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Chart 62: Real wages likely to fall Chart 63: REC and PMI point to higher unemployment 6 150 —— Claimant count, 3m change, inverted 400 === REC placements, lagged 3m (rhs) 2 50 1 nl Ml pene MI Bi NI % | lh 0 2 -2 hy -150 mum Real wages, BAML forecast 4 ——= Average weekly earnings, % 3m yoy -200 3 == (P| inflation, BAML forecast d -250 -4 2002 2004 2006 2008 2010 2012 2014 2016 2018 2004 2006 2008 2010 2012 2014 2016 Real wages calculated as average weekly earnings minus CPI inflationSource: BofA Merrill Lynch REC placements is an average of permanent and temporary placements. REC and PMI shown as Global Research, ONS. standard deviations from average. Source: BofA Merrill Lynch Global Research, Markit Given all of the above, we reiterate our preference for avoiding sectors with a high proportion of domestic UK companies. 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 in our view. This could be further compounded if our Oil Strategists’ forecasts are right and Brent averages ~S60/bb following an OPEC cut. But how much fs in the price? The pushback to our view is that the forecasted deterioration in growth hasn't really materialised and investors are already pricing it in a lot of bad news. For instance, Easyjet is down nearly 35% and investors are still underweight the UK in the FMS. While this is the case for certain stocks, at a sector level investors appear to have squared off their underweights in Retail/ Travel according to the FMS. Both sectors also back near pre-Brexit levels relative to the market (albeit Travel reflects the recent oil price weakness). Chart 64: Source: Brexit sectors no longer underowned by investors Chart 65: Retail and Travel are some way off their post-Brexit lows Construction Ind GdsaSvs 0.93 0.74 ecnnolo Healthcare 0.92 0.72 Autos Travel&Leis. 0.91 0.7 7 ante elecoms Insurance 0.9 0.68 Retail Chemicals 0.89 0.66 Real betate eal Estate Foodies 0.88 0.64 oods Oil & Gas 0.87 0.62 ; Utilities me Nov-16 Fingnes Sys Oct-16 0.86 | ——<Stoxx Retail relative ——=Stoxx Travel & Leisure relat -35 -25 -15 5 5 15 25 0.85 0.58 Source: BofA Merrill Lynch Global Research May-1 6 Jun-16 Jul-16 Aug-16 Sep-1 6 Oct-16 Source: Bloomberg Bankof America 2 European Equity Strategy |O1 December 2016 29 Merrill Lynch HOUSE_OVERSIGHT_014488