below $40. In other words, the outcome is highly binary in the short term for crude and

below $40. In other words, the outcome is highly binary in the short term for crude and related equities. We flag to investors that we would consider reducing our weighting in the event of no deal. Assuming OPEC does cut production and oil prices recover up to the high $50s per barrel, as per our commodity strategists views, earnings and cash flows can recover significantly in the coming 12-18 months. Our Oil analysts model between 8 and 17% upside to operating cash flows in 2017 for European integrated stocks if assumed crude prices are increased $10 from $50 to $60. That makes the highest DY in market at ~6% more sustainable out of FCF coverage. Cautious UK domestic (underweight Retail, Travel & Leisure). We are cautious on domestic UK exposure and underweight Retail and Travel & Leisure. To our mind, these companies face a lose-lose trade-off of maintaining margins by passing on higher costs at the expense of volumes, or face margin pressure by absorbing these costs in order to sustain current volumes. Building inflationary pressures point to a post-Christmas consumer squeeze. This could be further compounded OPEC cuts and oil prices rise. The Retail sector is also facing structural margin pressures and unattractive valuations. In Travel & Leisure (two thirds UK listed), profitability is declining from peak levels. Note our analysts also see structural pressures on airlines from overcapacity and competition. See below for more details. Table 4: European Sector Allocation Index Index Weight Delta | Portfolio | Portfolio / Weight Delta | Portfolio | Portfolio / Sector Ticker % Stance | (bp) | Weight % |Benchmark % |Sector Ticker % Stance | (bp) | Weight % |Benchmark % Oi1&Gas SXEP 46 olw +150 6.1 132% Autos&Parts SXAP 3.2 n 0 3.2 00% HealthCare SXDP 12.5 olw +150 14.0 112% Banks SX7P 12.4 n 0 12.4 00% Media SXMP 26 olw +100 3.6 138% BasicResou SXPP 3.0 n 0 3.0 00% Utilities SX6P 3.9 olw +100 49 125% Chemicals SX4P 5.0 n 0 5.0 00% Constr&Mtr SXOP 3.0 n 0 3.0 00% Trav&Leisr SXTP 1.8 ulw -150 0.3 15% FinServ SXFP 1.9 n 0 1.9 00% Food&Bevrg SX3P 5.9 ulw -150 4.4 75% InduGd&Ser SXNP 11.9 n 0 11.9 00% Retail SXRP 3.1 ulw -200 1.1 36% Insurance SXIP 64 n 0 64 00% 100.0 +0 100.0 0% Per&HouGds SXQP 8.8 n 0 88 00% Real Estate SX86P 1.9 n 0 1.9 00% Technology SX8P 3.8 n 0 3.8 00% Telecomm SXKP 41 n 0 44 00% Source: BofA Merrill Lynch Global Research, Bloomberg Reflation rotation - tactically got very stretched Over the last two weeks we cut our weightings in Basic Resources and Banks to neutral. That was in response to the signals from our technical models all flashing warning signs that the rotation out of bond proxies into reflation beneficiaries had got very stretched tactically. Our Composite Technical Indicators (CTls) for sector relative performance hit +100 at the recent high in the case of Basic Resources and +94 for Banks and Insurance. These models combine a range of technical indicators including RSIs, MACDs, Bollinger bands and others and +100 represents maximum overbought. Basic Resources relative price has also reached +2.7SD above the 52-week average, the highest reading for the sector since 2010. Financials hit +1SD while other cyclicals have also peaked at +1.5-2SD in recent weeks. By contrast bonds and equity bond proxies screen as very oversold on these models. All Defensives troughed at -92 or below at some point over the last 4 weeks. On Bollinger scores, relative prices hit between -2.4SD and -3.8SD for the Defensives and also Real Estate. In the case of Utilities (-3.8SD) that is close to a record low. Similarly our CT| readings for macro variables like 10-year Treasury yields, gold and S/yen also hit oversold levels. The models are useful in isolation for highlighting any anomalies in Bankof America Merrill Lynch European Equity Strategy |01 December 2016 = 21 HOUSE_OVERSIGHT_014480