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Media - raise to overweight Favourable entry point Media has been is a big laggard following a six-month period of sustained underperformance and hit very oversold levels on our CTIs in mid-November. Although Media is a bit more domestic than Tech both are “quality” cyclicals and typically trade fairly in line with one another. However, the relative is now back at 2009 lows. Optionality on European consumer We are bearish on the outlook for the UK consumer but consumer confidence has been steadily rising in the Eurozone since 2012 and the sector has tracked this measure very closely. We note however that the two have disconnected recently. We think Media is more likely to catch up then confidence fall given economists’ fairly positive view on Eurozone growth next year, and the potential for upside surprises to US growth. Chart 74: Favourable entry point for Media Chart 75: The pick-up in EU Consumer Confidence should boost Media Media and Tech are both “quality” cyclicals but the relative is at a 7y low 0.9 0 | 0.85 5 0.95 09 0.8 Ho 0.75 0.85 -15 0.7 0.8 ———= Stoxx Media Price relative -20 0.65 0.75 —— European Commission Consumer 0.6 Confidence Index 28 0.7 oom Stoxx Media relative to Tech 0.55 -30 fn ee ee a ee ee a ee a ee ee ee ee ee Source: Bloomberg Source: Bloomberg Media historically outperforms when PMIs and inflation rising The average return for Media when PMls and inflation are both rising is 0.6% relative but the sector has underperformed by 2% month to date. A stronger dollar is also a positive historically for Media given that many large caps within the sector, notably agencies, are large dollar earners. But again, the two have disconnected recently. Valuations now at a small discount to the market Media has de-rated by nearly four PE points (from 19.7 to 16) since the April 2015 highs and the sector now trades on a 5% discount to its average vs the market. We think the improving global growth backdrop will support earnings and should mean the sector can re-rate. Bankof America <> Merrill Lynch European Equity Strategy |01 December 2016 33 HOUSE_OVERSIGHT_014492