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pricing pressure is better factored in, M&A and pipelines look supportive again. Prefer Roche, Shire, Sanofi in Large Pharma; Hikma, Ipsen in Specialty Pharma.

Upgrade Pharma to Attractive, well positioned among defensives. 

Our strategists favour financials but consider EU Pharma is well placed among defensives, and rate the sector Overweight. A sharp de-rating over the past 12 months has left the sector trading at a 2% P/E discount to the market, far from its historical average premium of 15% where it was a year ago. We believe this is undervalued in the context of the sector's 2017-20e CAGR of 5% for sales and 10% for EPS and attractive yields (4% dividend, 7% FCF). Our 14% weighted

average upside for the sector is above our strategists' MSCI Europe 8% upside target for 2017.

We upgrade Sanofi to Overweight (turnaround, M&A), now a top pick with Shire (execution) and Roche (pipeline upside), and remain buyers of AstraZeneca (pipeline upside). We remain Equal-weight on GSK (self-help and dividend vs HIV competition) and Novo Nordisk (remaining US pricing risks). We keep Novartis at Underweight (high consensus expectations on Entresto, Alcon, challenging corporate strategy).

EU Specialty Pharma: we are buyers of Hikma and Ipsen. 

We like Hikma (generic pipeline upside) and Ipsen (ongoing launches and margin upside). We downgrade UCB to Equal weight (limited short-term upside) and also Indivior (fewer catalysts). We remain Equal-weight on Merck KGaA (non-pharma upside to kick in 2H17) and Actelion (limited upside in 2017 offset by the recent J&J approach).

2017 global equity outlook After a flattish 2016, we expect global equities to deliver higher returns in 2017 thanks to stronger economic growth, higher inflation prints and more active shareholder policies (M&A + share buybacks). Expect more political and policy uncertainty in the first half of the year. US protectionism is the main risk for global equities.

S&P 500 at 2400 by end-2017 The Trump agenda should push back the peak in equity markets to towards end-2018, at 2500 on the S&P 500. Our forecasts factor in a stronger but realistic pace of US economic growth (infrastructure spending), US corporate tax cuts and overseas cash repatriation. The current high valuation and further repricing of Fed hike expectations (i.e. higher cost of debt) prevent us from being more bullish.

Elections in Europe: opportunities beyond risks In Europe, similar causes are likely to have similar effects: a EuroSTOXX 50 at 3300 by end-2017 on our estimates. 2016 was rich in political events, as will be 2017. Two ‘surprise’ outcomes (Brexit and Trump) turned out to be ‘surprisingly’ well received by markets. On the Italian referendum (Dec 4), we see the ‘No’ as already priced in. The elections in France (in May) and Germany (in the autumn) could potentially be a source of stress (who trusts polls anymore?), but the outcomes could allow more fiscal easing.

Brexit is not priced in We are cautious on the FTSE 250, more domestic than the FTSE 100, as it is trading above its pre-referendum level despite the outlook for much lower GDP growth and much higher inflation. The FTSE100 should benefit from its value tilt, higher commodity prices and weaker sterling. Pension deficits should be kept in mind: bond yields may have risen of late (a tailwind) but so has inflation (a headwind). These could weigh on a number of companies.

Higher bond yields to impact equities We estimate that US equities could absorb the impact from a rise in 10Y bond yields up to 2.6%, and eurozone equities could absorb the impact from a rise in 10Y bond yields up to 1.0%. A brutal steepening of the yield curve and/or violent euro appreciation would be negative for eurozone equities, but this is not our scenario. The ECB tapering impact is more a serious headwind for highly geared stocks and sectors. At the country

level, this suggests favouring core Europe vs Peripherals and avoiding the SMI (full of bond proxies). This also favours Value style over Growth.

The great sector rotation has further to go After two years of the STOXX 600 posting only single-digit gains/losses, the onus of providing portfolio performance rests on sector allocation. The rotation this year has been massive, driven by the turnaround in the growth and inflation outlook, as well as, of late, shifts in earnings momentum. As we head into 2017, we engage more fully with this rotation out of long-duration/growth sectors into the value end and consumer

Caught in the rotation tide: single stock outliers The moves in the recent major sector rotation have been pretty dramatic, with investors buying/selling whole segments of the market without always discriminating much between the stocks. SG analysts find SG Buy-rated KPN, Sky and Carrefour in the oversold camp, and sell-rated Fiat Chrysler, Credit Suisse and Deutsche Bank in the overbought camp – all of which have significant upside/downside potential (respectively) to our target prices.

category cells where Unilever is gaining or holding share, as well as positive

growth in new product launches and the Net Revenue Management programme,

we feel the most comfortable with Unilever’s ability to accelerate organic growth,

despite some short-term potential disruption from demonetisation in India. While

Unilever has the biggest input costs pressures, its exposure to high or mid-level

price elasticity categories is the lowest of the group at c20%. The margin should

benefit from the initial EUR1bn overhead costs savings, which should enable up to

50bp pa margin expansion versus the 30bp historical rate. Our 9.2% EPS CAGR is

in line with its constant currency EPS CAGR over the last five years (Unilever is the

only stock to deliver positive EPS growth – a 5.5% CAGR). We believe a sale of the

Spreads division is likely which, with further bolt-ons in HPC, means Unilever

could exit 2017 with 70% of profits from HPC, driving the long-anticipated rerating

towards HPC.

● Nestlé – change ahead, but patience needed: Expectations for new CEO Mark

Schneider are higher, with hopes of greater cost discipline, further portfolio

restructuring in the core food and beverage portfolio and rapid growth of the

Nestlé Health Science division. While not unreasonable expectations, we are

mindful of the timeframe for communication and implementation of significant

strategic actions. In the meantime, we take comfort by the fact that 52% of Nestlé’s

sales globally are generated from country category cells gaining or holding share

(68% in emerging markets), with 50% of sales from categories with low or very low

levels of price elasticity. Margins should start to benefit from the 200bp structural

cost saves, although most of the benefit will not be until 2018. Our 7.4% EPS

growth for 2017 is in line with historical constant currency EPS growth.

● Danone – highest earnings potential, highest risk: Danone has de-rated the most

of the three, with now the lowest P/E (15.6x 2018), and the highest earnings

growth (12.5% CAGR through 2018), due to WhiteWave. However, we see greater

forecast risk due to the lower visibility on trading at Early Life Nutrition (ELN) and

Waters (Mizone) in China, as well as the timing of completion of WhiteWave.

Although 59% of Danone sales are gaining or holding share, it has the highest

exposure to categories with high or mid-level price elasticity. We now believe that

Danone has now played its M&A card for the next three years.

*SGL CARBON SHR CAPITAL WILL BE INCREASED BY EU76.8M

*SGL CARBON SE: SUBSCRIPTION PRICE OF EU6.00PER NEW SHR

* Cost optimisation the key focus area as companies look to emulate Air Products’ success, while a Linde-Praxair combination, if talks resumed, would have strategic merit but also significant uncertainties

* Our preferred name in the global industrial gas space is Air Liquide, initiating at Buy

A weak growth environment and Air Products’ success in eliminating overheads have rekindled interest in sector consolidation. Linde and Praxair recently (12 September 2016) broke off merger talks, but the CEO of Praxair has publicly left the door open to resuming discussions (Source: Praxair’s Q3 2016 conference call, 27 October 2016) and, in our view, such a combination, if talks were to resume and be successful, would have significant strategic merit on our scenario analysis. We estimate the potential earnings accretion from replicating APD-like cost cuts on the combined asset base of the two companies suggests such a combination is

likely to remain at the top of mind for investors for the foreseeable future.