EUROPEAN EQUITIES: gaining traction?

Market insight: EUROPEAN EQUITIES: gaining traction? European equities have lagged behind the US market could this change? SEPTEMBER 2015 Please see pages 14-17 for important disclosures and definitions of terms. This material is only for distribution in those countries and to those recipients listed. Please refer to the disclosure information on the final page. IN THE U.S. INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

WHY EUROPE? European equities have lagged those in the US, amid delayed monetary policy reaction to the financial crisis and the impact of Greece s debt problems on confidence in the European Union. 180 160 140 120 STOXX Europe 600 Price Index EUR S&P 500 Index After a few false dawns, and after a choppy first half of 2015, are European equities about to reflect the region s improving present and its potential? 100 80 60 40 Source: Bloomberg as of 21/08/2015. Indices have been rebased to 100. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Page 2

7 TAILWINDS FOR EUROPEAN EQUITIES The European Commission said last spring that the area s economic outlook is brighter than at any time since 2008-09. What tailwinds could help propel it forward? 1 Low rates: Europe s financing costs have fallen sometimes to negative levels, something which could fuel economic growth. 2 Central bank support: The European Central Bank (ECB) plans to inject 60 billion euros per month until September 2016, which acts as a cap on yields. 7.5 6.5 5.5 4.5 3.5 2.5 1.5 0.5-0.5 Sovereign 10-year yields (%) Germany UK Spain Italy France Switzerland Source: Bloomberg as of 21/08/2015. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Page 3

7 TAILWINDS FOR EUROPEAN EQUITIES 3 Low inflation: Low rates and a slow recovery are keeping inflation and inflation expectations under control, which is positive for industry. 4 Low euro: The ECB s monetary stimulus has pushed down the euro, which favours exporters. It s also positive for domestic-focused companies as foreign competitors are less keen to sell in Europe. 5 Reduced break-up risk: After much drama, Greece has reached an agreement with its creditors, and its borrowing costs have fallen sharply. 2.1 2 1.9 1.8 1.7 1.6 1.5 1.4 Europe s 5yr-5yr inflation swap (%) 1.6 1.5 1.4 1.3 1.2 1.1 1 US dollars per euro 35 30 25 20 15 10 5 0 Greece 10-yr bond yield (%) Source of all graphics: Bloomberg as of 21/08/2015. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Page 4

7 TAILWINDS FOR EUROPEAN EQUITIES 6 Resilience to global woes: While Europe s external sector is bigger relative to Gross Domestic Product (GDP) than in the US and Japan, European countries import more than export to China, making them less vulnerable to the country s economic slowdown. Trading partner US China Russia Switzerland Norway EU exports to (million euro) EU imports from (million euro) Trade Balance (million euro) 310,887 205,205 105,682.00 164,737 302,455-137,718.00 103,320 181,818-78,498.00 140,346 96,580 43,766.00 50,182 83,966-33,784.00 Europe: A more internationalised economy Exports of goods and services (% GDP) Imports of goods and services (% GDP) 30 Europe 25 20 15 10 5 China 0 US Japan Source: European Commission. Directorate General for Trade. 2014. Excludes intra-eu trade. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Source: European Central Bank. 2014 data. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Page 5

7 TAILWINDS FOR EUROPEAN EQUITIES 7 Less correlation to energy and commodities: European stocks are less correlated to commodities and to oil than US stocks (in bold). They are also relatively independent of safe-haven sovereign bonds (circled). A sign of the more open European economy, European equities are more correlated to Emerging Markets, Chinese and Japanese stocks (in red). STXE 600 S&P 500 BBG Comm. US 10-yr yield German 10-yr yield JPN 10- yr yield HANG SENG Oil EM Equities EM bond local EM bond USD US HY NIKKEI 225 STXE 600 0.561 0.032 0.249 0.095 0.074 0.389 0.036 0.517 0.202 0.325 0.544 0.302 S&P 500 0.561 0.107 0.34 0.121 0.066 0.192 0.173 0.374 0.271 0.328 0.407 0.168 Source: Bloomberg as of 21 August 2015. The SXTE 600 Index is the STOXX Europe 600 index, while the S&P 500 is the Standard & Poor s 500 Index. The BBG Comm. Is the Bloomberg Commodities index, the Hang Seng is Hong Kong s leading stock index, while the Nikkei 225 is often used as the benchmark index for Japanese equities. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Page 6

POSITIVE DATA US PMI EU PMI Japan PMI 60 The Markit Eurzone Purchasing Managers Index (PMI), one of the best indicators of corporate confidence in the future, edged above expectations to 54.1 in August, above 53.9 in July. Germany led the improvement, which was close to the highest level since the index was created three years ago. A level above 50 indicates the economy is on an expansionary mode. Below, it signals a contraction. 58 56 54 52 50 48 46 44 Real GDP (YoY%) The Eurozone s economy expanded in the three months to June for a ninth straight quarter. It is forecast to accelerate its growth this year, next, and in 2017 (red columns). 1.5 0.5-0.5-1.5-2.5 Source: Bloomberg as of 21/08/2015. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. There is no guarantee that forecasts or estimates will be correct. -3.5-4.5 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Page 7

SIGNS OF RECOVERY? 0 EU Consumer confidence is improving 10 5 and so is Retail Trade Confidence (%) -5 0-10 -15-20 -25-5 -10-15 -20-25 -30-30 13 12 11 10 9 8 7 The unemployment rate is falling (%) Source: Bloomberg as of 21/08/2015. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Page 8

SIGNS OF RECOVERY? 115 105 95 85 75 65 EU economic sentiment is slightly higher 1.1 0.9 0.7 0.5 0.3 0.1-0.1-0.3-0.5-0.7 And household consumption, stronger (%) 660 640 620 600 580 560 540 520 500 Consumer Credit is finally picking up ( Bn) Source: Bloomberg as of 21/08/2015. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Page 9

EQUITY MARKETS: A DIFFERENT APPROACH European markets offer different exposure than US equities, with more weight on Consumer Staples (such as food & beverages) and Materials (such as chemicals), and less on IT or Energy. US S&P 500 Stoxx Europe 600 IT Financials Utilities Telecoms IT Telecoms Materials Financials Materials Utilities Energy Health Care Energy Consumer Discretionary Health Care Consumer Discret. Industrials Consumer Staples Industrials Consumer Staples Source: Bloomberg as of 21/08/2015. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Page 10

EQUITY MARKETS: IMPROVING FUNDAMENTALS Rising profitability. And moderate valuations Stoxx Europe 600 Earnings per share Stoxx Europe 600 Price/Earnings ratio 30 26 25 24 20 22 15 20 18 10 16 5 14 0 2008 2009 2010 2011 2012 2013 2014 Current 2015 Est 2016 Est 12 Source: Bloomberg as of 21/08/2015. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. There is no guarantee that forecasts or estimates will be correct. Page 11

EQUITY MARKETS: IMPROVING FUNDAMENTALS Less debt. and more M&A action Stoxx Europe 600 Net Debt to EBITDA M&A deals Western Europe (USD bn) 10 1600 9 1400 8 7 1200 6 1000 5 800 4 600 3 2 400 1 200 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Est Est 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2015 Source: Bloomberg as of 21/08/2015. EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortisation. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. There is no guarantee that forecasts or estimates will be correct. Page 12

EQUITY MARKETS: ATTRACTIVE RELATIVE TO BONDS 6.5 Stoxx Europe 600 Dividend Yield (%) 2-yr sovereign bond yields (%) 5.5 4.5 3.5 2.5 1.5 0.5-0.5-1.5 Source: Bloomberg as of 21/08/2015. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. There is no guarantee that forecasts or estimates will be correct. Page 13

IN CONCLUSION: Low inflation Central Bank support Low rates Economic recovery More political stability Increased profitability More M&A Make European equities an attractive opportunity to diversify an Equities portfolio Page 14

Investment Risks The opinions and views expressed herein are subject to change and are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice. Common stocks generally provide an opportunity for more capital appreciation than fixed-income investments but are subject to greater market fluctuations. Investments in small-cap and mid-cap companies involve a higher degree of risk and volatility than investments in larger, more established companies. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Yields represent past performance and there is no guarantee they will continue to be paid. Fixed income securities are subject to interest rate and credit risk, which is a possibility that the issuer of a security will be unable to make interest payments and repay the principal on its debt. As interest rates rise, the price of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Outperformance does not imply positive results U.S. Treasuries are direct debt obligations issued and backed by the full faith and credit of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities. Active Management does not ensure gains or protect against market declines. Yields and dividends represent past performance and there is no guarantee they will continue to be paid. All All investments investments involve involve risk, risk, including including loss loss of of principal. principal. Please see pages 7-8 for important disclosures and definitions of terms Page 15

DEFINITIONS The EURO STOXX 600 Index provides a Blue-chip representation of supersector leaders in the Eurozone. The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. The European Union (EU) is an economic and political union established in 1993 after the ratification of the Maastricht Treaty by members of the European Community and since expanded to include numerous Central and Eastern European nations. The European Commission is the executive body of the European Union. The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency. The nominal yield is the amount of income earned from a fixed-income security divided by the security's par value, expressed as a percentage. Real yields are calculated by adjusting stated yields to compensate for inflation expectations over the time period during which the yields are expected to be paid. Inflation swap is a derivative used to transfer inflation risk from one party to another through an exchange of cash flows. Gross Domestic Product ("GDP") measures the market value of all final goods and services produced within a country in a given period of time. Correlation is a statistical measure of the relationship between two sets of data. When asset prices move together, they are described as positively correlated; when they move opposite to each other, the correlation is described as negative. If price movements have no relationship to each other, they are described as uncorrelated. Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms. PMI greater than 50 indicated economic expansion; below 50, contraction. Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock. An index EPS is an aggregation of the EPS of its component companies. The price-to-earnings (P/E) ratio is a stock's (or index s) price divided by its earnings per share (or index earnings). The forward P/E ratio is a stock s (or index s) current price divided by its estimated earnings per share (or estimated index earnings), usually one-year ahead. EBITDA is Earnings Before Interest, Tax, Depreciation and Amortization Merger and acquisition (M&A) is a general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. Dividend yield is a financial ratio that indicates how much a company pays out in dividends each year relative to its share price. All All investments investments involve involve risk, risk, including including loss loss of of principal. principal. Please see pages 7-8 for important disclosures and definitions of terms Page 16

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