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Chart 50: Utilities relative PE close to the 2013 low Chart 51: Chemicals / Industrials — re-rated but PE-rel not excessive
1.20 -0.5 1.30
1.15 0.0 425
4 0.5
10 10 1.20
1.05 ,
15 4.15
1.00
2.0 1.10
0.95 25
1.05
ai an — Chemicals / Industrials PE-rel
_— ——PE-relative UTILITIES 1.00 nanan
3.9 ——= German 10y (RHS)
0.80 ——— German 10y (RHS, inverted) 40 0.95
01/10 01/11 O12 0193 0194 O15 01/16 01/08 01/10 01/12 01/14 01/16
Source: BofA Merrill Lynch Global Research, Datastream, IBES Source: BofA Merrill Lynch Global Research, Datastream, IBES
UK —- Waiting for Brexit
It’s useful to think about where the UK is today in terms of the four risk factors we
identified in our February 2016 Brexit preview: 1) weaker GBP; 2} weaker UK growth; 3)
Higher UK risk premia & gilt yields; 4) increased regulatory, political and market
uncertainty.
Although we saw a severe risk-off move immediately following the Brexit vote, the only
truly significant post-Brexit delta has been a weaker GBP. GBP is down 16% vs USD and
11% on a trade weighted basis. In fact, a simple post-Brexit strategy of going equal
weighted long UK-listed sectors with above market international sales exposure vs
sectors with below market sales exposure would have delivered ~110% returns in USD.
Chart 52: GBP and sales exposure have been the key determinants for post-Brexit UK equity
returns
3% UK MATERIALS $
.
20%
m UK FD/STAPLES
oe = _ a CAP GDS$ ee
UK INSURANCES UK}US K ENERGY $
10% —r9
OHGREAL ESORETAKNEISTES 8 UK DIV FINS
$ a
-30% / U
UK PHIBIO L SCI$
UK TICMBVS $ ees RS
TRANSPT $
Performance since Brexit (%$ in USD)
40%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% International Sales exposure
Source: BofA Merrill Lynch Global Research, Bloomberg, Factset. Performance in USD from 23-June-2016 close to 25-Nov-2016 close.
The currency move contrasts with the other risk factors. To date, UK growth which has
held up better than many expected; policy uncertainty has fallen following a sharp spike;
gilts are only 2bp higher than June 23” (although this masks a 85bp rally then 87bp sell-
off); and the UK cost of equity is now down ytd. What Brexit, you could ask.
Bankof America
Merrill Lynch European Equity Strategy |O1 December 2016 25
HOUSE_OVERSIGHT_014484