Summer 2016 Ski Report:

JANUS EQUITY OUTLOOK

AFTER THE BREXIT AVALANCHE

Were happy to be away from Wall Street and the consensus views of crowds. And
on winter weekends, were happier yet to be in the heart of ski country. In our regular
equity outlook, we combine investing and skiing to map the current market terrain.
Like a ski day, markets offer a mixture of riskier paths and easier ones. Well point
out the positive and negative themes driving equities, and tips to navigating those
themes more effectively.

Black runs are themes that present key risks to equity markets. Be careful and alert before proceeding.

The blue runs highlight issues that are less dangerous, but not without pitfalls. These are attractive runs
but proceed with care.

Green runs signal easier paths, but watch for crowds and stay away from the pack.
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Equity Outlook
As usual we start with our three equity outlook scenarios: The best case is our sunny outlook or the easiest path for equities, i.e.,
the green runs. We call our base case, which could lead to a pleasant outcome nonetheless, "cloudy" or the blue runs. Lastly,
our worst case blizzard or black runs is clearly a tough path for markets, including equities.
Lets start there. The worst case scenario is the post-Brexit world leads to more political pressures, sapping confidence for
businesses and importantly the consumer, with a continued low or negative rate environment because central banks have lost
their effectiveness. Some suggest we are there today but we think it is too negative of a view. As we will see there are some
positive offsetting factors. Still, this blizzard outcome is negative for equities and brings the defensive and yield focus that we
saw early in 2016 and in other periods of crisis.
Our base case is called cloudy because there are still lingering concerns. We just dont expect a storm. Markets are up slightly
as we continue in a low growth economic environment. The consumer holds up, giving us stability in China and oil stays
around current levels, perhaps providing some floor to industrial activity. It is not a robust growth market and business
investment remains subdued, favoring buybacks over expansionary capital spending. This is not a bad market for equities,
especially against the alternatives. It is a particularly strong market for active investors because growth will come to
companies that are innovative or market share gainers rather than to deeply cyclical companies, or to marginal competitors
riding a wave of market growth.

Finally, the sunny outlook sees equities rally sharply. Political concerns diminish and good news out of China and stable oil calms
markets. The Fed may be raising rates but it should be data dependent and typically rising rates precede rising markets.
Currency markets should stabilize. While growth equities should benefit, one would expect financials to be particularly strong as
margins could finally expand and business loan demand picks up.
As usual, we see the cloudy outlook as the most likely, followed by the sunny scenario. Least likely is the blizzard but the Brexit
outcome, which surprised us, raised its odds. Its why the summer could be a choppy environment for equities as we wait for one
of these scenarios or perhaps one entirely unexpected to unfold.
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The Black Runs

Black runs are themes that present key risks to equity markets. Be careful and alert before proceeding .

> Political upheavals in a post-Brexit world sap consumer and business confidence
> Low or negative rates, combined with poor economic outlooks, exacerbate fears that
central banks have lost their effectiveness

> Equity markets languish in a defensive posture with a renewed focus on yield

Post-Brexit Europe
> Tumultuous summer as the post-Brexit era unfolds and continues for several years

> A summer of policy uncertainty with central banks charting a path through Brexit, political, and economic headwinds
> Currencies remain volatile, with the British pound and euro weakening, while capital flight underpins the U.S. dollar, yen,
and Swiss franc

5
Source: Janus, Bloomberg.

European Electoral Uncertainty Continues

* Expected in Autumn 2016

** Constitution Referendum Autumn 2016

The Way Down

> Watch election outcomes and confidence indicators: Europe appeared to be gaining some traction toward recovery when
Brexit hit
> Look for traction from aggressive central bank policies, especially the Bank of England and European Central Bank
> Keys: Business investment and hiring environment will be closely monitored as measurements of post-shock sentiment
6
Source: Janus, Bloomberg.

Negative Rates
> Negative rates represent uncharted territory for most developed country financial systems and leaves little or no room
for stimulative monetary policy
> The risk is that negative interest rates increase investor caution rather than activity; risk-taking is delayed raising risks of
deflation and anti-growth actions by investors and firms alike
> Unpredictable Outcomes: So far, not so good in Japan where negative rates and a strengthening yen prolong the
now 26-year era without sustainable growth

7
Source: Janus, Bloomberg.

Ski Tip: Avoid the Hazards

The Way Down

> Banks look cheap but returns are under pressure as low or negative interest rates undermine net interest margins
> Watch to see if rates change business behavior, not just feed investor activity
> Higher interest rates would likely favor the financial sector
8
Source: Janus, Bloomberg.

Defensive Environment
Markets penalize stocks with above-average volatility

Defensive stocks and low beta do better as the safety trade leads to demand for consumer staples and yield
Active managers lag in this environment as winners gain market cap, thereby maintaining capital inflows

9
Source: Janus, Bloomberg.

Ski Tip: Avoid The Lure of Passive

The Way Down

> Avoid the lure of chasing passive strategies, as buying on a market-cap basis may lead to risk when those positions are
eventually unwound
> A calmer market rewards growth, innovation and active stock selection
> The market is not just numbers but business models and opportunities the fundamentals of these companies have
taken a backseat to risk factors. We dont think that distortion is sustainable
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Source: Janus, Bloomberg.

The Blue Runs

The blue runs highlight issues that are less dangerous, but not without pitfalls. These are attractive runs
but proceed with care.

> Consumer holds up, China and oil stable providing some constancy to economic activity
> No crisis but business investment remains subdued with buybacks favored over
capital spending
> Stock selection, i.e., active investing adds value as growth should come to innovative
companies or firms focused on expanding market share

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Equity Valuations
> Valuations are not demanding, in the U.S. or elsewhere, as we feel low interest rates and low inflation expectations
underpin higher P/E ratios
> Risk premiums are high and growth expectations too low

12
Source: Janus, Bloomberg.

Ski Tip: Find Opportunities

The Way Down

> Growth therefore becomes the key, and we feel companies that can grow will be good investments
> And, yes, there is growth ahead; slow growth is not no growth. Given the severity of the Great Recession there is still
room for expansion
> Non-U.S. uncertainty and the stronger dollar could be good for small caps as the historic premium associated with
small-cap stocks has narrowed
13
Source: Janus, Bloomberg.

Volatility
Volatility is not historically high, despite the Brexits exogenous shock to the equity markets
But its impact on stocks is unusually important, as the positive correlation between share prices and volatility has
been unusually significant

14
Source: Janus, Bloomberg.

Don't Fear Fear

The Way Down

> Tolerate rather than run from volatility, historically it is part of the process of generating excess returns
> Dont fear fear: Historically, when VIX - as the collective expectation of future volatility - is highest, the markets
subsequent three months are better than more benign risk environments
> Over time, the importance of volatility on stocks should subside
15
Source: Janus, Bloomberg.

China and Oil

Worries about China and oil are fading
Chinese economy is stabilizing: the consumer is holding up and producers are slowly rationalizing production.
Oil production counteracts supply-led oil price weakness; the U.S. is now the worlds swing producer

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Source: Janus, Bloomberg.

Not Out of the Woods, but Close

The Way Down

> However, China still faces risks to its financial systems as economy shifts from a manufacturing-led system to one fueled
by the services and consumer spending
> Favor the consumer in China
> Oil could go higher but in our view services and large cap Exploration and Production firms look most attractive
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Source: Janus, Bloomberg.

The Green Runs

Green runs signal easier paths. But watch for crowds and stay away from the pack.

> Political concerns diminish following the Brexit upheaval

> Economic growth and investment pick up as concerns about China dissipate
> Equities rally sharply with financials bouncing off bottom; Fed may resume tightening,
but rising rates precede rising markets

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Innovation: Health Care and Technology

> We expect markets will settle, accommodating growth stocks and predictability we favor innovators, especially
in health care and technology
> Health care: Innovation still matters most and nowhere is innovation more profound, more long lasting and
timelier than in the health care sector

> Technology: The cloud revolution continues the two key trends are the adoption of cloud computing and
the Internet of Things

19
Source: American Association of Cancer Research.

Source: Janus, Bloomberg.

M&A
> M&A should resume across the market potential suitors are armed with strong balance sheets

> Companies continue to buy their own stock but will look to buy growth too in a slow-growth environment, firms will
look to buy market share, rather than invest and build it organically
> M&A revalues sectors and signals confidence; we anticipate that technology, health care and industrials will see the
most M&A activity

20
Source: Janus, Bloomberg.

No Alternative
> Equities are attractive relative to other asset classes

> Markets underestimate growth and overplay risk

Our final green run is less about one key trend within equities and more about where equities fit in a broad portfolio.
Equities to us are the most attractive asset class, unless we have our black diamond conditions. But in either a
cautious market or a more sanguine one, equities are compelling. Fixed income is challenging although active,
corporate credit-oriented investors can add value. Real estate can diversify but as with fixed income, weakens as
rates rise. Meanwhile, the simple math of equities is this: If you can find long-duration growth, the value compounds.

21
Source: Janus, Bloomberg.

Disclosures
The views presented are as of 06/30/16. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or
market sector. No forecasts can be guaranteed. The opinions and examples are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to
changes in market or economic conditions. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. It is not
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