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• Top European equities reviewed

• Outlook on Germany's DAX index

• Key Eurozone Economic figures

This week…

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General Advice & Risk Warning

Please note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or

advice given does not take into account your particular objectives, financial situation or needs.

Therefore at all times you should consider the appropriateness of the advice before you act further.

CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You

can lose more than your initial deposit so you should ensure CFD and Forex trading meets your investment

objectives. We recommend you seek independent advice. Strategies and charts used in this presentation are

for example only. You are reminded that past performance is not indicative of future performance.

Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product

Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you

decide whether or not to acquire any financial products. These documents are available at www.invast.com.au

Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

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This week we look at the following topics:

• Top European equities reviewed

• Outlook on Germany's DAX index

• Key Eurozone Economic figures

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Dear Readers,

As we wrote last week, this month’s reports will be structured as follows:

Key theme 1 - Week commencing 1 December 2015: Watch closely what happens toApple shares.Key theme 2 - Week commencing 8 December 2015: Watch closely what happens toEuropean shares.Key theme 3 – Week commencing 15 December 2015: Watch closely what happens toJapan’s Nikkei.Key theme 4 & 5 – Week commencing 22 December 2015: Key energy losers & theirlenders.

Key theme 2 - Week commencing 8 December 2015: Watch closely what happens toEuropean shares.

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Last week we wrote about Apple shares becoming a major issue in 2015. A day afterpublishing our report, Apple shares were subject to a mini-flash crash in which manycommentators and analysts came out and published strong views. We think this willcontinue into 2015 where Apple’s earnings sustainability and geographicalvulnerabilities, as discussed in our reports, comes under close scrutiny. Our focus thisweek is on European shares, a subject that we have been following very closelythroughout the year.

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Most of our discussion when discussing European equities is centred on the DAX, due tothe fact that:

1) It is a very popular index to trade as a broad basket among many traders2) The constituents form some of the largest companies in Europe; and3) Germany is only of the world’s largest economies and truly the powerhouse ofEuropean monetary policy movements. What happens in Germany is extremelyimportant4) Despite all the European turmoil this year and deflationary issues in Germany, theDAX is around 7.8% over the past year as of the time of writing.

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In our 2014 Forecast Guide Special report, we wrote the following on the DAX:

“…We have the same concerns with other indices that the move up is rather forced andwe would likely see a short term correction. First towards the rising trend line around8500 and following that 8138, a previous resistance turned support. We expect thiscorrection to occur early 2014, before buyers comes in around the above supports.Longer term view of the market points to a potential move towards 10900 – 11000range, but without a correction it is unlikely to happen…” Full report here.

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We started to reiterate our view on the DAX later during the year after strong volatilityand question marks over the Eurozone’s ability to stimulate any meaningful economicgrowth. Our main premise through 2014 was that the depreciation in the Euro willbecome a major tailwind for European equities and the DAX in particular. We saw shortterm shocks as good trading opportunities as Draghi and the ECB started to increaserhetoric and market significant market interventions, even though at times it seemedlike they were purely talking and not acting.

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Image: GER30 daily price chart throughout 2014 via Invast MT4 platform

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As the chart above shows, volatility on the DAX has had a large correlation to ECB ratepolicy. In second half of 2014, Invast Insights Chief Editor in his weekly’ blog post wrote“I remain a big believer in the scope for the European markets and the DAX in particular,to become solid markets in the next year or two. Germany won the world cup soccerfinals this year and the nation is still the fourth largest economy in the world, behindJapan, China and the USA respectively, when measured by nominal GDP. The short termtechnical indicators on the DAX might not be pretty but to me the long termfundamentals and cheap money being pumped into the system are just too attractive toignore”. Full blog post here.

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The comments were reiterated in October when the DAX fell but then went on to stage asolid recovery. As we write this note, the DAX is just shy of the 10,000 level again.Question marks over the ECB’s commitment remain, we however think that the ECB hascome too far to abandon its explicit anti-deflation mandate. The big question in themarket is Draghi’s willingness and capacity to do more. We will address our view herebut first we need to put the economic situation, particularly in Germany intoperspective. This will confirm our view that Draghi will do more in 2015 and Europeanstocks, like those listed on the DAX, will continue to remain major beneficiaries.

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Despite the rapid fall in the EURUSD during the secondhalf of 2014 and all of Draghi’s rhetoric, the latestEurozone economic figures continue to disappoint. In thethird quarter of the year, the Eurozone grew by just 0.6%,at an annualised rate. This time, the peripheraleconomies weren’t the problem.

For example, Greece’s economy grew faster than anyother euro-zone country, and Spain and Ireland arerecovering from a low base. The chart to the left issourced from The Economist Magazine with data sourcesnote.

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This time around it was the core, large pillars that exhausted the growth figures —andfew more so than the largest contributor of capital to the ECB - Germany. It grew by just0.1% in the third quarter, after contracting by the same amount in the prior quarter.

Inflation is also a problem for the ECB, or a lack thereof. Inflation fell to just 0.4% inOctober which is well below the ECB’s target range of 2%. Deflation is problematicbecause it makes debt burdens harder to bare, on an absolute basis. Many largeEuropean economies are forecast to have public debt to GDP in excess of 100%.Deflation means these asset base and the income servicing base does not grow andthere is a cost of servicing the debt, which needs to be taken into account for par value.

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In a nutshell, the ECB needs inflation. It can afford the inflationary impact that a lowercurrency provides. The EUR/USD can probably fall by another 10% before the importedinflation target moves within the guidance range and we need to also keep in mind thatone of the key imported inflation items, energy, has seen huge falls on an absolute basis.For us it seems like a no-brainer that Draghi has fire power to back up his talk in 2015.It’s been almost two years since the Eurozone last achieved its inflation target.

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Image: EURUSD daily chart since April 2013 via Invast MT4 platform

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For us, inflation is the ultimate issue and this was reaffirmed by Draghi last week.Quoting from the New York Times, Draghi reiterated at his press conference ““We have amandate. We don't tolerate prolonged deviations from our mandate...not to pursue ourmandate would be illegal.” The market does not necessarily doubt Draghi’s capacity tomove into a full large scale bond buying program, instead it comes down to timing. Wefeel that European equities will become a major beneficiary of stimulus and a lowercurrency in 2015 when the action is taken. Losing credibility and not asking, to us, is nota likely outcome which Draghi nor the ECB can afford.

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Draghi’s statement in December was almost identical to ones he made in October andNovember. The market is starting to grow tired of his talk but we think patience will payoff. In early April, Editor Peter Esho published another blog post on the Invast site talkingabout the importance of maintaining credibility when running a central bank. The postwas made as the EURUSD was approaching the 1.40 level and the market was starting toreally doubt Draghi’s capacity and willingness to act. Esho wrote “The most importantpart of running a central bank is maintaining credibility with the market. After all,currencies are just pieces of paper and worthless unless the market trusts a centralbank’s willingness to come good when required. We often forget about the very basics ofmonetary policy when dealing with markets.

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For me, the European Central Bank is even more extreme in that it doesn’t represent asingle sovereign country but a collection of members, each with their own rules,regulations and associated political messes. We saw how this played out in 2012. At theend of the day, the Euro is a piece of paper backed by other pieces of paper whichcommit European countries to their obligations. As we know, pieces of paper can beripped up. Europe has fought many wars over the past few centuries because certainmembers decided to rip up pieces of paper or prior conventions…” Full blog post here.

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We reiterate the view that Draghi has no other choice but to act. The ‘if needed” tag lineis now becoming clearly “needed”. There is no more if, it’s just a matter of being patientwith Draghi as was the case in April this year. The actions to stave off deflation andreassert the 2% inflation target will probably take place in the first quarter of 2015 butpicking the exact time is difficult. There is no doubt that European conglomerates will bemajor beneficiaries. Each company has its own specific earnings risk and executionconsiderations to take into place but our preferred list of exposures to monitor next year,with reasons, are as follows (prices and earnings estimates sourced through Bloomberg):

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Comments:

Financial services will benefit from cheap money via ECB. The market is alreadydiscounting earnings issues via the low price to earnings ratio. Could benefit from Draghistimulus upon announcement, along with other financial names.

Stock: Allianz SE

Price (EUR) 5.12.14: 137.25

Price/Earnings: 9.6

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Comments:

Has leverage to lower currency, higher translated earnings. We have written about Bayerpreviously in our Invast Insights reports and our view on the quality of the business andbenefits from a lower EURUSD have come home to roost, solid returns in 2014 so far.

Stock: Bayer AG

Price (EUR) 5.12.14: 118.41

Price/Earnings: 19.6

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Comments:

Lower fuel prices to offset domestic passenger weakness. The impact of lower fuel costsand a weaker currency have the added benefits on travel yields, Qantas is a perfectexample in Australia seeing its shares almost double in 2014.

Stock: Deutsche Lufthansa AG

Price (EUR) 5.12.14: 14.52

Price/Earnings: 13.1

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Comments:

Stimulus and flow on impact to construction could benefit earnings. There are manyissues at play here but the largest and most respected building names tend to find verystrong support in periods of government and central bank stimulus, for obvious reasons.

Stock: Heidelberg Cement AG

Price (EUR) 5.12.14: 59.81

Price/Earnings: 15.6

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Comments:

International growth leverage, lower fuel costs and Euro benefits. The price to earningsratio is already factoring in depressed earnings, so this needs to be watched closely. Ifearnings aren’t as bad as forecast, there could be a positive surprise here.

Stock: Volkswagen AG

Price (EUR) 5.12.14: 183.27

Price/Earnings: 8.3

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Two key charts below via Invast DMA CFD offering (for more info visit www.invast.com.au/DMA)

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Bottom line: The whole point of ECB intervention of deflation is to stimulate economicgrowth and fuel the financial system with cheap credit in order to artificially generateinflation. The main beneficiaries of this process will be companies who 1) Are given anartificial competitive advantage via a cheap currency relative to trade peers and 2) Haveaccess to cheap credit, below their business yield. For example if a European corporategiant can borrow at 2% and invest at 4%, the amount of wealth being created is 2% overthe asset base each and every single year.

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This is what fuels stock prices as earnings grow. There will be some bold action by theECB in 2015, we’re not sure exactly when but we have a good sense that something iscoming. The list of stocks to watch on the DAX are all high quality names and they shouldbe on your watch list for when the ECB action does finally arrive. Next week we willdiscuss the irony between what is happening in Europe compared to what has alreadyhappened in Japan – multiple rounds of quantitative easing to no real avail. Japan is atan important juncture in 2015 and we will discuss which exposures on the market willbenefit and which stand to lose the most as the “big bet” by Abe approaches dangerouslevels.

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5 Major Themes for 2015: Join the webinar to discuss these points

Invast Insights chief editor and contributing author Peter Esho will summarise hisoutlook on 5 key investment themes he believes are critical in 2015. Esho will documenthis findings based on the performance of key markets in 2014 and where he believes thebig opportunities lie next year. His presentation will focus on the following 5 themes:

Watch closely what happens to Apple shares. Watch closely what happens to European shares. Watch closely what happens to Japan’s Nikkei. Key energy losers & impact on their lenders.

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Esho is a regular contributor on CNBC, Bloomberg and host of ‘YourMoney Your Call’. His webinar will cover both the fundamental andtechnical outlook on these key themes and a basic introduction toInvast’s new DMA CFD product offering which complements MT4and other services.

This webinar is expected to fill fast. Q&A will be open straight after the presentation.Register now by visiting http://www.invast.com.au/resources/webinars.aspx.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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DisclaimerPlease note that you are receiving this report complimentary from Invast Financial Services Pty Ltd(AFSL 438 283). Invast staff members may from time to time purchase securities which areincluded in this or future reports. The authors of this report may or may not be holding a positionin the securities mentioned. Please note that the information contained in this report and Invast'swebsite is of a general nature only, and does not take into account your personal circumstances,financial situation or needs. You are strongly recommended to seek professional advice beforeopening an account with us.

General Disclaimer: This newsletter contains confidential information and is intended only for theperson who downloaded it. You should not disseminate, distribute or copy this newsletter. Invastdoes not accept liability for any errors or omissions in the contents of this newsletter which ariseas a result of downloading this newsletter. This newsletter is provided for informational purposesand should not be construed as a solicitation or offer to buy or sell any financial product. InvastFinancial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

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Risk Warning: It's important for you to read and consider the relevant Product DisclosureStatement, and any other relevant Invast Financial Services Pty Ltd documents before youdecide whether or not to acquire any financial products listed in this email. Our FinancialServices Guide contains details of our fees and charges. All these documents are available hereon our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange areleveraged products and carry a high level of risk and you can lose more than your initial depositso you should ensure CFD and Foreign Exchange trading meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take account of yourobjectives, financial situation or needs. Before acting on this general advice you shouldtherefore consider the appropriateness of the advice having regard to your situation. Werecommend you obtain financial, legal and taxation advice before making any financialinvestment decision.

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