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a —- a return to positive EPS growth in 201 7% EPS growth in 2017 as global growth improves and Resources EPS recovers We think the earnings backdrop will be supportive in 2017 with a return to positive EPS growth in Europe for the first time since 2014 and with downside to consensus forecasts for the year ahead that are well below average. Our base case assumes +7% EPS growth in 2017 and 2018. With EPS broadly stagnant over the last 6 years, investors might justifiably ask what is different this time. We see several reasons to think mid to high single digit EPS growth is achievable next year. Chart 25: Earnings revisions are currently modestly positive Chart 26: Broad based recovery in global growth (based on 29 PMIs) 20% 100% 10% 90% 0% 80% 170% -10% 60% -20% 50% -30% 40% 40% si 42/00 12/03 12106 12/09 12/12 12/15 apy, |___ Pills 60 peel OF PIG inciasing (last tn) Stoxx 600 EPS revisions ratio (4 wk avg) ====13-week average 113 0384 O74 1144 038/15 07/15 11/15 03/16 07/16 Source: BofA Merrill Lynch Global Research, Datastream, IBES Source: BofA Merrill Lynch Global Research, Markit, Bloomberg Return to positive EPS growth feasible with global GDP at 3.5%... First, global growth is accelerating and on our economists’ base case forecasts global GDP growth will be 3.5%, the first materially above trend growth year since 2010. That is significant for European earnings given a reasonably tight relationship to global GDP growth. 3% represents the tipping point around which earnings growth tends to turn positive according to our regression model. At the BofAML forecast of 3.5% global GDP growth, 7% EPS growth is implied as likely by the same model. ..aS leading Indicators point to a synchronized global recovery. What gives us confidence in this putative earnings recovery is the more synchronized nature of the current recovery. All major regions of the world are showing momentum in growth indicators for the first time in several years. One measure of the broad nature of the improvement is manufacturing PMI surveys. Of 29 Markit PMIs 83% are currently above 50, highest since August 2014. More importantly, 79% have improved over the last 3 months — higher than at any point in the last three years. Bull case of global GDP towards 4% would signal double digit EPS growth. To see a more bullish outcome for EPS we would need to see global GDP accelerating further. Based on our regression model, double digit EPS growth historically was consistent with global GDP growth above 3.8%. Under our bull case scenario for 2017, with say 4.0% global GDP growth, consensus EPS growth forecasts for +14% in Europe would become realistic. PMs beyond 55 would suggest upside to base case. Significant further gains in leading indicators would be a signal that earnings growth could exceed our base case. Over the longer term EPS growth has followed manufacturing PMI surveys with a 9- month lag approximately (using an average of US and Eurozone). Historically readings above 55 were consistent with mid-teens EPS growth. The relationship has weakened in recent years as low interest rates and weaker commodity prices weighed on earnings in Financials and Resources. Nevertheless, in the last year of decent EPS growth in Europe in 2014 the PMIs peaked at 54 so we would look for upside to our base case EPS forecast should PMIs improve to the mid-50s level or beyond. Bankof America <> Merrill Lynch European Equity Strategy |01 December 2016 =—-11 HOUSE_OVERSIGHT_014470