Chart 76: A stronger dollar benefits agencies with global exposure Chart 77: Media now at a small discount to its 10y average vs market 0.9 105 1.30 0.85 100 1.25 08 95 1.20 0.75 90 18 07 85 10 1.05 0.65 80 4.00 06 75 0.95 ———Media 12m fwd PE relative M88 —— Stoxx Media price relative me sia 0.5 ——DXy Cumey (RHS) 65 0.85 0.45 60 0.80 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bloomberg 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: BofA Merrill Lynch Global Research, Bloomberg, Datastream, IBES Overweight Healthcare Healthcare looks very attractively valued and we see compelling risk reward in the sector on an outright basis at current levels. The fundamental bull case for Health rests on the strong pipeline of new products for the big cap pharma universe. Our sector analysts forecast EU Pharma to deliver a 2018-21E EPS CAGR of 11%, up from mid-single digit levels in recent years. Historically that would justify a PE re-rating and a multiple for the pharma sub-sector nearer 17-18x than the current 13x 2018 PE. We believe the Republican clean sweep in the US elections represents a positive catalyst as it significantly decreases the potential for legislative initiatives to aggressively control drug pricing in the US. The catalyst for the sector to re-rate will come progressively from newsflow around new products. The next 12 months should see progress on this front with several of the European large caps expected to announce key data on important drugs in 2017. Chart 79: Healthcare PE relative back near market multiple and lowest since 2011 when patent cliff was at its worst Chart 78: Pharma’s improving growth outlook not reflected in PE 3 Year Sales, EBIT and EPS CAGR Majors and 12 month forward PE ratio 15% 20 1.70 ——HealthCare 12m fwd PE relative sc 8 1.60 6 1.50 5% 4 1.40 0% 2 1.30 . 1.20 -5% 1.10 -10% 6 1.00 t= tft tft et tft tt tw Ye Yee wa ww : Bee woe SHE AHeH HSH 0.90 mame 3yr Sales CAGR mam 3yr EBIT CAGR 0.80 mmm 3yr EPS CAGR 12 month forward PE (rhs) 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research, Datastream, IBES, Bloomberg Healthcare’s forward PE is now down to just a 7% premium relative to the market and nearing the valuation lows recorded in 2010-12 when the patent cliff was at its worst and pipelines were very weak. Today pipelines are twice the size they were in 2011 and innovation is the key to growth in the sector - pricing power remains strong in drug categories with differentiated products. The new product launches expected between 2015 and 2018 add up to potential sales of $133 billion. 34 European Equity Strategy | 01 December 2016 orate 2 HOUSE_OVERSIGHT_014493