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were underweight at the start of the year too and missed the lows. We recognized we were wrong and closed our underweight and while it took us a while but we eventually managed to go overweight in September. The lesson of that is that themes are great, but when the facts change strategists and investors have to change their minds.

Chart 11: Cyclicals vs Defensives: from -3.5SD to +3.2SD in 14 months
[Chart showing market volatility from Dec-97 to Dec-13]
-Cyclicals vs Defensives - relative price vs 52wk average (SD)
Source: BofA Merrill Lynch Global Research, Bloomberg

Chart 12: Financials vs Defensives: -2.5SD to +2.5SD post Brexit
[Chart showing market volatility from Dec-97 to Dec-13]
-Financials vs Defensives - relative price vs 52wk average (SD)
Source: Re BofA Merrill Lynch Global Research, Bloomberg place this text

In fact your best guide to this year was to buy something when it has oversold, underowned and unloved, like Miners and Emerging Markets in February, Banks in July, the Nikkei the day of the US election and sell when the opposite e.g. bonds and defensive equities shortly after Brexit. Our CTI models did actually pick up a number of those events as the table below shows. It also got picked up by our standard deviation analysis. We acted on some but not all of these readings. The lesson, with the benefit of hindsight, is to pay more attention to them. Indeed, our recent decision to downgrade both Banks and Basic Resources reflected very high readings on our models.

Table 1: Reflation rotation very stretched on our CTIs post-Trump
Asset | 11/11/2016 | 10/11/2016 | 09/11/2016
EUR/GBP | -46 | -44 | -12
German 10y Bonds | 66 | 61 | 24
US 10y Bonds | 96 | 96 | 93
Stoxx Banks | 80 | 71 | 0
Stoxx Basic Resources | 92 | 93 | 92
Stoxx Food & Beverages | -84 | -96 | -54
Stoxx Insurance | 67 | 64 | 23
Stoxx Personal & Household Goods | -34 | -75 | -7
Stoxx Utilities | -92 | -94 | -19
Relative CTI
Relative Stoxx Banks | 86 | 87 | 50
Relative Stoxx Basic Resources | 100 | 100 | 99
Relative Stoxx Food & Beverages | -93 | -93 | -89
Relative Stoxx Insurance | 92 | 91 | 76
Relative Stoxx Media | -34 | -77 | -87
Relative Stoxx Pers&Hhold Goods | -92 | -94 | -75
Relative Stoxx Technology | -80 | -74 | -55
Relative Stoxx Telecom | -91 | -92 | -28
Relative Stoxx Utilities | -82 | -92 | -59
Source: BofA Merrill Lynch Global Research, Bloomberg

Table 2: While opposite true immediately post-Brexit
Asset | 29/06/2016 | 28/06/2016 | 27/06/2016
Relative Stoxx Autos | -95 | -39 | -9
Relative Stoxx Banks | -80 | -83 | -86
Relative Stoxx Basic Resources | 21 | 3 | 0
Relative Stoxx Chemicals | 2 | 19 | 40
Relative Stoxx Construction & Materials | -10 | -36 | -71
Relative Stoxx Financial Services | -91 | -91 | -92
Relative Stoxx Food & Beverages | 60 | 78 | 82
Relative Stoxx Healthcare | 88 | 88 | 88
Relative Stoxx Industrial Goods & Services | -47 | -35 | -44
Relative Stoxx Insurance | -87 | -94 | -94
Relative Stoxx Media | -6 | -13 | -35
Relative Stoxx Oil & Gas | 93 | 86 | 91
Relative Stoxx Personal & Household Goods | 57 | 58 | 70
Relative Stoxx Retail | -63 | -81 | -75
Relative Stoxx Technology | 0 | 0 | 0
Relative Stoxx Telecom | 3 | 0 | -16
Relative Stoxx Travel & Leisure | -98 | -100 | -100
Relative Stoxx Utilities | 65 | 6 | 2
Source: BofA Merrill Lynch Global Research, Bloomberg

We think 2017 is another year where investors will need to be nimble. Markets have responded enthusiastically to a prospective Trump Presidency but as the above charts suggest we may well have discounted much of it. That is also supported by our fixed income and FX forecasts, which suggest much has already been priced in. In addition we have political risk starting with next weekend's Italian referendum stretching to the German elections in Autumn 2017. In the middle we have the crucial French elections. A

Bank of America Merrill Lynch
European Equity Strategy | 01 December 2016
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