Key charts
Chart 1: Synchronised rise in leading indicators globally augurs well for earnings recovery — especially if PMIs kick on to or above mid-50s
65 60 60 40 55 20 50 0
45
40 20 35 ; 40
—— (SM / Euro PMI manuf alg (advanced 9m)
30 =———=|\iSCI Europe EPS € (trailing yoy, R 60
01/98 «= 01/01 0104 01/07 O10 O13 O16
Source: BofA Merrill Lynch Global Research, Datastream, IBES
Chart 3: Cyclicals vs Defensives trade now looks very stretched
4
3 2 1 0 { -2 3 -4 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Cyclicals vs Defensives - relative price vs 52wk average (SD)
Source: BofA Merrill Lynch Global Research, Bloomberg
Chart 5: Financials valuations have recovered significantly relative to the move in bond yields — relative PE back around average levels
0.90 3.5 0.85 i 3 25 0.80 9 0.75 15 0.70 i 0.5 0.65 =——— Banks / Insurance PE-rel 0 060 ——— German 10y (RHS) 05
O1N0 O11 O12 01/13 0104 O1/15 01/16 Source: BofA Merrill Lynch Global Research, Datastream, IBES
Chart 2: Modestly higher yields and higher equities compatible — Rising inflation breakevens the key for equities
Stoxx 600 4-week returns vs 4-week change in real
an yields / inflation breakevens (since 2009)
1.5 1.0 0.5
0.0
0.5
-1.0 Bund real >+0, b/even +ve Bund real >+0, b/even -ve
Source: BofA Merrill Lynch Global Research, Bloomberg
Chart 4: Likewise Financials vs Defensives: -2.5SD to +2.5SD post-Brexit 4
4
Dec-97 _ _ Dec-01 Dec-05 ——_ Dec-09 Dec-13 Financials vs Defensives - relative price vs 52wk average (SD)
Source: Re BofA Merrill Lynch Global Research, Bloomberg place this text
Chart 6: Rapid relative de-rating for Staples — relative PE for Food & Beverage still 6-10% above 2010 / 2014 levels
1.70
1.60
1.50
1.40
1.30
1.20
=———PE-relative FOOD & BEV 110 eee German 10y (RHS, inverted
01/10 01/11 =O112 01/13) «01/14 «(015 = (01/16
Source: BofA Merrill Lynch Global Research, Datastream, IBES
Bankof America Merrill Lynch
European Equity Strategy | 01 December 2016 3
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