Chart 17: MSCI Europe forward PE in-line with 30-year average at Chart 18: ...but at lower end of 13-15.5x PE range of last 15 months 14.1x... 17.0 4 --------------- oo eee eee eee 30 — MSCI Europe PE 12m fwd 16.0 |---------------- af We-------- 295 20 15 ie ——MSCI Europe PE 12m fwd 12.0 -) 01/14 07/14 01/5 07/15 01/6 07/16 12/87 12/91 12/95 = 12/99 12/03 12/07, 12/11 12/15 Source: BofA Merrill Lynch Global Research, Datastream, IBES Source: BofA Merrill Lynch Global Research, Datastream, IBES Relative attractiveness of Europe depends on EPS recovery in medium-term. Moving to relative valuations, European equities screen somewhat cheap vs their DM peers. However, the medium-term bull case for Europe is far more a function of potential earnings and ROE recovery rather than significant undervaluation. Europe’s valuation discount to the US is at multi decade wides on PBV (over 40%) but that in turn reflects Europe’s significant underperformance on EPS growth and ROE. Trailing ROE for MSCI Europe is just 8% (at historical trough levels). That is nearly 5pp below MSCl USA compared to a 3pp gap on average historically and close to the widest spreads since the mid-1990s. Europe vs US relative PE 7% below average. Based on PE, Europe nevertheless trades cheap relative to the US. The PE discount at 18% is 7% wider than the 20 year average and relative PE is at the lowest level since 2012. So while a sustained reversal in the underperformance of Europe versus the US would over time have to be driven by a recovery in relative profitability we do see current valuations reflecting a discount perhaps for political reasons (Brexit, upcoming elections). Chart 19: Europe vs US: modest PE discount but cheap on rel. PBV Chart 20: European earnings and profitability significantly lag the US 1.19 ——Relative PBV (MSCI) 20 4.00 ——Relative PE (12m fwd, IBES) 18 16 . 0.90 : 14 0.80 12 0.70 10 0.60 8 ——MSCI USA - trailing ROE ———|MSCI Europe - trailing ROE 0.50 6 06/96 = 06/99. OG/O2—s—sC«G/