NEWS. Equities Commentary. DAX Retracement near completion Closing Price: 9, Monday, 18th January 2016

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1 NEWS R Monday, 18th January 2016 Oil prices remain under pressure, which continues to weigh on global equities. Though last week stocks saw some relief rallies, these could not be maintained, as oil fell below $30 a barrel on the news that export sanctions on Iran were to be lifted. We believe a large contributor to the current weakness in equities is the lack of data points for investors to focus on beyond speculating on the extent of China s slowdown and its impact on oil and global growth. As such, we expect markets should stabilise once earnings season gathers pace. In the interim, there is likely further risk to the downside in equities, albeit punctuated by occasional relief rallies. The economic calendar holds a number of key data points this week for investors to assess, including Chinese GPD and Industrial production on Tuesday, US inflation on Wednesday, Eurozone inflation, and the ECB meeting on Thursday, and US Chicago Fed and Leading Indicators index on Friday. David Donnelly Senior Investment Analyst Equities Commentary DAX Retracement near completion Closing Price: 9,545.3 Global growth concerns originating from China and the Emerging Markets have weighed heavily on the German DAX Index in 2016, due to Germany s high exposure to Asian economies through its exports. This expected slowdown in global growth continues to weigh on oil prices which is in turn driving markets lower. The DAX Index is currently sitting just 2% above key support at 9346 which is the low from the sharp selloff in global equities seen back in August 2015, when the PBOC unexpectedly devalued its currency, the Yuan against the USD. A similar price action has unfolded since the turn of the new year, as the PBOC once again devalued its currency, which increased market speculation of a hard landing in China. This 9346 support level represents a 25% retracement off the highs seen in However, we still think the DAX Index can recover these early year losses throughout European equity valuations are attractive at 11.6x 2016 earnings, compared to the US at 15.2x earnings. The earnings growth outlook is strong in Europe, at 10% and finally, European risk assets should be supported by the ongoing QE programme by the ECB which is expected to run until March 2017 at a minimum. If investors prefer a more geographically diversified exposure to Europe, we recommend the Eurostoxx 50 ETF which is currently sitting just above crucial support at Stephen Hall, CFA Investment Analyst Dax Index Level Support level 1 9,346 Support level 2 9,172 Eurostoxx 50 Support level 1 2,880 Support level 2 2,731 Share Price Return YTD DAX -11.2% Eurostoxx -9.6% Source: ishares, Blackrock, Bloomberg C AN T O R F I T Z G E R AL D I R E L AN D L T D 1

2 RD Shell BG deal set to close in February Closing Price: GBp1,351 Shares in Royal Dutch Shell have come under renewed selling pressure as a result of the year-to-date declines in the price of oil, and the belief that Shell has overpaid for BG s assets. However it is important to note that, due to the heavy weighting of stock in the purchase price, the actual cost to Shell has fallen from the c.$70 billion originally announced last April, to c. $53billion now. There are also concerns regarding Shells capacity to maintain its dividend in the face of lower oil prices. Shell has actively been reducing spending, and capital expenditure is expected to be reduced by c.$400m this year. In addition, the disposals of assets following the conclusion of the BG acquisition should also provide c.$30billion over In a worst case scenario, cash dividend payments could be replaced with share distributions of the same magnitude. The transaction economics require oil to average over $60 per barrel over a 15 year period; current forecasts see Brent topping $60 in 2017, $66 in 2018 and $68 in Full integration of BG is expected to be completed by Overall, we remain holders of the stock, and believe that the BG deal will ultimately prove transformative for the company. Shell will release its results for FY15 on the 4th of February. David Donnelly Senior Investment Analyst Revenue ($ bn) EPS ($) P/E 11.48x 11.35x 8.04x Div Yield 9.76% 9.76% 9.85% RD Shell -7.7% -24.1% -11.5% Crude Oil -21.2% -36.6% -20.6% Verizon Showing defensive qualities and strong yield in volatile environment Closing Price: $44.43 While we continue to prefer European equities, we remain positive on some US names with stock specific catalysts. One example of this is core portfolio name Verizon. While YoY earnings have seen downgrades across a number of sectors, telecoms have seen upgrades, with expectations now for earnings growth. Despite the S&P declining 6% YTD, Verizon s share price has held up better, declining just 2.9% in the same period. It is set to announce Q4 earnings this Thursday, with market expectations for EPS of $0.89, again, driven by post-paid subscriptions. We will also be looking for an update on its recently launched Go90 video streaming service, which includes live broadcasts of college football, basketball and international soccer, music performances, as well as programs like Comedy Central s Daily Show, ESPN s 30 for 30 and live NFL games. In addition to increased data usage, Verizon is looking to add value to advertisers by providing targeted marketing and a more comprehensive picture of consumers. It will look to utilise data from multiple platforms across traditional and digital media to provide a more multi-dimensional view that improves targeting and customer conversion. Its 2016 dividend yield is 5.16% against the S&P on 2.4%. The dividend is well covered at 1.74x FY15 EPS and 3.54x on a cash basis while shares trade on 11.2x FY16 earnings. Shane Kelly Investment Analyst Revenue ($ bn) EPS ($) P/E 11.20x 11.18x 11.12x Div Yield 5.0% 5.13% 5.29% Verizon -2.5% -0.1% -3.9% S&P -4.9% -3.6% -5.9% C AN T O R F I T Z G E R AL D I R E L AN D L T D 2

3 Lloyds The dividend story remains in tact Closing Price: GBp64.71 Lloyds has underperformed the broader UK equity Index so far in 2016 due to increased BREXIT concerns. Expectations of a UK rate hike have also been pushed further back to July 2017, which has weighed on Lloyds future Net Interest Margin (NIM) expansion potential. There has also been negative speculation over the strength of future dividend payments. We believe future Net Interest Margin expansion above 2.63% can improve further, despite limited ability to re-price deposit accounts, and as competition in the UK mortgage market remains high, which could weigh on asset yields; however repricing of wholesale liabilities should provide support to its NIM. We feel Lloyds will have a sufficiently strong capital base (currently has a CET1 ratio 13.7% as of Q3/15), to achieve consensus forecast dividend yields of 5.6% in 2016 and 6.9% in This could be achieved through organic capital generation and tight cost control. The market is broadly bullish on the stock, with a 12 month consensus target price of GBp 86.58, which offers investors c. 30% upside potential in addition to an attractive dividend yield. Lloyds is conservatively priced with a 8.6x 2016 P/E, which is significantly below its 3 year average of 11.4x. It is currently trading at 1.06x P/B Key catalysts for the stock in 2016 would be BREXIT polls showing the UK will stay within the European Union as the market does not like the uncertainty associated with the referendum. Continued strong organic capital generation supporting dividends, would be a further positive, as would the healthy interest from the general public in the UK when the Government disposes of its stake. Lloyds will release its results for FY15 on the 25th of February. Stephen Hall, CFA Investment Analyst Revenue ( bn) EPS (GBp) P/B 1.07x 1.04x 0.99x Div Yield 3.61% 5.57% 6.92% Lloyds -8.9% -8.8% -11.4% Eurostoxx Bank 600ETF -12.4% -18.3% -12.5% C AN T O R F I T Z G E R AL D I R E L AN D L T D 3

4 This Weeks Market Events Monday Tuesday Wednesday Thursday Friday Corporate Corporate Corporate Corporate Corporate Rio Tinto - Q4 Bank of America - Q4 British Land - Q3 IBM - Q4 UniLever - Q4 Goldman Sachs - Q3 Royal Mail - Trading Update SABMiller - Q3 Verizon - Q4 GE - FY15 SAP - FY15 Economic Economic Economic Economic Economic N/A China - Industrial Production China - Retail Sales China - GDP Germany - CPI UK - CPI UK - Retail Price Index Germany - ZEW Survey Expectations US - CPI EU - CPI EU - ECB Refinancing Rate US - Philly Fed Outlook Germany - Markit Composite PMI EU - Markit Composite PMI US - Chicago Fed Nat Activity Index US - Leading Index Upcoming Events 25/01/2016 McDonalds - Q4 26/01/2016 Apple - Q1, easyjet - Q1, Johnson & Johnson - Q4, P&G - Q2, Phillips - FY15, Siemens - Q1 27/01/2016 Boeing - Q4, ebay - Q4, Facebook - FY15, Novartis - FY15, PayPal - Q4 28/01/2016 Diageo - Interims, Caterpillar - Q4, Microsoft - Q2, RPC Group - Q3 29/01/2016 Alibaba - Q3, Chevron - Q4 Ex Div Dates 18/01/2016 N/A 19/01/2016 N/A 20/01/2016 CVS Health Group $0.425, P&G $0.663, 21/01/2016 Colgate Palmolive $0.38, Kering 1.50, SuperGropup GBp6.20, 22/01/2016 RBC CAD 0.79, C AN T O R F I T Z G E R AL D I R E L AN D L T D 4

5 Regulatory Information Issuer Descriptions: () ishares Core Dax ETF: ishares Core DAX UCITS ETF (DE) is an open-end, UCITS compliant exchange traded fund incorporated in Germany. The fund aims to track the performance of the DAX index. The fund reinvests income received back into the fund. Royal Dutch Shell: Royal Dutch Shell PLC, through subsidiaries, explores for, produces, and refines petroleum. The Company produces fuels, chemicals, and lubricants. Shell owns and operates gasoline filling stations worldwide. Verizon: Verizon Communications Inc. is an integrated telecommunications company that provides wire line voice and data services, wireless services, Internet services, and published directory information. The Company also provides network services for the federal government including business phone lines, data services, telecommunications equipment and payphones. Lloyds: Lloyds Banking Group plc, through subsidiaries and associated companies, offers a range of banking and financial services. The Company provides retail banking, mortgages, pensions, asset management, insurance services, corporate banking, and treasury services. Historical Record of recommendation ishares Core Dax ETF: We added ishares Core Dax ETF to the core portfolio on the 27/07/15 with an Outperform rating. Royal Dutch Shell: We have been positive on Core Portfolio stock, Royal Dutch Shell, since 20/05/13 and no change has been made to our recommendation since then. Verizon: We have been positive on Core Portfolio stock, Verizon, since 26/02/14 and no change has been made to our recommendation since then. Lloyds: We have been positive on Core Portfolio stock, Lloyds, since 01/03/14 and no change has been made to our recommendation since then. None of the above recommendations have been disclosed to the relevant issuer prior to dissemination of this Research. 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