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were underweight at the start of the year too and missed the lows. We recognized we were wrong and closed our underweight and while it took us a while but we eventually managed to go overweight in September. The lesson of that is that themes are great, but when the facts change strategists and investors have to change their minds. Chart 11: Cyclicals vs Defensives: from -3.5SD to +3.2SD in 14 months Chart 12: Financials vs Defensives: -2.5SD to +2.5SD post Brexit 4 4 3 3 2 2 { 1 0 0 -{ -1 ry) -2 3 3 A A Teese Dec-01 Dec-05 Dec-09 Dec-13 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Financials vs Defensives - relative price vs 52wk average (SD) Cyclicals vs Defensives - relative price vs 52wk average (SD) Source: BofA Merrill Lynch Global Research, Bloomberg Source: Re BofA Merrill Lynch Global Research, Bloomberg place this text In fact your best guide to this year was to buy something when it has oversold, underowned and unloved, like Miners and Emerging Markets in February, Banks in July, the Nikkei the day of the US election and sell when the opposite e.g. bonds and defensive equities shortly after Brexit. Our CTI models did actually pick up a number of those events as the table below shows. It also got picked up by our standard deviation analysis. We acted on some but not all of these readings. The lesson, with the benefit of hindsight, is to pay more attention to them. Indeed, our recent decision to downgrade both Banks and Basic Resources reflected very high readings on our models. Table 1: Reflation rotation very stretched on our CTIs post-Trump Table 2: While opposite true immediately post-Brexit Asset 11/11/2016 10/11/2016 09/11/2016 Asset 29/06/2016 28/06/2016 27/06/2016 EUR/GBP 46 -44 -12 Relative Stoxx Autos -95 -39 9 German 10y Bonds 66 61 24 Relative Stoxx Banks -80 -83 -86 US 10y Bonds 96 96 93 Relative Stoxx Basic Resources 21 3 0 Stoxx Banks 80 ial 0 Relative Stoxx Chemicals 2 19 40 Stoxx Basic Resources 92 93 92 Relative Stoxx Construction & Materials -10 -36 7 Stoxx Food & Beverages -84 -96 -54 Relative Stoxx Financial Services -91 -91 -92 Stoxx Insurance 67 64 23 Relative Stoxx Food & Beverages 60 18 82 Stoxx Personal & Household Goods -34 1 1 Relative Stoxx Healthcare 88 88 88 Stoxx Utilities -92 -94 -19 Relative Stoxx Industrial Goods & ; A? -35 4A Services Relative Stoxx Banks Relative Stoxx Insurance -87 -94 -94 Relative Stoxx Basic Resources 100 100 99 Relative Stoxx Media 6 “13 35 Relative Stoxx Food & Beverages -93 -93 -89 Relative Stoxx Oil & Gas 93 86 cal Relative Stoxx Insurance 92 94 16 Relative Stoxx Personal & Household 57 58 70 Relative Stoxx Media -34 TT 87 Goods Relative Stoxx Pers&Hhold Goods -92 -94 Pid Relative Stoxx Retail 63 81 15 Relative Stoxx Technology -80 -14 -55 Relative Stoxx Technology 0 0 0 Relative Stoxx Telecom -91 -92 -28 Relative Stoxx Telecom 3 0 -16 Relative Stoxx Utilities i) -92 59 Relative Stoxx Travel & Leisure -98 -100 -100 Relative Stoxx Utilities 65 6 2 Source: BofA Merrill Lynch Global Research, Bloomberg Source: BofA Merrill Lynch Global Research, Bloomberg We think 2017 is another year where investors will need to be nimble. Markets have responded enthusiastically to a prospective Trump Presidency but as the above charts suggest we may well have discounted much of it. That is also supported by our fixed income and FX forecasts, which suggest much has already been priced in. In addition we have political risk starting with next weekend’s Italian referendum stretching to the German elections in Autumn 2017. In the middle we have the crucial French elections. A Bankof America Merrill Lynch European Equity Strategy | O01 December 2016 5 HOUSE_OVERSIGHT_014464