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Unauthorized redistribution of this report is prohibited. This report is intended for amanda.ens@baml.com European Equity Strategy 2017 year ahead — Refining the reflation rotation Key takeaways e 2017 - Reflation, Reversal, Rotation, Relief or Revolt. EPS to turn +ve but politics to remain a valuation overhang in H1. « Defensive vs Cyclical rotation at extreme levels. More balanced approach needed but look for another leg to cyclical trades. ¢ O/w Media as quality cyclical and Oil. Stay cautious on UK domestic (Retail, Travel}. Health, Utilities over Food & Bev. 2017 - A year of cross currents, nimble investors required Recovery (positive but moderate in our view) and Rotation go hand in hand - we think that the pace of the rotation has to moderate. ECB reversal on QE is a risk and tapering because the ability or willingness to do QE fades would likely cause a setback. Investors will demand a premium for political risk until we get clarity on populist Revolt or policy Relief in France and elsewhere. Like 2016 investors will need to trade the ranges. High single digit upside - politics likely to weigh near term A valuation overhang remains in Europe vs other DM. We see a return to positive EPS growth (+7%) in Europe for the first time since 2014, driven by higher global GDP growth Resources recovery, capex discipline and FX. +7% growth implies less downgrades than usual (10% is the average). Base case upside in high single digits (c9% total return) but politics may mean market highs are more likely achieved in H2. Modestly higher yields and higher equities compatible Equities can continue to perform with rising rates — the key is that inflation breakevens are not falling. However, a more aggressive bond sell-off taking Treasury yields to 3% or higher would undermine EM, the growth outlook, peripheral spreads and risky assets. Reflation rotation stretched — refining our approach Rotation has been extreme (>6SD move in Def vs Cyclicals). Argues for a moderation in returns and a more balanced approach to sector allocation. Look for another leg to cyclical trades in the New Year. Sector valuations have also moved a long way already. Cautious on domestic UK exposure - Brexit still to bite The full impact of sterling weakness on the UK consumer environment is yet to be felt and Brexit negotiations are likely to drive further uncertainty and FX volatility. Structural issues add to our concerns in Retail and Travel & Leisure (both underweight). O/w Oil, Health, Utilities, Media; u/w Food & Beverage An OPEC cut and higher oil would make Oil’s high DY sustainable. Healthcare is too cheap vs an improving sector growth outlook and 2017 is a key year for pipeline news. Food & Beverage still seems the least attractive Defensive on valuation, positioning. We move overweight Media, a quality cyclical that has lagged and seen valuations de-rate. >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 37 to 38. Analyst Certification on page 36. 11690765 Timestamp: 01 December 2016 12:00AM EST Bankof America Merrill Lynch 01 December 2016 Equity Strategy Europe Ronan Carr, CFA >> European Equity Strategist MLI (UK) +44 20 7996 3292 ronan.carr@baml.com James Barty >> Investment Strategist MLI (UK) +44 20 7996 3291 james.barty@baml.com Tommy Ricketts >> European Equity Strategist MLI (UK) +44 20 7996 3294 tommy.ricketts@baml.com HOUSE_OVERSIGHT_014460