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Chart 50: Utilities relative PE close to the 2013 low Chart 51: Chemicals / Industrials — re-rated but PE-rel not excessive 1.20 -0.5 1.30 4.15 0.0 425 4 0.5 10 10 1.20 1.05 : 15 1.15 1.00 2.0 1.10 0.95 25 1.05 aa an — Chemicals / Industrials PE-rel — ——PE-relative UTILITIES 1.00 en ann 3.5 ——= German 10y (RHS) 0.80 ——— German 10y (RHS, inverted) 40 0.95 01/10 301/11 O12 0193 0194 O15 01/16 01/08 01/10 01/12 01/14 01/16 Source: BofA Merrill Lynch Global Research, Datastream, IBES Source: BofA Merrill Lynch Global Research, Datastream, IBES UK — Waiting for Brexit It’s useful to think about where the UK is today in terms of the four risk factors we identified in our February 2016 Brexit preview: 1) weaker GBP; 2} weaker UK growth; 3) Higher UK risk premia & gilt yields; 4) increased regulatory, political and market uncertainty. Although we saw a severe risk-off move immediately following the Brexit vote, the only truly significant post-Brexit delta has been a weaker GBP. GBP is down 16% vs USD and 11% on a trade weighted basis. In fact, a simple post-Brexit strategy of going equal weighted long UK-listed sectors with above market international sales exposure vs sectors with below market sales exposure would have delivered ~110% returns in USD. Chart 52: GBP and sales exposure have been the key determinants for post-Brexit UK equity returns 3% UK MATERIALS $ . 20% m UK FD/STAPLES we = “ws SK CAP GDS$ na UK INSURANCES UK}US K ENERGY $ 10% —rg OHGREAL ESMORETAKINEISTES 8 UK DIV FINS $ a -30% / U UK PHIBIO L SCI$ UK TICMBVS $ ees RS TRANSPT $ Performance since Brexit (%$ in USD) 40% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % International Sales exposure Source: BofA Merrill Lynch Global Research, Bloomberg, Factset. Performance in USD from 23-June-2016 close to 25-Nov-2016 close. The currency move contrasts with the other risk factors. To date, UK growth which has held up better than many expected; policy uncertainty has fallen following a sharp spike; gilts are only 2bp higher than June 23” (although this masks a 85bp rally then 87bp sell- off); and the UK cost of equity is now down ytd. What Brexit, you could ask. Bankof America Merrill Lynch European Equity Strategy |O1 December 2016 25 HOUSE_OVERSIGHT_014484