Exhibit 61: EAFE Price to 10-Year Average Cash Exhibit 62: MSCI EMU Trailing 12-Month Flow Discount to the US Earnings per Share Today's larger-than-average discount provides a margin of Profits have been range-bound for almost four years. safety to EAFE equities. Discount (%)} Trailing 12-Month EPS (€) 60 5 —— MSCI EAFE Discount to MSCI US 20 4 — ——-— Average Since 1982 ‘0 Average Since 1992 84 16 5 oo 14 4 12 0 + 10 + Sideways 8 Since 2012 0 +------- Veena ba eee 3 AK pw 1 “40 4 avd Vey 24 -60 J 0 1982 1987 1992 1997 2002 2007 2012 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 Data through December 31, 2016. Data through December 31, 2016. Source: Investment Strategy Group, MSCI, Datastream. Source: Investment Strategy Group, Bloomberg. likely to exceed those of cash and bonds. In turn, today’s larger-than-normal valuation discount to we recommend that clients maintain their strategic | US equities (see Exhibit 61). While this margin weight in US equities, although we acknowledge of safety does not guarantee outperformance, that risks have risen at the same time that returns it may provide investors with a larger buffer to appear likely to be lower going forward. While US —_ absorb adverse developments and miscalculations equities are not yet running on fumes, we should in their forecasts. In our view, the risk/return keep a close eye on the fuel gauge. profile of EAFE equities is more attractive than it first appears. As a result, we do not recommend that EAFE Equities: Priced for Imperfection investors underweight EAFE equities. In fact, there are reasons to believe that EAFE equities will There is no shortage of concerns surrounding the outperform US equities in local currency terms various countries that comprise Europe, Australasia this year. In the sections that follow, we explore and the Far East (EAFE) equity markets. The these reasons by examining the three main EAFE list is both long and valid, including persistently markets, beginning with the Euroz