Strategy Matters - pg.jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/6/6/4d33b7eb-c97e-484… · fiscal policy moves towards centre-stage (May 27, 2016). For example, the Ipsos

June 6, 2016

Europe

Strategy Matters Portfolio Strategy Research

Five questions on Brexit and equities

As the EU referendum approaches, the topic of Brexit risk remains a focus for investors. We look at

how UK equities have priced in Brexit risk by answering some of the most frequent questions we

are asked. UK domestic stocks declined in the beginning of the year as the date was set and

investors started to digest Brexit risks. By late May, domestic stocks had rallied and recovered

about half of their relative underperformance. But uncertainty persists and in recent weeks they

have underperformed again. We look at valuation, fund flows, and exposure across Europe.

Q: How has Brexit risk been priced?

We've seen large oscillations in the performance of UK domestic

companies, with declines in the first 3-4 months of the year followed by a

sharp rebound to recover half of their previous underperformance in late

April/May. But with the opinion polls remaining volatile and relatively

close, these names have dropped again in the last couple of weeks.

Q: Is there value in UK domestic stocks and mid-caps?

Yes, although much less so than in April given the rebound in these

names, but a 12% discount to the UK market on a 12mth fwd P/E basis still

looks inexpensive given our economists’ forecast of underlying UK growth;

of course, much depends on the outcome of the referendum. Assuming a

vote to remain, there is value but the discount for these stocks is unlikely to

close before the referendum.

Q: Is the recent weakness in US flows into European equities a function of Brexit risks?

We think a large part is; we find US flows in particular are very sensitive to

shifts in risk (rather than, say, earnings or valuation) and outflows have

correlated strongly with an index of UK policy uncertainty.

Q: If the vote is to exit, would sterling cushion big caps when exporters could be hit by a lack of trade agreements?

With 80% of sales outside the UK, FTSE 100 companies have c.55% of their

assets outside the UK; many of these companies are less exporters than

global companies that are listed in the UK.

Q: What is the exposure of the rest of Europe?

If there is Brexit, we think the exposure is large; all of the major European

indices are highly negatively correlated to UK risks. The DAX has 9% of its

sales direct to the UK and this compares, for example, to 10% to China.

Sharon Bell, CFA

+44(20)7552-1341 [email protected] Goldman Sachs International

Peter Oppenheimer


Christian Mueller-Glissmann, CFA


Ian Wright


Lilia lehlé Peytavin


Jim McGovern

(801) 741-5572 [email protected] Goldman, Sachs & Co.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research

June 6, 2016 Europe

Goldman Sachs Global Investment Research 2

Five questions on Brexit and equities

Q: How has Brexit risk been priced?

UK mid-caps (FTSE 250) and domestic names in general underperformed the UK market

from January to mid-April as investors started to digest Brexit risks. At one point our

domestic basket (GSSTUKDE) was down 8% versus the market. We find companies that are

both domestic and have a high beta of earnings to UK investment spend are the most

sensitive to pricing Brexit risks; our screen of these companies underperformed by 14% at

its worst for the year. See Exhibit 1 below for the performance of these groups.

Since mid-April the performance of these UK-exposed companies has been very sensitive to news flow, especially with each new opinion poll, particularly those

showing an extreme or slightly surprising result. There remains a large amount of volatility

in the polls themselves and substantial uncertainty as well given the high proportion of

respondents that are undecided. For a discussion of the opinion polls and the uncertainties

surrounding them, see Europe's outlook: Unspectacular growth and subdued inflation, as

fiscal policy moves towards centre-stage (May 27, 2016). For example, the Ipsos Mori poll

in mid-May pointed to an 18-point lead for ‘remain’ and this coincided with a sharp

rebound in the UK domestic names from relative lows in mid-April. At one point these

stocks had retraced more than half of their ytd decline in a matter of three or four weeks.

But the ICM phone poll on May 29 pointed to a lead for ‘exit’; the first phone poll to do so.

And the UK domestic stocks have underperformed again since then (indeed they started to

underperform again slightly prior to this).

Exhibit 1: Mid-caps and UK Domestic stock performance Relative performance to the UK market

Source: Datastream, Goldman Sachs Global Investment Research

86

88

90

92

94

96

98

100

102

104

Sep-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

FTSE 250

UK domestic (GSSTUKDE)

UK domestic + Investment-sensitive screen

EU referendum date set Ipsos Mori Poll indicating an 18pt lead

for Remain is published

June 6, 2016 Europe


Q: Is there value in domestic stocks and mid-caps?

Yes, although this has diminished since mid-April, we think the value gap is unlikely to

close materially further before the referendum given the continued uncertainty with respect

to the opinion polls.

The underperformance this year to date has pushed domestic-facing names to a discount versus the broader UK market. As shown below, the discount on a forward P/E basis reached almost 20% at the end of April. This discount has diminished in recent weeks and now stands at closer to 12% versus the FTSE

All-Share.

Exhibit 2: Stocks with UK domestic exposure (GSSTUKDE) are at a discount to the UK

market 12m forward P/E discount/premium (%)

Source: Datastream, I/B/E/S, Goldman Sachs Global Investment Research

Of course Brexit risks or uncertainty are not the only variables driving this performance:

The FTSE 100 has benefited from the sharp turn in oil prices; none of our basket of

domestic names has significant oil exposure whereas Oil is c.13% of the FTSE 100

market cap.

China economic growth picked up in 1Q16; by definition GSSTUKDE has no

exposure to this improvement, whereas many of the large caps names do.

Last, domestic economic growth has slowed; our Current Activity Indicator

(CAI) for the UK indicates growth of around +2.2% annualised in May, having

slowed from +2.8% annualised growth in January. Of course, some of this could

be delays in investment or other spending given the uncertainty surrounding the

referendum vote.

Whatever the reason, the underperformance of mid-caps and UK domestic-focused

companies has coincided very closely with the softening of UK economic activity. In our

view how these names do from here will depend very much on the domestic economic

outlook.

-20

-15

-10

-5

0

5

10

15

20

25

Jan-12 Nov-12 Sep-13 Jul-14 May-15 Mar-16

UK Domestic Exposure vs. FTSE All-Share (12m fwd PE Prem/Disc)

Average

June 6, 2016 Europe


Our economists looked at the economic impact of Brexit in European Economics Analyst:

Brexit: The uncertainty shock of leaving the EU, March 4, 2016. They looked at the impact

of uncertainty shocks in the past and their analysis points to a hit to industrial production

of between 0.5 pp and 2.5 pp. The lower end of this range assumes a rise in uncertainty of

similar magnitude to that around the time of the Scottish referendum (they regard this as

too modest a benchmark) and the higher end assumes that the rise in uncertainty is similar

to the Lehman’s crisis (this may be too harsh).

The recent performance of the FTSE 250 versus the FTSE 100 is plotted in Exhibit 3, with

UK IP growth; the deceleration in the FTSE 250’s relative performance has been marked since the middle of last year and is probably already discounting a modest IP recession in the UK.

Should we see a vote to remain in the EU, we would expect relief for the mid-caps and

especially for the UK domestic names. We also think the current 10% P/E discount for UK

domestic stocks is attractive, although we think this is unlikely to narrow ahead of the vote.

Should there be a vote to exit the EU, in practice we think the BoE would ease policy quite

substantially, with the emphasis likely through “credit easing” policies. See European

Economics Daily: UK - Credit easing as a robust BoE policy response to Brexit, May 26, 2016.

Exhibit 3: FTSE 250 underperformance is already indicative of a mild IP recession in the UK

FTSE 250 versus FTSE 100 is closely linked to domestic output


30

35

40

45

50

55

60

65

70

-30

-20

-10

0

10

20

30

40

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

FTSE 250 vs. FTSE 100 (Yoy) UK Manufacturing PMI (RHS)

June 6, 2016 Europe


Q: Is the recent weakness in flows into European equities a function

of Brexit risks?

We think Brexit risks are having a large impact on flows into European equities. Of course, this is difficult to judge definitively, but we do find that flows from US investors

into European equities (measured by AMG/Lipper mutual fund data which includes ETFs)

are very sensitive to policy uncertainty. The first chart below (Exhibit 4) shows monthly

flows into Europe from US investors with the six-month change in the European Economic

Policy Uncertainty index (EPU). The two are highly negatively correlated.

That said, in the last few months outflows from European funds have been large compared

with the degree of policy uncertainty measured in this index. But looking at the second

chart below (Exhibit 5), which shows specifically the UK Policy Uncertainty index which has

increased much further in recent months, the outflows from US investors seem to have

coincided closely with this shift. Over the longer run, we think UK Policy Uncertainty

specifically is less strong an indicator for US flows than the aggregate European

uncertainty. For example, UK Policy Uncertainty and flows from US investors were poorly

correlated in 2012-2015 when US investors were more focused elsewhere in Europe.

Should the referendum outcome be to remain in the EU, we expect to see policy

uncertainty conditions in the UK lessen, and this would be consistent with a modest pick-

up in flows into Europe.

Exhibit 4: US flows into European equity funds correlate with policy uncertainty...

AMG/Lipper data is 4-week sums (US$ bn), latest data point is 4-weeks to May 25, 2016

Source: “Measuring Economic Policy Uncertainty” by Scott R. Baker, Nicholas Bloom and Steven J. Davis atwww.PolicyUncertainty.com, AMG/Lipper, Goldman Sachs Global Investment Research.

-150

-100

-50

0

50

100

150

200-4

-3

-2

-1

0

1

2

3

4

06 07 08 09 10 11 12 13 14 15 16

Flows into European funds from US investors

Europe Policy Uncertainty index 6-month change (RHS, inverted)

Policy uncertainty rising

June 6, 2016 Europe


Exhibit 5: …and more recent a rise in UK Policy Uncertainty has coincided with a sharp

outflow by US investors AMG/Lipper data is 4-week sums (US$ bn), latest data point is 4-weeks to May 25, 2016

Source: “Measuring Economic Policy Uncertainty” by Scott R. Baker, Nicholas Bloom and Steven J. Davis atwww.PolicyUncertainty.com, AMG/Lipper, Goldman Sachs Global Investment Research.

Q: If the vote is to exit, would sterling cushion big caps when

exporters could be hit by lack of trade agreements?

We receive many questions on this point. We estimate 80% of FTSE 100 sales are outside the UK. Also, while it's difficult to be confident of this figure, we estimate that c.55% of FTSE 100 company assets are also outside the UK. (We

calculate this by aggregating bottom-up by company. For some companies, the data is

outdated or not available, hence the figure carries uncertainty.) In other words, many of

these companies are not exporters so much as simply UK-listed companies that operate

elsewhere.

We do think that a fall in sterling would provide a large cushion for the performance of

these stocks. Our FX team estimates that a vote to leave the EU would see sterling weaken

by 15%-20% in trade-weighted terms. This would likely provide a large offset to the large-

cap names.

Indeed, that has been evident this year. Sterling fell sharply from the end of last year as

investors focused on both Brexit risks and the weaker UK data prints. This weakness in has

partially reversed from mid-April as Brexit fears have receded. So far, the relative

performance of the UK market (in local currency) vs Europe has been highly negatively

correlated with sterling as shown in Exhibit 6.

We have seen no evidence so far that large-cap domestic UK stocks are being sold-off in

anticipation that a 'lack of trade agreements' will be negative for their business. Meanwhile,

as described above, UK domestic stocks have seen sharp oscillations in share price

performance driven in part by views on Brexit risk. Certainly, the market seems to be

pricing this risk as a hit to domestic growth – probably based on the potential for a

slowdown in investment spend – rather than a lack of ability of large-cap stocks to continue

to do international business.

-300

-200

-100

0

100

200

300

400-4

-3

-2

-1

0

1

2

3

4

06 07 08 09 10 11 12 13 14 15 16

Flows into European funds from US investors

UK Policy Uncertainty index 6-month change (RHS,inverted)

Policy uncertainty rising

June 6, 2016 Europe


Exhibit 6: All about the GBP: UK equities versus Europe are closely tied to sterling


Indeed, the FTSE 100 has been an outperformer; in local currency terms it is the best

performing market in Europe this year to date, outperforming for example the DAX by over

6% in total returns. And, even in euro terms, it is the second-best performing European

market – after the CAC 40. However, not so the FTSE 250, which is the second-worst

performer of the major European indices; the MIB being the worst performer. For the FTSE

100, the fall in sterling and rise in oil prices are substantial offsets to Brexit risks.

Of course, there is a difference between the risk of a UK exit from the EU and this actually

occurring, and it's possible the FTSE 100 stocks would move to a discount vs Europe as

investors apply a higher risk premium to UK assets. As shown below (Exhibit 7) around

50% of UK equities are owned by investors outside the UK.

Exhibit 7: Non-UK investors own half of the UK market Ownership breakdown of listed UK equities

Source: Haver, Goldman Sachs Global Investment Research

82

84

86

88

90

92

94

9687

89

91

93

95

97

99

101

103

105

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

UK Market ex Resources vs. SXXE

BOE Sterling TWI (RHS, inverted)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Rest of the world

GovernmentDomestic

insurance and pension funds

Public non-financial institutions

Households

Monetary institutions

Other financial intermediaries

June 6, 2016 Europe


But we cannot be certain about this. Despite all the turbulence around the UK leaving ERM

in 1992, we did not see a clear discount for UK stocks. And the FTSE 100 and FTSE 250

outperformed vs Europe strongly afterwards. We went through this example in UK: The

market, valuation ...and Brexit, January 20, 2016, and acknowledge it does not work as a

perfect parallel.

The big difference is that the UK economy was in recession in late 1991/early 1992,

whereas by 1993, growth had recovered. The falling pound combined with sharp falls in

interest rates helped (interest rates had risen to 15% prior to ERM exit in an attempt to

defend the pound). In the event of an exit from the EU today, we could potentially see the

opposite – the UK going from the strong economic growth of the past few years to a

slowdown induced by the risks and concerns relating to EU exit, with the opportunity for

policy stimulus not being as significant as in 1992.

Exhibit 8: The UK’s exit from the ERM was a good entry point for investment in UK

equities


80

90

100

110

120

130

140

150

Jan-90 Jul-90 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93

FTSE 100

S&P

FTSE 100 in USD

Sep 1992 UK exits

ERM

June 6, 2016 Europe


Q: What is the exposure of the rest of Europe?

The rest of Europe is hardly immune to Brexit risks and the policy and political uncertainty

this creates. As shown below (Exhibit 9) the most sensitive indices to UK policy uncertainty

are FT Small Caps and the FTSE 250, but beyond this the DAX and CAC are very negatively

correlated to UK policy risks.

Exhibit 9: UK small and mid-caps are most negatively correlated to UK uncertainty; but so

are DAX and CAC (based on monthly performance since 2010)

Source: “Measuring Economic Policy Uncertainty” by Scott R. Baker, Nicholas Bloom and Steven J. Davis atwww.PolicyUncertainty.com, Datastream, Goldman Sachs Global Investment Research

The direct sales exposures to the UK are shown in Exhibit 10 for the DAX and CAC 40

companies in aggregate. For the DAX, the exposure is not immaterial, it is notable that

DAX exposure to the UK is very similar to its exposure to China, and of course if sterling

falls, this would mean German and French companies would be less competitive with their

UK counterparts as well as potentially suffering in terms of weaker UK domestic demand

for their UK-based sales. Still we would argue these direct exposures pale in comparison to

the impact on uncertainty and politics throughout Europe.

Exhibit 10: DAX and CAC exposures to the UK and China are about the same Aggregated bottom-up company data, 2015

Source: Datastream, Bloomberg, Goldman Sachs Global Investment Research

-0.40

-0.34-0.31

-0.28 -0.28 -0.27-0.25 -0.24 -0.24

-0.20

-0.45

-0.40

-0.35

-0.30

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

FT Smallcap

FTSE250

CAC DAX FTSE100

EuroSTOXX

50

STOXX SMI MIB IBEX

Correlation of index performance with changes in 'UKpolicy uncertainty'

UK Sales

exposure

China Sales

exposure

DAX 9% 10%

CAC 40 4% 5%

June 6, 2016 Europe


Appendix 1: Constituents of UK Domestic Exposure (GSSTUKDE)

Notes: Market cap based on share prices as at June 3, 2016; NTM P/E and P/B based on I/B/E/S consensus; sales exposure based on company data for 2014; Source: Company data, Datastream, I/B/E/S, Goldman Sachs Global Investment Research

UK DOMESTIC EXPOSURE (GSSTUKDE)

Company name Basket weightsMarket cap

GBP BnNTM P/E NTM P/B UK Sales Exposure

Banks 3.3%

Lloyds Banking Group 3.3% 50.0 9.3 1.1 97%

Financial Services 6.7%

Provident Financial 3.3% 4.2 15.9 7.6 100%

British Land 3.3% 7.6 20.7 0.8 100%

Industrial Goods & Services 13.3%

Travis Perkins 3.3% 4.6 13.2 1.5 100%

Capita Plc 3.3% 7.0 14.0 7.3 96%

Royal Mail Group 3.3% 5.3 13.1 1.3 83%

Babcock International 3.3% 5.2 12.7 2.0 80%

Insurance 13.3%

Direct Line Group 3.3% 5.2 13.0 1.9 100%

St. James's Place plc 3.3% 4.8 25.1 4.2 100%

Legal & General Group 3.3% 13.8 11.3 2.0 92%

Admiral Group 3.3% 5.6 18.0 9.2 89%

Media 6.7%

ITV plc 3.3% 8.6 11.9 5.0 80%

Sky Plc 3.3% 16.1 16.3 4.1 67%

Personal & Household Goods 13.3%

Barratt Developments 3.3% 5.8 9.8 1.4 100%

Berkeley Group Holdings 3.3% 4.5 8.1 2.1 100%

Persimmon 3.3% 6.3 10.7 2.3 100%

Taylor Wimpey 3.3% 6.2 10.7 2.1 98%

Real Estate 3.3%

Land Securities 3.3% 9.2 25.0 0.8 100%

Retail 13.3%

J Sainsbury 3.3% 4.7 12.2 0.8 100%

Morrison (Wm) 3.3% 4.4 18.5 1.1 100%

Next 3.3% 8.0 12.0 13.6 98%

Marks & Spencer 3.3% 5.8 11.2 1.7 87%

Telecommunications 3.3%

BT Group 3.3% 42.9 14.2 4.7 78%

Travel & Leisure 10.0%

Whitbread 3.3% 7.6 16.7 2.8 100%

Ladbrokes 3.3% 1.4 19.3 2.9 92%

William Hill 3.3% 2.7 12.5 2.2 89%

Utilities 13.3%

Pennon 3.3% 3.5 20.8 2.5 97%

SSE Plc 3.3% 15.5 13.2 3.0 98%

United Utilities 3.3% 6.5 20.5 2.5 100%

Severn Trent 3.3% 5.3 22.4 6.1 92%

Median 5.8 13.2 2.2 98%

June 6, 2016 Europe


Appendix 2: Constituents of UK investment-sensitive screen

Notes: Sales exposure based on company data for 2014; betas are derived by regressing gross fixed capital formation against earnings growth for FTSE 350 companies over 1990 to 2014. The screen includes betas above the 50th percentile. Source: Company data, Datastream, FactSet, Goldman Sachs Global Investment Research

Name Sector UK Sales Exposure Beta of Earnings to UK Investment

Travis Perkins Industrial Suppliers 100% 1.6Bovis Homes Group Home Construction 100% 7.2Persimmon Home Construction 100% 5.4Intu Properties Retail REITs 100% 2.6Barratt Developments Home Construction 100% 7.2Bellway Home Construction 100% 5.9Berkeley Group Home Construction 100% 3.9Redrow Home Construction 100% 6.4Great Portland Estates Industrial & Office REITs 100% 5.4Land Securities Group Industrial & Office REITs 100% 2.8Shaftesbury Retail REITs 100% 9.2Go-Ahead Group Travel & Tourism 100% 2.4Greene King Restaurants & Bars 100% 1.8Wetherspoon (Jd) Restaurants & Bars 100% 1.8British Land Retail REITs 99% 4.3Taylor Wimpey Home Construction 98% 7.4Next Apparel Retailers 98% 1.9Legal & General Life Insurance 93% 4.8William Hill Gambling 90% 2.5Ted Baker Clothing & Accessories 76% 3.0Bt Group Fixed Line Telecommunications 69% 3.2Hammerson Retail REITs 63% 6.0Royal Bank Of Scotland Banks 61% 6.1Easyjet Airlines 46% 5.0Kingfisher Home Improvement Retailers 42% 3.9Average 89% 4.5

June 6, 2016 Europe


Disclosure Appendix

Reg AC

We, Sharon Bell, CFA, Peter Oppenheimer, Christian Mueller-Glissmann, CFA, Ian Wright, Lilia lehlé Peytavin and Jim McGovern, hereby certify that

all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We

also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in

this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.

Disclosures

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 32% 53% 15% 65% 58% 51%

As of April 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 3,029 equity securities. Goldman Sachs assigns stocks as

Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for

the purposes of the above disclosure required by the FINRA Rules. See 'Ratings, Coverage groups and views and related definitions' below. The

Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has

provided investment banking services within the previous twelve months.

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager

or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-

managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs trades or may

trade as a principal in debt securities (or in related derivatives) of issuers discussed in this report.

The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,

professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of

coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking

revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their

households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to FINRA Rule 2241 or FINRA

Rule 2242 restrictions on communications with subject company, public appearances and trading securities held by the analysts.

Additional disclosures required under the laws and regulations of jurisdictions other than the United States

The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws

and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in

the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any

access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman

Sachs. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and

other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part

or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to

the site visit or meeting. Brazil: Disclosure information in relation to CVM Instruction 483 is available at

http://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of this

research report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of this report, unless indicated otherwise at

the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The Goldman Sachs Group Inc. and therefore is included in the company

specific disclosures relating to Goldman Sachs (as defined above). Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for,

this research report in Canada if and to the extent that Goldman Sachs Canada Inc. disseminates this research report to its clients. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs

(Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs

(India) Securities Private Limited, Research Analyst - SEBI Registration Number INH000001493, 951-A, Rational House, Appasaheb Marathe Marg,

Prabhadevi, Mumbai 400 025, India, Corporate Identity Number U74140MH2006FTC160634, Phone +91 22 6616 9000, Fax +91 22 6616 9001. Goldman

Sachs may beneficially own 1% or more of the securities (as such term is defined in clause 2 (h) the Indian Securities Contracts (Regulation) Act,

1956) of the subject company or companies referred to in this research report. Japan: See below. Korea: Further information on the subject

company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman

Sachs New Zealand Limited and its affiliates are neither "registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act

1989) in New Zealand. This research, and any access to it, is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless

otherwise agreed by Goldman Sachs. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian

legislation, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of

the Russian legislation on appraisal activity. Singapore: Further information on the covered companies referred to in this research may be obtained

from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted

without permission. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual

investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the

Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to

herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a

glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.

June 6, 2016 Europe


European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/125/EC is available

at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with

Investment Research.

Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho

69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms

Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific

disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese

Securities Finance Company.

Ratings, coverage groups and views and related definitions

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy

or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as

a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a

global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage

group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment

recommendations focused on either the size of the potential return or the likelihood of the realization of the return.

Return potential represents the price differential between the current share price and the price target expected during the time horizon associated

with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each

report adding or reiterating an Investment List membership.

Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at

http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook

on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12

months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the

following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over

the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an

advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman

Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for

determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and

price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended

coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The

information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global

basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on

macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd

(ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs

Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in

Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs

New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in

the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in

the United Kingdom and European Union.

European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority

and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom;

Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für

Finanzdienstleistungsaufsicht, may also distribute research in Germany.

General disclosures

This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we

consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and

forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as

appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large

majority of reports are published at irregular intervals as appropriate in the analyst's judgment.

Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have

investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research

Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal

trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks

and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.

The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may

discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity

securities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Any

such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's

return potential relative to its coverage group as described herein.

We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,

act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.

The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do

not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.

Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in

the products mentioned that are inconsistent with the views expressed by analysts named in this report.

June 6, 2016 Europe


This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be

illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of

individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if

appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them

may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.

Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at

http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase

and sales of options such as spreads. Supporting documentation will be supplied upon request.

All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all

research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our

research by third party aggregators. For research, models or other data available on a particular security, please contact your sales representative or

go to http://360.gs.com.

Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY

10282.

© 2016 Goldman Sachs.

No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.

Documents

Strategy Matters - pg.jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/6/6/4d33b7eb-c97e-484… · fiscal policy moves towards centre-stage (May 27, 2016). For example, the Ipsos