Key charts Chart 1: Synchronised rise in leading indicators globally augurs well for Chart 2: Modestly higher yields and higher equities compatible — Rising earnings recovery — especially if PMIs kick on to or above mid-50s inflation breakevens the key for equities 65 60 Stoxx 600 4-week returns vs 4-week change in real yields / inflation breakevens (since 2009) 60 AQ 2.0 55 \ La \ \, me 15 50 ; 1.0 0 . 45 0 05 40 0.0 35 ~40 ——|SM / Euro PMI manuf alg (advanced 9m) 05 30 =————MSCI Europe EPS € (trailing yoy, RHS 60 01/98 §=901/01 = 01/04 01/07 0110 O13) = OTE 1.0 Bund real >+0, b/even +ve Bund real >+0, b/even -ve Source: BofA Merrill Lynch Global Research, Datastream, IBES Source: BofA Merrill Lynch Global Research, Bloomberg Chart 3: Cyclicals vs Defensives trade now looks very stretched Chart 4: Likewise Financials vs Defensives: -2.5SD to +2.5SD post-Brexit 4 4 3 . 2 : 2 4 J “ 0 0 -{ J J rE) -2 ; 3 4 -4 : Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Dec-97 _ Dec-01 Dec-05 Dec-09 Dec-13 Cyclicals vs Defensives - relative price vs 52wk average (SD) ——Financials vs Defensives - relative price vs 52wk average (SD) Source: BofA Merrill Lynch Global Research, Bloomberg Source: Re BofA Merrill Lynch Global Research, Bloomberg place this text Chart 5: Financials valuations have recovered significantly relative to Chart 6: Rapid relative de-rating for Staples — relative PE for Food & the move in bond yields — relative PE back around average levels Beverage still 6-10% above 2010 / 2014 levels 0.90 3.5 1.70 -| 035 VAD ° 1.60 0 \ 25 : 1.50 0.80 ‘ 9 f 1 1.40 ¥ { 0.75 { 15 , 2 0.70 1 1.30 0.65 Banks /| PE rel A 0 , ———PE-relative FOOD & BEV ans f insurance Pee 1.10 === German 10y (RHS, inverted 4 ——— German 10y (RHS) : 0.60 0.5 O110 O11 0112 01/13 0114 0145 01/16 01/10 o1/1 O12 0113 O14 01/15 01/16 Source: BofA Merrill Lynch Global Research, Datastream, IBES Source: BofA Merrill Lynch Global Research, Datastream, IBES waflipa. 2 European Equity Strategy | 01 December 2016 3 HOUSE_OVER