Q3 | 2012Putnam Global Equity Fund Q&A

Low rates lend support to global equities

Shep Perkins, CFA Portfolio Manager

Low rates were good news for real estate markets and the equities connected to them.

Key takeaways Volatility dropped in the third quarter, with VIX levels coming down to multi-year lows. In the developed world, low interest rates are supporting a recovery in real estate and housing-related stocks. In China, policymakers have been unable to arrest the risk of a hard economic landing. Putnam Global Equity Funds thematic focus currently includes housing, financials, natural gas, the emerging-market consumer, and companies with Internet-fueled business models. Did global equity markets perform in line with your expectations? In some respects, the third quarter was a surprise in terms of how dramatically volatility declined. The VIX, which tracks volatility in the S&P 500 Index, is now at multi-year lows, suggesting that the intensity of perceived risk in the markets has abated since earlier this year and, even more substantially, relative to a year ago. Another surprise came in the relative performance of developed and emerging markets. Although economic growth is more firmly established in the emerging world, performance there was weak. In the developed markets, led by the United States but also including Europe, economic recovery was touch and go, but performance was generally strong. Policy actions by the U.S. Fed and the European Central Bank played a key role in supporting developed market equities, while Chinese policy failed to lower the risk of a hard economic landing in that country. How did low interest rates support global equity markets? We came into the year with rates already at multi-decade lows, but rates continued to fall. Additional downward pressure on rates was applied by the U.S. Fed in its third and newest phase of quantitative easing, a bond-buying program designed to keep borrowing costs low for institutions and individual consumers. Low rates were good news for the real estate markets and the equities connected to them,

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and signs of housings stabilization are quickly becoming signs of housings recovery. This is the case not just in the United States, but also in countries like Germany, where real estate prices continue to rise. While rates were largely responsible for this positive development, another factor was the high level of concern about the overall macroeconomic environment. Historically, uncertain economic times have led investors to leave riskier assets like stocks in favor of real estate, which is typically perceived as the more stable asset. That shift has taken some time and sustained low rates to materialize, primarily because of the depth of the housing crisis. But its continuing impact on the economy and housing-related stocks will continue to play out well into 2013. Would you say Chinas attempts to stabilize its economy have backfired? The jury is still out on whether Chinese policymakers have been successful in optimally slowing their economy. Over the past year or two, I would say their policies have been effective in terms of cooling down the domestic real estate markets. Prices have indeed slowed, and in some cases real estate prices have declined. But with respect to other areas, it is unclear whether policy has been as effective in engineering a soft landing for Chinas overheated economy. I feel the risk is that policymakers may in fact be engineering a hard landing, particularly in infrastructure, where companies focused on heavy machinery and excavation, for example, are suffering badly. Order declines of 50% or more, combined with substantial cost increases due to wage inflation, put these companies in a serious bind and threaten to strangle rather than slow one of the engines of Chinas growth. This has implications for companies outside China, as well, particularly those companies that have benefited for the past 10 years from Chinas massive infrastructure build-out.

Would you say emerging-market consumers are doing well despite the slowdown in countries like China? In general, the emerging-market consumer is healthy, but there is regional and country differentiation worth noting. In Brazil, the average income is above $10,000 per year, whereas in China and Indonesia, average incomes are in the $2,000$5,000 range. As Brazilian incomes grow say from $10,000 to $20,000 per year Brazilian consumers are more likely to buy bigger ticket items, such as cars, houses, or major appliances. As incomes grow in China or Indonesia, by contrast, say from $2,000 to $4,000, consumers are more likely to spend additional money on smaller-ticket items, including personal care products and food. So while we expect incomes in all of these countries to continue to grow, we think it is important to understand where the real-dollar growth is likely to occur, as that will have implications for the companies that supply emerging-market consumers with a variety of goods and raw materials. Have you been focusing on opportunities in the global energy markets? Natural gas is one important area. For the past few years, U.S. natural gas prices have been weak, yet prices outside the United States have been quite strong. In Japan, for example, where natural gas has become so much more important as an energy source after the devastating impact of last years tsunami led to the curtailment of the countrys nuclear energy sector, natural gas prices have ranged from three to five times higher than U.S. prices. China, meanwhile, is beginning to build more gas-fired electricity plants to fuel the countrys industrial growth and rapid urbanization. These factors are creating opportunities for companies that have found new natural gas fields in Asia, for example, as they are able to take advantage of burgeoning global demand. Also, this spread in natural gas prices is changing the competitive landscape of some industries that use natural gas as a primary feedstock, such as chemicals, and creating opportunities for those companies with access to North American gas.

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How else are you positioning Putnam Global Equity Fund going forward? I try to look beyond the current and succeeding quarter in an effort to find companies that can thrive for the next three to five years. One of the key strategies of the fund, in fact, is to take advantage of opportunities that the market serves up on a short-term basis. For example, we have positioned the fund to benefit from continuing positive developments in U.S. housing, particularly through exposures to U.S. homebuilders, select U.S. financials, and building supply companies. Professional investors are aware that prospects for the housing markets have turned positive, but I dont think they currently appreciate that home prices could rise fairly substantially over the next year or two, which could have a major impact on equities linked to the sector. As with the previous quarter, companies that harness the power of the Internet to accelerate their revenue growth continue to be attractive. This includes companies that have rolled out e-commerce sites across their geographic regions, enabling them to increase sales despite deteriorating economic conditions in Europe. It also includes a number of companies in the online travel markets, which all use the Internet to increase their lowcost reach to customers and suppliers, helping them take share from the offline travel market. Global financials, furthermore, have continued to display much promise. I continue to believe that financial stocks could rank among the best-performing areas of the global markets. With pervasively low rates, historically depressed valuations, and developed economies in an already weak state, financials appear to harbor a substantial amount of upside potential as these factors normalize.

Q32012| Low rates lend support to global equities

Putnam Global Equity Fund (PEQUX)

Annualized total return performance as of September 30, 2012 Class A shares (inception 7/1/94)
Last quarter 1 year 3 years 5 years 10 years Life of fund Total expense ratio: 1.38%

Before sales charge

8.12% 25.75 7.11 -4.30 6.83 7.40

After sales charge

1.86% 18.58 5.03 -5.43 6.20 7.05

MSCI World Index (ND)

6.71% 21.59 7.48 -2.15 8.04 6.02

Quarterly returns are cumulative. Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. Performance of class A shares before sales charge assumes reinvestment of distributions and does not account for taxes. After-sales-charge returns reflect a maximum 5.75% load. The short-term results of a relatively new fund are not necessarily indicative of its long-term prospects. To obtain the most recent month-end performance, visit putnam.com. The funds expense ratios are based on the most recent prospectus and are subject to change. The MSCI World Index (ND) is an unmanaged index of equity securities from developed countries. You cannot invest directly in an index.

The views and opinions expressed are those of Shep Perkins, CFA, Portfolio Manager of Putnam Global Equity Fund, as of September 30, 2012. They are subject to change with market conditions and are not meant as investment advice. Consider these risks before you invest: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. Investments in small and/or midsize companies increase the risk of greater price fluctuations. The use of derivatives involves additional risks, such as the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. Growth stocks may be more susceptible to earnings disappointments, and value stocks may fail to rebound. The prices of stocks may fall or fail to rise over extended periods of time for a variety of reasons, including both general financial market conditions and factors related to a specific issuer or industry. Request a prospectus or summary prospectus from your financial representative or by calling 1-800-225-1581. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
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