TheChek News Flow

* Fat & Flat

The bull market since 2010 has been driven almost entirely by multiple

expansion. We think valuations are now stretched and the European market

trades at a 12-month forward P/E of 16.8x ex financials, similar to the US (at

17.4x) and we expect no further increase in P/E multiples from here. Profit

growth is in Europe likely to be 8% in 2016 and 10% in 2017, supported by a

weak euro and better domestic and global GDP growth. Our 12-month (end

2016) index targets are 400 for the SXXP and 3650 for the SX5E. For the

SXXP this implies a return of 7.5% in euro and negligible returns in USD.

* The need to differentiate

This year has been dominated by the underperformers (EM and

commodities) rather than the outperformers. These themes remain in play

but sustained underperformance and some moderation in fundamentals

(softening imbalances in some EM and cost adjustments in oil) mean that

greater differentiation within sectors and the themes is now required.

* Five themes for 2016

We focus on differentiation within: 1) Commodities (we prefer oil to

mining), 2) Industrials (we prefer opex to capex), 3) Consumer (we prefer

cyclicals to staples), 4) Income (we prefer income with growth to staples),

and 5) EM (we prefer Consumers to Industrials)

* Sectors and baskets

Our favoured sectors are Media, Insurance, Telecoms, Technology, Travel

& Leisure, Healthcare and Banks. Our Underweight sectors are Basic

Resources, Food & Beverages, Tobacco, Industrial Goods & Services, and

Chemicals. We recommend some relative value positions: long General

Retail versus Food Retail (GSSBGERE vs GSSBFORE); long opex Industrials

vs capex Industrials (GSSBOPEX vs GSSBCAPX); and long Household

Products vs. Tobacco (GSSBHOU vs GSSBTOBA). For our thematic

baskets, we prefer high yield with growth (GSSTHIDY) and companies with

European cyclical exposure (GSSTEUGR).