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Exhibit 65: FTSE 100 Price Level and British Pound A weaker pound benefits FTSE 100 companies, which generate 75% of sales outside the UK. Exchange Rate FTSE 100 Price Level 15 e---- GBP/USD (Right, Inverted) Index Level 7,300 7100 .20 Brexit 6,900 25 6,700 30 6,500 35 6,300 40 6,100 AB Depreciation 5,900 50 5,700 55 5,500 : 60 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Data through December 31, 2016. Source: Investment Strategy Group, Bloomberg. Exhibit 66: TOPIX Price Level Japanese equities have traded in a large-but- contained range. Price Level 3,500 5 3,000 2,500 2,000 Flat 1,500 1,000 500 - g 4 1980 1985 1990 1995 2000 2005 2010 2015 Data through December 31, 2016. Source: Investment Strategy Group, Goldman Sachs Global Investment Research, Bloomberg. footprint—75% of sales come from outside the UK economy—should benefit from the accelerating global GDP growth we expect this year, just as this exposure profited from last year’s 16% depreciation of the British pound (see Exhibit 65). Second, last year’s best-performing sectors— commodities and financials—are well positioned to extend their run. Financials—the largest UK sector—stands to benefit from rising interest rates, while the commodity sectors should get a boost from higher oil prices. Notably, these two sectors account for nearly half of FTSE 100 market capitalization. With these tailwinds in mind, we forecast UK earnings growth of 11% this year, the highest of our estimates across EAFE markets. That said, continued uncertainty around the implications of Brexit coupled with higher interest rates will likely weigh on FTSE 100’s well-above-average valuations. This view, combined with the UK equity market’s hefty dividend yield of 4.0%, results in a 4% total return projection for the FTSE 100. Although this return is attractive on its face, We project UK earnings growth of 11% this year, the highest of our estimates across EAFE markets. we do not believe it offers investors a large enough margin of safety to justify a tactical overweight. Keep in mind that significant uncertainties remain around the final contours of Brexit. Moreover, a shift by the Bank of England toward raising interest rates this year could reverse much of the British pound’s depreciation, to the detriment of UK earnings. Finally, FTSE 100’s global footprint could magnify any disruption to global trade volumes resulting from protectionist policies. Japanese Equities: Scaling a Familiar Peak Japanese equities have experienced their fair share of booms and busts over the last 25 years. As seen in Exhibit 66, this pattern of offsetting swings has resulted in a “fat and flat”!* trading range. With the TOPIX price level again in the upper third of its historical band, it is natural to ask whether 2017 will mark yet another market top in Japan. The earnings outlook is pivotal to answering this question. While our forecast for accelerating global GDP growth points toward higher earnings, near-peak profit margins are a headwind (see Exhibit 67). Moreover, with less central bank easing given the BOJ’s already sizable balance sheet, yen depreciation—a key driver of Japanese revenue growth since 2012—is expected to moderate this year. Even so, the 58 | Goldman Sachs | JANUARY 2017 HOUSE_OVERSIGHT_014591