below $40. In other words, the outcome is highly binary in the short term for crude and related equities. We flag to investors that we would consider reducing our weighting in the event of no deal. Assuming OPEC does cut production and oil prices recover up to the high $50s per barrel, as per our commodity strategists views, earnings and cash flows can recover significantly in the coming 12-18 months. Our Oil analysts model between 8 and 17% upside to operating cash flows in 2017 for European integrated stocks if assumed crude prices are increased $10 from $50 to $60. That makes the highest DY in market at ~6% more sustainable out of FCF coverage. Cautious UK domestic (underweight Retail, Travel & Leisure). We are cautious on domestic UK exposure and underweight Retail and Travel & Leisure. To our mind, these companies face a lose-lose trade-off of maintaining margins by passing on higher costs at the expense of volumes, or face margin pressure by absorbing these costs in order to sustain current volumes. Building inflationary pressures point to a post-Christmas consumer squeeze. This could be further compounded OPEC cuts and oil prices rise. The Retail sector is also facing structural margin pressures and unattractive valuations. In Travel & Leisure (two thirds UK listed), profitability is declining from peak levels. Note our analysts also see structural pressures on airlines from overcapacity and competition. See below for more details. Table 4: European Sector Allocation ic [oe an | Lee ae Weight Delta | Portfolio | Portfolio / Weight Delta | Portfolio | Portfolio / Ticker % (bp) | Weight % | Benchmark % Ticker % (bp) | Weight % | Benchmark % il&Gas_ | SXEP | 46 | ow | +450 | 61 | 132% |fAutos&Parts | SxAP | 3.2 [| on | 0 HealthCare | SXDP_[ 125 | olw | +450 | 140 | 112% [Banks | sx7P_ | 124 | on 0 Media| SXMP_ [| 26 | olw | +400 | 36 | 138% _—[BasicResou_—| SXPP_| 30 [| on | 0 tities | sxep_ | 39 | ow |+too | 49 | 125% _|iChemicals__—| s