the margin outlook into 2017-18, given Capex to depreciation for the Market Ex- Financials in 2015 hit its lowest level since 2003 and had been declining for 3-years. Finally, we note that FX may provide a modest tailwind to European EPS again in 2017. Our FX team’s $/€ forecasts trough at $1.02 in mid-2017, implying a rate of depreciation for the euro that peaks at 10%. Chart 31: Stronger dollar would be a tailwind for EPS Chart 32: Change in consensus EPS (%) vs annual market returns: YoY change in $/€ actual and implied by BofAML FX forecasts downgrades are the norm and average -10% 30 30 20 20 10 | 10 0 - -10 0 -20 ‘ ; 30 -10 ¥ -40 -50 30 =———= 3m YoY (at BAML forecast) mEPS change Dec pre to March post == Cal year return 01/01 01/03 01/05 01/07 O1/09 01/11 01/3 01/15 O1/17 Source: BofA Merrill Lynch Global Research, Datastream Source: BofA Merrill Lynch Global Research, Datastream, IBES Consensus downgrades in our base case — but less than average Our base case 7% EPS growth assumption is below the current bottom up consensus of +14%. Hence, for now we don’t see the prospect of a sustained upgrade cycle. Consensus downgrades are the norm however. 2010 was the last year that consensus forecasts started the year too low. In fact, consensus was too high in 12 of the last 17 years. Moreover, our estimate of 7% EPS growth in 2017 implies less downgrades than usual (10% is the average). It’s also worth noting that over the past 17 years annual consensus downgrades of less than 10% have never been accompanied by negative equity returns for the same calendar year. Sector EPS growth prospects Correlation analysis of sector earnings growth against global GDP suggests that Banks are the sector that may be most sensitive to improvements in global economy. Interest rate developments are likely the key to earnings but they in turn should reflect the nominal growth environment. Real economic growth would also have some effect on credit volumes and collateral valuations though