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Key charts Chart 1: Synchronised rise in leading indicators globally augurs well for earnings recovery — especially if PMIs kick on to or above mid-50s 65 60 60 40 55 20 50 0 45 40 “20 35 ; 40 —— ($M / Euro PMI manuf alg (advanced 9m) 30 == |\iSCI Europe EPS € (trailing yoy, R 60 01/98 «= 01/01 0104 01/07 O10 O13 O16 Source: BofA Merrill Lynch Global Research, Datastream, IBES Chart 3: Cyclicals vs Defensives trade now looks very stretched 4 3 2 1 0 | -2 3 -4 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Cyclicals vs Defensives - relative price vs 52wk average (SD) Source: BofA Merrill Lynch Global Research, Bloomberg Chart 5: Financials valuations have recovered significantly relative to the move in bond yields — relative PE back around average levels 0.90 3.5 0.85 y 3 25 0.80 9 0.75 15 0.70 i 0.5 0.65 ——— Banks / Insurance PE-rel 0 0.60 == German 10y (RHS) 05 O1N0 =O1f1 O12 01/13 0104 O15 801/16 Source: BofA Merrill Lynch Global Research, Datastream, IBES Chart 2: Modestly higher yields and higher equities compatible — Rising inflation breakevens the key for equities Stoxx 600 4-week returns vs 4-week change in real an yields / inflation breakevens (since 2009) 1.5 1.0 0.5 0.0 0.5 -1.0 Bund real >+0, b/even +ve Bund real >+0, b/even -ve Source: BofA Merrill Lynch Global Research, Bloomberg Chart 4: Likewise Financials vs Defensives: -2.5SD to +2.5SD post-Brexit 4 4 Dec-97 _ _Dec-01 Dec-05 —_—— Dec-09 Dec-13 Financials vs Defensives - relative price vs 52wk average (SD) Source: Re BofA Merrill Lynch Global Research, Bloomberg place this text Chart 6: Rapid relative de-rating for Staples — relative PE for Food & Beverage still 6-10% above 2010 / 2014 levels 1.70 1.60 1.50 1.40 1.30 1.20 ———PE-relative FOOD & BEV 110 eee German 10y (RHS, inverted 01/10 = O1/11 =O1N2 «013 «01/14 =(01/15 (01/16 Source: BofA Merrill Lynch Global Research, Datastream, IBES Bankof America Merrill Lynch European Equity Strategy | O01 December 2016 3 HOUSE_OVERSIGHT_014462