunmanagedindexofhigh-yield
fixed-incomesecuritiesissuedindevelopedcountries.
TheJPMorganEmergingMarketsGlobalDiversifiedIndexiscomposedofU.S.
dollar-denominatedBradybonds,eurobonds,tradedloans,andlocalmarketdebt
instrumentsissuedbysovereignandquasi-sovereignentities.
JPMorganGlobalHighYieldIndexisanunmanagedindexofglobalhigh-yield
fixed-incomesecurities.
TheMSCIEAFEIndexisanunmanagedlistofequitysecuritiesfromEuropeand
Australasia,withallvaluesexpressedinU.S.dollars.
TheMSCIEmergingMarketsIndexisafree-float-adjustedmarket-capitalization-
weightedindexthatisdesignedtomeasureequitymarketperformanceintheglobal
emergingmarkets.
TheMSCIEuropeIndexisanunmanagedlistofequitysecuritiesoriginatinginanyof15
Europeancountries,withallvaluesexpressedinU.S.dollars.
TheMSCIWorldIndexisanunmanagedlistofsecuritiesfromdevelopedandemerging
markets,withallvaluesexpressedinU.S.dollars.
TheNasdaqCompositeIndexisawidelyrecognized,market-capitalization-weighted
indexthatisdesignedtorepresenttheperformanceofNasdaqsecuritiesandincludes
over3,000stocks.
TheRussell1000Indexisanunmanagedindexofthe1,000largestU.S.companies.
TheRussell2000Indexisanunmanagedlistofcommonstocksthatisfrequentlyused
asageneralperformancemeasureofU.S.stocksofsmalland/ormidsizecompanies.
Russell3000GrowthIndexisanunmanagedindexofthosecompaniesinthebroad-
marketRussell3000Indexchosenfortheirgrowthorientation.
Russell3000ValueIndexisanunmanagedindexofthosecompaniesinthebroad-
marketRussell3000Indexchosenfortheirvalueorientation.
TheSPGSCIisacompositeindexofcommoditysectorreturnsthatrepresentsa
broadlydiversified,unleveraged,long-onlypositionincommodityfutures.
TheSP/LSTALeveragedLoanIndex(LLI)isanunmanagedindexofU.S.leveraged
loans.
TheSP500Indexisanunmanagedlistofcommonstocksthatisfrequentlyusedasa
generalmeasureofU.S.stockmarketperformance.
TheTokyoStockExchangeIndex(TOPIX)isamarket-capitalization-weightedindexof
over1,100stockstradedintheJapanesemarket.

8. NOTES
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument,
or any Putnam product or strategy. References to specific securities, asset classes, and financial markets are for illustrative purposes
only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this
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Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the
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