Chart 27: 3% Global GDP growth the tipping point for EPS Chart 28: Synchronised rise in leading indicators globally augurs well for Europe trailing EPS growthvsWorldGDP earnings recovery — especially if PMIs kick on to or above mid-50s 50% 1% 65 60 40% ts e m0 40 5% 20% : BS 20 10% 4% 50 0, fe} 0 0% 3% 45 -10% 2% 20 -20% - 40 -30% ° 35 -40 40° 0% © " ; 30 60 80% 496 0499 Qs02 0405 0408 adit cat “7 7 01/98 01101 01/04 0107 «O10 «O113.ONNG Q Q Q Q Q a a au ———|SM / Euro PMI manuf avg (advanced 9m) ———MSCl Europe 12m trail EPS (IBES) —-——World GDP (right) —MSCI Europe EPS € (trailing yoy, RHS) Source: BofA Merrill Lynch Global Research, Datastream, IBES Source: BofA Merrill Lynch Global Research, Datastream, IBES Removal of the 3pp p.a. drag from Resources supports EPS outlook. Second, the Resources sectors in 2017 will likely provide a (strongly) positive contribution to market EPS, in turn reversing what has been the biggest headwind for several years. Over the last 3-5 years the Resources sectors provided a 2.5 percentage point drag on annualized market EPS growth. In 2016 Banks have been the other big drag on market earnings. While structural headwinds to profitability mean the contribution of Banks remains open to debate, consensus forecasts nevertheless imply a strong recovery in 2017 (driven in part by one-offs reversing). The important point is that the market ex-Banks and Resources has delivered modest but positive EPS growth — estimated at +5.5% for 2016. Hence, removing the drag from Oil and Mining makes high single digit growth achievable in our view. Chart 29: Resources a 2.5pp drag on market EPS growth in recent years Chart 30: Capex discipline supportive to margin outlook Annualized EPS growth Europe Ex-Financials: EBIT margins vs capex/depreciation 4 14% 100% moyr mSyr m 10yr 3 .) ; 1a #r 120% 2 i 10% 140% 1 8% 0, 0 6% 160% 4 4% 180% 1990 1994 1998 2002 2006 2010 2014 2018 2 ——EBIT / sales (LS, %) Stoxx 600 Market Ex-Resources Market Ex-Banks & — — Fore