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03 European Equities EUROPE OUTPERFORMS Europe has the potential to be a key investment area in 2016. Conditions there are looking very promising for equities. A favorable environment for growth means that domestically focused companies should do well. Investment Ideas OVERWEIGHT EUROPE CONSIDER SECTORS EUROPEAN SMALL CAPS MANAGED VOLATILITY STRATEGIES For exposure to the region’s growth potential. Domestic cyclicals have promise. Have characteristics that will benefit from European growth. Can give participation in the region’s growth story coupled with volatility management in case of a reversal. Marketing Communication. For Investment Professional Use Only. Not For Use With The Public. Global Market Outlook 2016 Where’s Europe Now? What Matters in Europe Europe took center stage again for investors in 2015, and this time not only because of crises such as the ongoing Greek situation but also because some of the investment opportunities that we hinted at in our 2015 Global Market Outlook came to fruition. With European large-cap equities having a substantial 16% sales exposure to the US and 15% to emerging markets, the economic dynamics in those regions should not be ignored. Indeed, for the first three quarters of the year, the MSCI Europe index was 1% better than the World index and slightly better that than its US counterpart. But what’s in store for 2016? Will the success story continue? And, will the European small-cap premium, which was over 12% versus the MSCI Europe index in the first three quarters of 2015, be sustained? Could the eurozone offer a shelter against more troubled environments elsewhere? A Return of Sorts Lagging the Fed by fully six years, the ECB announced on 22 January 2015 the final details of its quantitative easing program. On 22 October it followed up with an announcement of further expansion of the program, coupled with a potential rate decrease. At the same time, gradual rate increases by the Fed have been alluded to but have taken time to materialize due to general concerns over the economy and this summer’s Chinese stock market crash. All this happened in a context where the economic situation in Europe is looking better, leading indicators are improving and the unemployment rate is smoothly slowing down. Ideal for Growth The recent decoupling in the economic momentum of the three regions (slowdown in Emerging markets, stabilization in the US and improvement in Europe) will continue to contribute volatility in the coming quarters. As a matter of fact, in recent months the economic decoupling between the three regions has somewhat accelerated. The reading in the eurozone looks more favorable with positive manufacturing indicators and upward-trending earnings. Following the global financial crisis, and after a five-year period where European equities were off of most investors’ radar, the first signs of renewed interest appeared with the “whatever it takes” speech from Mario Draghi in mid 2012. Between then and mid 2014, European equities rallied sharply. Since the beginning of 2015, the picture has looked encouraging, with flows coming back to European equities. It is probably too early to assess the long-term effects of European QE on the real economy in Europe. The longterm challenge for the eurozone is to raise its growth potential, significantly reduce structurally high unemployment and shift public finances to a more sustainable path. Part of the answer has to do with the ability of European governments to succeed in implementing their reform agendas (labor market, privatesector liberalization and competitiveness, education etc.) in a difficult context. With that disclaimer in mind, over the short term, the eurozone economy is underpinned by strong market conditions. A WEAKER EURO LOW INTEREST RATES LOW RAW MATERIAL PRICES LOW ENERGY PRICES All create a very favorable environment for European growth. The vast majority of European countries are expected to grow at a faster pace over the next two years. Economic leading indicators that coincide with stronger economic growth also rebounded, notably in Germany, one of Europe’s key countries. Overall, there is a very positive outlook for Europe. But how best to harvest it? Which industries should be targeted and which avoided? And how does large cap and small cap differ in Europe? Let’s look at these questions in more detail now. State Street Global Advisors | SPDR ETFs 02 Global Market Outlook 2016 HOW TO HARVEST Choose the Right Industry How should investors position their portfolios to benefit from this decoupling environment? In order to tackle this question, we begin by classifying European industry groups into 4 clusters according to whether they are cyclical/defensive in one dimension, or global/domestic (depending on their sales exposure breakdown) in the other dimension. We’re looking for the industry group that looks best placed to benefit from the European growth story. We then check where the different industry groups are positioned with respect to their own business cycle over both the short term (earnings revisions over the last 3 months) and the longer term (EPS distance to previous 2007 peak). If more analysts revise their earnings expectations upwards than downwards, this is a positive since it indicates return potential within this industry. The graph below shows this on the horizontal axis, and this represents our short-term view. 50% EPS Distance to Previous 2007 Peak 100% The overall European market is a mixed bag, with earnings still lagging their previous cyclical peak and suffering from negative earnings revisions. But clearly, most of the industries in the lower-right quadrant are green — they are both domestic and cyclical, and it is industries with these characteristics that are our recommendation. Domestic Cyclicals Domestic Defensive Global Cyclicals Global Defensive Household & Personal Products Healthcare Equipment The second dimension, representing our long-term view, on the vertical axis, looks at each industry in terms of earnings per share (EPS) and how the current EPS value is relative to the EPS peak in 2007 right before the Global Financial Crisis. If an industry currently shows a lower value EPS than in 2007, this should indicate that there is still potential in terms of earnings growth (and return, as a result). 1 Software & Services Automobiles & Components Food Beverages & Tobacco Consumer Durables Semiconductors Pharmaceuticals Commercial & Professional Services 2 Retailing Media 0% Capital Goods MSCI Europe Consumer Services Insurance Transportation Telecommunications Services Food Retailing Utilities Materials Energy -50% 3 Real Estate Diversified Financials Technology Banks -100% Earnings Revisions Last 3 Months -0.5 -0.25 0 0.25 In general, industries with positive earnings revisions also trade below their last cyclical peaks while industries above their last peak are almost always negatively revised. This suggests some diverging sector dynamics within the market. Globally exposed industry groups (both cyclicals and defensives) all exhibit negative earnings trends, while the picture is more mixed for domestic industry groups. Domestic industries (both cyclical and defensive) are all below previous peak levels while only a few global industries (e.g. Energy, Materials) share this characteristic. 0.5 Source: SSGA, as of 31 October 2015. For illustrative purposes only. State Street Global Advisors | SPDR ETFs 03 Global Market Outlook 2016 Choose the Right Capitalization Go Active? European small-cap companies are more domestically focused than their large-cap counterparts and also offer a more cyclical exposure. European small-cap stocks have on average more cyclical exposure than large-cap stocks. European small-cap stocks are also more domestic than large caps.* A number of factors make the current market environment favorable for active quant equity managers: But how have European small-cap stocks done in the recent past? The graphic below shows that the small-cap premium remains strong. In 2015 especially, it was a very good year for small-cap investors in Europe. The asset class offers a purer leverage to the domestic European economy than large-cap companies. With these characteristics, we think investing in European small-cap companies is another good way to play the economic decoupling within Europe. The European Small-Cap Premium 4.34 % 5.89 12.47 Last 10 Years Last 5 Years % % 2015 (YTD) Source: SSGA. MSCI Europe Small Cap Index minus the MSCI Europe Large Cap Index return (in EUR). As of 30 September 2015. Past performance is not a guide to future results. *More on this analysis can be found in Chatron, Ekambi and Schulmerich, “European View on Equities: Q4-2015”. SSGA IQ Insights, October 2015. Heightened Market Volatility More volatility offers an opportunity for skilled active management to separate good stocks from bad stocks. Range of Return Dispersion Higher dispersion among factors can be preferable since it gives opportunities for managers to express their views on factor premia. Lower Correlations Correlations have been decreasing since their peak at the end of 2011, a positive sign for active managers. Lower correlations can improve active returns for skilled managers and present opportunities for adding value. Active management primarily makes sense when an asset manager is managing a complex strategy that invests in less-widely researched areas such as small-cap equities or emerging markets. The more efficient the market, the more difficult it is to generate excess returns through active management. However, with superior research, and an “information edge,” successful active management in more efficient markets is indeed possible. Convinced but Cautious? There are still many unresolved issues that may yet throw some volatility into the European mix. The rest of the world continues to slow down, especially Emerging Markets. Although Europe has a large internal market, it is not insulated from slowdowns elsewhere, as recent decreases in German exports shows. And, the impact of the recent influx of refugees has yet to be fully quantified. The first casualty has been Chancellor Merkel’s approval rating, leaving her less able to maneuver politically. The recent Volkswagen emissions affair has also cast a cloud over the powerful “Made in Germany” brand. Investors may want to retain exposure to Europe but with added downside protection in case of a reversal. One way of achieving this is via managed volatility strategies. These target a 20-30% reduction in overall volatility relative to the broad equity market while remaining fully exposed to equities. The long-term investment case for managed volatility strategies is strong, and they really come into their own in times of uncertainty. State Street Global Advisors | SPDR ETFs 04 Global Market Outlook 2016 IDEAS FOR YOUR PORTFOLIO WITH SPDR ETFs Amid a complex but recovering growth profile, potential opportunities to access sources of return while managing European equity market risk include cyclical sector investing and smart beta strategies. The following SPDR ETFs can help you express these investment ideas for the upcoming year. European Sector ETFs In a sector rotation strategy, an investor can use ETFs to increase their allocation to sectors expected to outperform because of cyclical trends, and decrease their allocation to sectors that are expected to underperform. The SPDR fund range is the broadest suite of sector ETFs in the market. Our shorter term European cyclical picks for the upcoming part of the year are: SPDR® MSCI Europe Financials UCITS ETF SPDR® MSCI Europe Industrials UCITS ETF ISIN IE00BKWQ0J47 TER 0.30% Euronext Ticker STQ (EUR) LSE Ticker NDUS (EUR) SPDR® MSCI Europe Energy UCITS ETF ISIN IE00BKWQ0G16 ISIN IE00BKWQ0F09 TER 0.30% TER 0.30% Euronext Ticker STZ (EUR) Euronext Ticker STN (EUR) LSE Ticker FNCL (EUR) LSE Ticker ENGY (EUR) SPDR® MSCI Europe Consumer Discretionary UCITS ETF SPDR® MSCI Europe Technology UCITS ETF ISIN IE00BKWQ0C77 ISIN IE00BKWQ0K51 TER 0.30% TER 0.30% Euronext Ticker STR (EUR) Euronext Ticker STK (EUR) LSE Ticker CDIS (EUR) LSE Ticker ITEC (EUR) State Street Global Advisors | SPDR ETFs 05 Global Market Outlook 2016 A Domestic Bias with European Small Caps European small caps have fairly high exposure to Consumer Discretionary and Financials, sectors which are expected to benefit from quantitative easing as per the previous sector selection. With close to 12% exposure to Italy, Spain and Portugal combined, the MSCI Europe Small Cap Index provides investors with quick, efficient, diversified exposure should potential outperformance arise from the ECB’s drive to foster rapid reforms in these markets. SPDR® MSCI Europe Small Cap UCITS ETF Smart Beta Investors are looking for new ways to access sources of return while managing equity market risk. Smart beta strategies, which seek to isolate factors that have been shown to outperform standard market cap-weighted indices over the long term, respond directly to this demand. Dividend investing is a potentially effective way to augment income. The following Dividend Aristocrats ETF provides exposure to the 40 highest yielding companies in the eurozone that have paid increasing or stable dividends for at least 10 consecutive years. SPDR® S&P® Euro Dividend Aristocrats UCITS ETF ISIN IE00BKWQ0M75 ISIN IE00B5M1WJ87 TER 0.30% TER 0.30% Euronext Ticker SMC (EUR) Deutsche Börse Ticker SPYW (EUR) LSE Ticker EUSC (GBP) LSE Ticker EUDI (EUR), EUDV (GBP) Visit spdrseurope.com for our full range of European exposure ETFs. State Street Global Advisors | SPDR ETFs 06 About Us For nearly four decades, State Street Global Advisors has been committed to helping our clients, and the millions who rely on them, achieve financial security. We partner with many of the world’s largest, most sophisticated investors and financial intermediaries to help them reach their goals through a rigorous, research-driven investment process spanning both indexing and active disciplines. With trillions* in assets, our scale and global reach offer clients unrivaled access to markets, geographies and asset classes, and allow us to deliver thoughtful insights and innovative solutions. State Street Global Advisors is the investment management arm of State Street Corporation. *Assets under management were $2.2 trillion as of 30 September 2015. ssga.com For Investment Professional Use Only. Not For Use With The Public. For Investors in Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute its Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland. For Investors in France: This document does not constitute an offer or request to purchase shares in the Companies. Any subscription for shares shall be made in accordance with the terms and conditions specified in the complete Prospectuses, the KIID, the addenda as well as the Companies’ Supplements. These documents are available from the Company centralizing correspondent: State Street Banque S.A., 23-25 rue Delariviere- Lefoullon, 92064 Paris La Defense Cedex or on the French part of the site spdrseurope.com. The Companies re undertakings for collective investment in transferable securities (UCITS) governed by Irish law and accredited by the Central Bank of Ireland as a UCITS n accordance with European Regulations. European Directive no. 2009/65/CE dated 13 July 2009 on UCITS, as amended, established common rules pursuant to the cross-border marketing of UCITS with which they duly comply. This common base does not exclude differentiated implementation. This is why a European UCITS can be sold in France even though its activity does not comply with rules identical to those governing the approval of this type of product in France. The offering of these compartments has been notified to the Autorité des Marchés Financiers (AMF) in accordance with article L214-2-2 of the French Monetary and Financial Code. For Investors in Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semi-annual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. Telephone +49 (0)89-55878400. Facsimile +49 (0)89-55878-440. For Investors in Luxembourg: The Companies have been notified to the Commission de Surveillance du Secteur Financier in Luxembourg in order to market their shares for sale to the public in Luxembourg and the Companies are notified Undertakings in Collective Investment for Transferable Securities (UCITS). For Investors in the Netherlands: This communication is directed at qualified investors within the meaning of Section 2:72 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) as amended. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Distribution of this document does not trigger a licence requirement for the Companies or SSGA in the Netherlands and consequently no prudential and conduct of business supervision will be exercised over the Companies or SSGA by the Dutch Central Bank (De Nederlandsche Bank N.V.) and the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten). The Companies have completed their notification to the Authority Financial Markets in the Netherlands in order to market their shares for sale to the public in the Netherlands and the Companies are, accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 Dutch Financial Markets Supervision Act of Investment Institutions. For Investors in Norway: The offering of SPDR ETFs by the Companies has been notified to the Financial Supervisory Authority of Norway (Kredittilsynet) in accordance with applicable Norwegian Securities Funds legislation. By virtue of a confirmation letter from the Financial Supervisory Authority dated 28 March 2013 (16 October 2013 for umbrella II) the Companies may market and sell their shares in Norway. For Investors in Spain: SSGA SPDR ETFs Europe I plc and SSGA SPDR ETFs Europe II plc have been authorised for public distribution in Spain and are registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores) under no.1244 and no.1242. A copy of the Prospectuses and Key Investor Information Documents, the Marketing Memoranda, the fund rules or instruments of incorporation as well as the annual and semi-annual reports of SSGA SPDR ETFs Europe I plc and SSGA SPDR ETFs Europe II plc may be obtained from the Spanish distributors. The complete lists of the authorised Spanish distributors of SSGA SPDR ETFs Europe I plc and SSGA SPDR ETFs Europe II plc is available on the website of the Securities Market Commission (Comisión Nacional del Mercado de Valores). For Investors in Switzerland: The information provided does not constitute advice or an offer or solicitation to purchase shares. This document is directed at qualified investors only, as defined by Article 10(3) of the Swiss Act on Collective Investment Schemes (CISA) and Article 6 of the Swiss Ordinance on Collective Investment Schemes (CISO). Certain of the funds are not registered with the Swiss Financial Market Supervisory Authority (FINMA) which acts as supervisory authority in investment fund matters. Certain of the funds referenced herein have not been authorised by the FINMA as a foreign Collective Investment Scheme under Article 120 of the Collective Investment Schemes Act of June 23, 2006. Accordingly, the shares of these funds may not be offered to the public in or from Switzerland unless they are placed without public solicitation as such term is defined by FINMA from time to time. In relation to those funds which are registered with FINMA, prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semi-annual reports free of charge from the Swiss representative, State Street Fund Management Ltd., Beethovenstrasse 19, 8027 Zurich, from the Swiss paying agent, State Street Bank GmbH Munich, Zurich Branch, Beethovenstrasse 19, 8027 Zurich as well as from the main distributor in Switzerland, State Street Global Advisors AG , Beethovenstrasse 19, 8027 Zurich. Before investing please read the Prospectuses and KIIDs, copies of which can be obtained from the Swiss representative, or at spdrseurope.com For Investors in the UK: The Companies are recognised schemes under Section 264 of the Financial Services and Markets Act 2000 (“the Act”) and are directed at ‘professional clients’ in the UK (within the meaning of the rules of the Act) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme. State Street Global Advisors | SPDR ETFs 07 Important Information This document has been issued by State Street Global Advisors Limited (“SSGA”). Authorised and regulated by the Financial Conduct Authority. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350 Web: ssga.com SPDR ETFs is the exchange traded funds (“ETF”) platform of State Street Global Advisors and is comprised of funds that have been authorised by European regulatory authorities as open-ended UCITS investment companies (“Companies”). SSGA SPDR ETFs Europe I plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland. SSGA SPDR ETFs Europe II plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland. This document is not, and under no circumstances is to be construed as, an offer or any other step in furtherance of a public offering in the United States, Canada or any province or territory thereof, where the Companies are not authorised or registered for distribution and where the Companies prospectuses have not been filed with any securities commission or regulatory authority. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States. The Companies have not and will not be registered under the Investment Company Act of 1940 or qualified under any applicable state securities statutes. The views expressed in this material are the views of SSGA’s Economics and Investment Teams through the period ended 30 November 2015 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Past performance is not a guarantee of future results. The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2004/39/EC) or applicable Swiss regulation and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information. Exchange traded-funds (ETFs) trade like stocks, are subject to investment risk and will fluctuate in market value. The value of the investment can go down as well as up and the return upon the investment will therefore be variable. Changes in exchange rates may have an adverse effect on the value, price or income of an investment. Further, there is no guarantee an ETF will achieve its investment objective. This communication is directed at professional clients (this includes eligible counterparties as defined by the Appropriate EU Regulator) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication. These investments may have difficulty in liquidating an investment position without taking a significant discount from current market value, which can be a significant problem with certain lightly traded securities. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent. There can be no assurance that a liquid market will be maintained for ETF shares. Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs. Risks associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions. Investments in small-sized companies may involve greater risks than in those of larger, better known companies. Select Sector SPDR Funds bear a higher level of risk than more broadly diversified funds. All ETFs are subject to risk, including the possible loss of principal. Sector ETFs products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market. Because of their narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. The financial products referred to herein are not sponsored, endorsed, or promoted by MSCI and MSCI bears no liability with respect to any such financial products or any index on which such financial products are based. The Prospectus contains a more detailed description of the limited relationship MSCI has with SSGA and any related financial products. Standard & Poor’s, S&P and SPDR are registered trademarks of Standard & Poor’s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation’s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index. You should obtain and read the Companies’ Prospectuses prior to investing. Prospective investors may obtain the current Prospectuses, the articles of incorporation, the Key Investor Information Documents (KIIDs) as well as the latest annual and semi-annual reports free of charge from State Street Global Advisors, or from spdrseurope.com © 2015 State Street Corporation. All Rights Reserved. IBGE-1986 1215 Exp. Date: 31/12/2016