STRATEGY NOTEUSA | Equity StrategyGlobal5 July 2016Global Equity StrategyUS: Divergent Policy, Broader Breadth (II)EQUITY STRATEGY GLOBALUSEconomicPolicyUncertaintyIndexSource:www.policyuncertainty.com,Jefferies05010015020025030085878991939597990103050709111315Source:www.policyuncertainty.com,JefferiesUSAssetAllocationtoBonds,CashandEquitiesSource:FactSet,Jefferies1520253035404550555456586062646668707274767880828486889092949698000204060810121416CashEquityBondEquityMarketFlowsintoUSSource:Bloomberg,EPFR,Jefferies1,5001,6001,7001,8001,9002,0002,100(200,000)(150,000)(100,000)(50,000)050,000100,000150,000200,000250,000Jul-14Oct-14Jan-15Apr-15Jul-15Oct-15Jan-16Apr-16AllFunds(LHS,US$mn,cumulative)MSCIUS(US$,RHS)USTradeWeightedRealBroadDollar(%,YoY)Source:Bloomberg,Jefferies(20)(15)(10)(5)051015207475777980828485878990929495979900020405070910121415Source:Bloomberg,JefferiesCBOESPXImpliedCorrelation17Source:Bloomberg,JefferiesNote:TiedtooptionswithJan2017maturities.3040506070809007070910121315Source:Bloomberg,JefferiesSean Darby *Chief Global Equity Strategist+852 3743 8073 sdarby@jefferies.comKenneth Chan *Quantitative Strategist+852 3743 8079 kenneth.chan@jefferies.comIrene Zhou *Equity Associate+852 3743 8769 izhou@jefferies.com * Jefferies Hong Kong Limited^Prior trading day's closing price unlessotherwise noted.Key TakeawayWith the year half way finished, we review our original investment thesis aswell as our ‘Magnificent Seven investment themes” and sector bias. To date, themajor theme of ‘Market Rotation’ continues to play out with market breadthimproving and stock leadership changing post the December rate hike. Equally,the US yield curve has ‘bear flattened’ over the past twelve months suggestinga benign low growth, low inflation environment.We continue to expect the S&P 500 to deliver single-digit returns in 2016 withthe index rising to 2,180. We remain Bullish on US equities within our GlobalAsset Allocation. The mature bull market and challenging stock multiplesalongside a weaker earnings trend acted as a brake against share prices overthe past six months.“There are decades where nothing happens; and there are weeks where decades happen”,Vladimir Ilyich LeninIt is the headwinds from a stronger dollar and ongoing Chinese RMBdepreciation that US investors should be eyeing. The former will eat into earningswhile the latter has more impact on ‘currency’ stability in the short-run than longer-termissues over the credibility of the euro-zone.Exports are not a large component of GDP for the US (around 13% of GDP) butas we have remarked before it is a good chunk of S&P 500 earnings. If the UKand European economies downshift because of the UK departure from Europe, US tradewill suffer because the UK and Germany are ranked 5 and 6 as destinations for US exports.The elasticity of the dollar to US sector earnings varies with utilities and real estate low whiletechnology, media and healthcare is high.We had been more optimistic on global growth, a weaker dollar and higher oilprices. The recent bout of dollar strength alongside expectations of further QE by the BoEand the BoJ is likely to keep the greenback stronger for longer. The downside risk from Brexiton UK and EU consumer and corporate sentiment remains to be seen while EM is recoveringbut not quickly enough to offset slower DM growth. Hence we lower our 2016 integers from129.5 to 123.5. We have not changed our assumptions on oil prices or the US economy. Wedon’t expect any rate hikes until after the US election.We have removed ‘the multinational earnings basket’ from our 2016‘Magnificent Seven’ investment themes. The remaining ‘Super Six’ baskets are shownoverleaf. We have also highlighted our preferred S&P 500 sector weightings for the comingquarter. We are bullish on Health Care and Consumer discretionary. We are modestly Bullishon Energy, Materials and Telecom Services.Valuations. The S&P 500 currently trades on a 12-month forward PE of 16.73x, a PB of2.64x , 15.81% forward ROE and a dividend yield of 2.20% as welll as a 12-month forwardearnings growth estimate of 7.53%.(Cont overleaf)Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 24 to 28 of this report. The US has reasserted itself as the dominant global economy and will continue to grow in 2016 despite another disappointing first quarter. This cycle is becoming somewhat extended, but the expansion will not end any time soon. The US economy is overwhelmingly dominated by a large, diverse and growing service sector and, consequently, domestically oriented. Service activities, housing and construction will continue to be sources of growth. Government spending will no longer be a drag on growth. Transportation-related manufacturing will remain healthy. Manufactur