August 8, 2017

Portfolio Manager Toolkit

Equity Research

The (Lack of) Fear Factor

Positioning at Extremes
The confluence of low volatility, a fluid reflation
narrative and signs of complacency in rates & credit
markets have created positioning and correlation
extremes for equity managers. Relationships
between and among sectors and factors bear
watching as do signs of potential mean reversion.
The Changing Face of Low Vol & Carry
Tech acts like a low-vol bond proxy, complete with
positive correlation with Staples & Utes and an
inverse relationship to the 10Y. Healthcare has lost
its carry trait. Low Vol is skewed towards Growth
Dont Ignore HY Spreads
Robert D. Boroujerdi
A search for yield, lack of supply & benign defaults (212) 902-9158 robert.boroujerdi@gs.com
has driven HY credit spreads to multi-year tights Goldman Sachs & Co. LLC
despite elevated Policy Uncertainty (a strong
relationship historically). High correlation between Jessica Binder Graham, CFA
(212) 902-7693 jessica.graham@gs.com
spreads and factors and elevated skew in HYG Goldman Sachs & Co. LLC
suggest equity/options markets are more
concerned about leverage than the credit market. Deep Mehta
Worried? Watch your Growth exposure and stocks (212) 357-8419 deep.mehta@gs.com
with stretched balance sheets (HTZ, OI, WSTC). Goldman Sachs & Co. LLC
Buy Quality: BAX, DE, LRCX, PXD, SBUX & V.
Christopher Wolf, CFA
(212) 934-4221 christopher.wolf@gs.com
FX: Anchors Aweigh Goldman Sachs & Co. LLC

and Tech while Value weights are below historical
levels. If todays Low Vol mean reverted it would
have a higher vol than the SPX.
What if the Yield Curve Steepens?
History suggests the curve flattens when the Fed
raises rates and this year has been no exception.
However, with the Fed about to begin balance sheet
normalization and potentially less gravitational pull
on rates from the rest of the world, we provide a
Case Study on Steepening for equity investors.
The reversal in the USD is welcome news for US Ronny Scardino
multinationals after weighing on sales growth in (212) 357-3775 ronny.scardino@gs.com
10/11 last quarters. We peg the potential tailwind to Goldman Sachs & Co. LLC
be ~320 bp in 4Q17/1Q18, but minimal EPS
revisions suggest the Street may be anchoring.
Keeping Up With The Cryptocurrencies
With the total value nearly $120 bn, its getting
harder for institutional investors to ignore
cryptocurrencies. We offer up a FAQ in a bid to de-
mystify market structure, Ethereum and ICOs.

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

August 8, 2017 Portfolio Manager Toolkit

Table of Contents

Mind the Gap: Analyst Coverage, Volatility, Oil, Industrials 3

Cryptocurrency Corner: FAQ for the Institutional Investor 4
Keeping up with the Cryptocurrencies 5
FX: From headwind to tailwind but is it in estimates? 6
An Equity Manager's Guide to the Yield Curve: Steepening Anyone? 7
Key signposts to watch 8
Shifting notions of Low Vol and Carry: Can it last? 10
The curious case of low high yield spreads 14
Disclosure Appendix 20

The prices in the body of this report are based on the market close of August 4, 2017.

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Mind the Gap: Analyst Coverage, Volatility, Oil, Industrials

Exhibit 1: Stock coverage in the US leans heavily towards Large Cap v SMID Exhibit 2: The spread between the VXN and VIX is ~3x the 10-year average
Number of covering analysts (average) Chicago Board Options Exchange NDX Volatility Index vs SPX Volatility Index
25 8
Avg Number of covering analysts

20 6

4 4.1
15

2
10 1.6

0
5
-2
0
-4
Aug-07 Aug-09 Aug-11 Aug-13 Aug-15 Aug-17

S&P 500 (Large) S&P 400 (Mid) S&P 600 (Small) VXN vs VIX Spread Current 10yr avg

Source: FactSet, Goldman Sachs Global Investment Research. Source: Bloomberg, Goldman Sachs Global Investment Research.

Exhibit 3: Energy stocks have decoupled from oil prices Exhibit 4: Dow Theory facing a potential challenge?
XLE/S&P 500 vs 2YR WTI Swap (Indexed to August 2012) Dow Jones Industrial Average vs Transportation Average (RHS)
22,500 10,250
20%

21,500 9,750
0%
20,500 9,250
-20%
19,500 8,750
-40%
18,500 8,250

-60%
17,500 7,750

-80% 16,500 7,250

-100%
Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17
Dow Jones Industrial Average
XLE vs S&P 500 2YR WTI Swap Dow Jones Transportation Average (RHS)

Source: Goldman Sachs Global Investment Research. Source: Bloomberg, Goldman Sachs Global Investment Research.

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Cryptocurrency Corner: FAQ for the Institutional Investor

It's getting harder for institutional investors to ignore the rise of cryptocurrencies. Indeed the debate has shifted from the
legitimacy of the fiat of the internet to how fast new entrants are raising funds. The hype cycle is in full effect with Bitcoin, the first,
largest and most widely recognized cryptocurrency up almost 200% YTD (v 11% for the S&P 500) and a host of other emerging
altcoins growing in scope and presence (witness the growth of Ethereum). Whether or not you believe in the merit of investing in
cryptocurrencies (you know who you are) real dollars are at work here and warrant watching especially in light of the growing world
of initial coin offerings (ICOs) and fundraising that now exceeds Internet Angel and Seed investing.

FAQs:
1. Two Sides To The Coin: Is Cryptocurrency a Currency or Commodity?
Answer: It depends who you ask. The complexity exists because coins have attributes of a currency (e.g. presented and
trusted by some medium of exchange) and commodity (e.g. limited resource). The classification of cryptocurrencies varies by
country, government and even application. In the U.S., the IRS has ruled that virtual currency does not have legal tender status
in any jurisdiction. For tax purposes, the IRS treats virtual currency as property.
2. How Big Is The Cryptocurrency Market?
Answer: Nearly $120 billion. Bitcoin remains the largest and accounts for nearly 50% of the total market cap (Exhibit 5). There are
currently over 800 cryptocurrencies out there, though just 9 have a market cap in excess of $1 billion. While its growth has been
impressive, the aggregate market cap of cryptocurrencies equates to less than 2% of the value of all the mined gold in the world.
3. What Is Ethereum?
Answer: A Platform 1st, a Cryptocurrency 2nd. Ethereum differs primarily from Bitcoin in the latter is set up to be an
alternative to real money while the former is more of a platform set up to run any decentralized application and automatically
execute smart contracts when certain conditions are met. Ethereum offers a digital currency like Bitcoin called Ether but
this is just one component of its smart contract execution and primarily used to facilitate and reward using the network.
However, the rise of Ethereum has not come without setbacks, including the ~$60 million hack of "The DAO", a venture capital-
like organization with the mission of investing in Ethereum-related start-ups and projects (and is no longer operational today).
4. How Does One Trade Cryptocurrencies in the United States?
Answer: Digital Exchanges, Block Trades and (soon to be) Options. Individual investors can trade virtual coins on various
online exchanges. Institutional traders have largely stayed out of the cryptocurrency market due to its relatively small size,
structure of mandates and volatility, but block trading exists to facilitate the execution of larger orders. In addition, Bitcoin
options exist and are traded on offshore exchanges. Futures and options may also be coming to the US soon. On August 2,
2017, the CBOE entered an agreement with Gemini Trust Co to allow cash-settled Bitcoin futures on CBOE Futures Exchange in
4Q-17 or early 2018.
5. What is an Initial Coin Offering (ICO)?
Answer: Fundraiser through token sales. The amount of money funding ICOs has grown exponentially and the speed at
which money is raised via a white paper and internet browser has sounded the alarm bells from parties including the SEC and
the Peoples Bank of China. According to Coin Schedule, ICOs have raised $1.25 billion this year, outpacing global Angel & Seed
stage Internet VC funding in recent months. The Tezos blockchain raised a record breaking $232 million worth of Bitcoin and
Ether through an ICO completed last month. The next closest? Bancors ICO which raised $150 million in mid-June. And the
speed of ICOs is an added benefit: Gnosis raised more than $12 million in under 15 minutes.

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Keeping up with the Cryptocurrencies

Exhibit 5: Bitcoin represents almost half of the nearly $120bn in total Exhibit 6: While just 9 cryptocurrencies have a market cap in excess of $1
cryptocurrency market cap billion, there are more than 400 worth less than $1 million
Distribution of cryptocurrency market cap; $,millions Distribution of cryptocurrencies by market cap
250
222
IOTA, $1,301 Other (n=801),
Dash, $1,436 $16,143 200
Ethereum

# of Cryptocurrencies
Classic, $1,451
Litecoin, $2,405
150
NEM, $2,446
118 114
Bitcoin Cash,
Bitcoin, $55,525
102
$4,395 100
75 81
Ripple, $6,949
51
50 38

Ethereum,
0
$25,342 >$1bn $100m $25m $10m $2.5m $1m $250k $100k < $100k
-$1bn -$100m -$25m -$10m -$2.5m -$1m -$250k

Note: Includes all digital currencies and assets for which Coin Market Cap lists a market cap greater than $0.

Source: Coin Market Cap, Goldman Sachs Global Investment Research. As of August 7, 2017. Source: Coin Market Cap, Goldman Sachs Global Investment Research. As of August 7, 2017.

Exhibit 7: Boosted by the rise of Ethereum, Ripple and other Altcoins, the Exhibit 8: The pace of ICO fundraising has now surpassed Angel & Seed
cyptocurrency market has now surpassed $100bn in aggregate size stage Internet VC funding globally
Total cryptocurrency market cap ($, billions) Total Funds Raised by month ($, millions)
140 100% 600
90% Angel & Seed VC Funding (Internet)
120
80% 500

Total Funds Raised ($, mn)

ICO Fundraising
100 70%
Market Cap ($ billions)

400
80 60%
All other cryptocurrency
50% 300
60 Bitcoin
Bitcoin as % of Total Market Cap (RHS) 40%
40 30% 200
20%
20 100
10%
0 0% 0
Mar-16

May-16

Jul-16

Mar-17

May-17

Jul-17
Apr-16

Oct-16
Nov-16
Dec-16

Feb-17

Apr-17
Jun-16

Aug-16
Sep-16

Jan-17

Jun-17

Aug-17

Note: ICO fundraising as of July 18th, 2017, per Coin Schedule. Angel & Seed VC funding data as of July
31st, 2017 and does not include crowdfunding rounds.
Source: Coin Dance, Goldman Sachs Global Investment Research. As of August 7, 2017. Source: CoinSchedule, CB Insights, Goldman Sachs Global Investment Research.

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August 8, 2017 Portfolio Manager Toolkit

FX: From headwind to tailwind but is it in estimates?

After a strong rally in late 2016, the US Dollar Index (DXY) is down 9% YTD and is now near the lowest level since May 2016. This is
good news for US multinationals, as the typical company would have been bracing for a 280 bp drag for the full-year as of January
1. Instead, FX is now on pace to become an accelerating tailwind after weighing on sales growth in 10 of the last 11 quarters.
Our FX model suggests a +310bp tailwind in 4Q17, which marks a 485bp reversal from the 175bp headwind in 4Q16. However,
consensus estimates look not to yet fully reflect the potential benefit. Indeed, a sample of 75 large multinationals shows estimates
for 2017 and 2H17 have been revised higher over the last 3 months but are still below end-2Q16 levels. This suggests potential
upside risk to top-line estimates to the extent the Street may be anchoring, i.e., basing forecasts on history or guidance.

Exhibit 9: The US Dollar Index is down 9% YTD, with EUR the primary driver Exhibit 10: FX is no longer expected to be a drag on FY17 toplines
YTD change in the US Dollar Indexs (DXY) components DXY vs. estimated top-line impact of yoy FX changes for a typical multinational*
104 70
DXY YTD

Estimated FX Topline Impact (bp)

US Dollar vs. Weight Change 102 0

Euro (EUR) 57.6% -11%

100 (70)
Japanese Yen (JPY) 13.6% -5%

DXY Index
British Pound (GBP) 11.9% -5% 98 (140)

Canadian Dollar (CAD) 9.1% -5%

96 (210)
Swedish Krona (SEK) 4.2% -10%
Swiss Franc (CHF) 3.6% -4%
94 (280)
US Dollar Index (DXY) - LHS
FY17E FX impact (bp) - RHS
US Dollar Index (DXY) -9% 92 (350)
30-Jun-16 31-Aug-16 31-Oct-16 31-Dec-16 28-Feb-17 30-Apr-17 30-Jun-17

Source: Bloomberg, FactSet, Goldman Sachs Global Investment Research. As of August 7, 2017. Source: FactSet, Goldman Sachs Global Investment Research. As of August 7, 2017.

Exhibit 11: FX could be a meaningful top-line tailwind in 2H17 and 1H18E Exhibit 12: 2H17 estimates have been revised up but there is likely more to go
DXY vs. estimated top-line impact of yoy FX changes for a typical US multinational* Avg. revision to 2017 & 2H17 consensus est. for names with 50%+ Intl exposure**
Sample geographic 2014 2015 2016 2017E 2018E 2017CY Sales Estimate Revision 2H17 Sales Est. Revision DXY (RHS, Inverted)
Exposure 0% 92
Full Yr Full Yr Full Yr 1Q 2Q 3QE 4QE Full Yr 1QE 2QE

US 50% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Europe 25% 0% -16% 0% -4% -2% 5% 10% 2% 11% 6% -1% 96

UK 7% 5% -7% -11% -13% -10% -1% 5% -5% 5% 2%

Japan 5% -8% -12% 12% 1% -4% -8% 1% -2% 2% 0%

China 8% 0% -2% -5% -5% -4% -1% 2% -2% 3% 2% -2% 100

Asia - Other 5% ** ** -2.1% ** ** ** ** ** ** **

Weighted top-line impact (bps)

62 -534 -67 -221 -167 73 311 -1 332 188 -3% 104
30-Jun-16 30-Sep-16 31-Dec-16 31-Mar-17 30-Jun-17
* Methodology for our FX model (Exhibits 10- 11): Estimated YOY changes assuming current spot rates hold (historicals based on
** Methodology: Average consensus estimate revisions for a universe of 75 names in the S&P 500 that derived at least 50% of their
monthly average). FX rates for each full qtr weighted rates based on 17%/33%/50% linearity. For simplicity, we do not consider
Sales from outside the US in the last reported year. These revisions are indexed from June 30, 2016.
changes in Asia (Other) FX rates.

Source: FactSet, Goldman Sachs Global Investment Research. As of August 7, 2017. Source: FactSet, Goldman Sachs Global Investment Research. As of August 7, 2017.

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August 8, 2017 Portfolio Manager Toolkit

An Equity Manager's Guide to the Yield Curve: Steepening Anyone?

If equity investors had a crystal ball on the US 10Yr, their jobs this year would have been much easier. Indeed, the direction
of rates and shape of the yield curve continue to exert their influence on sector and factor performance. Nowhere has this
been more pronounced than the carry trade. However, we now see ourselves at a potential key juncture. History suggests
the yield curve flattens when the Fed raises rates and so far this year it has. However the possibility of steepening has
creeped into investor conversations given: 1.) the Fed is on the verge of Balance Sheet normalization; 2.) the potential for
the ECB & BoE slowing QE; and 3.) the yield advantage of US Treasuries vs. JGBs & German Bunds fading (on a FX-hedged
basis). In a bid to help managers frame how to position in the face of a yield curve regime change, we consider the portfolio
implications of a steeper curve through a tactical and sector lens. We note the following:
Rate hikes have always meant flattening over the last 30 years.... In our prior work weve highlighted the clear precedent of
curve flattening when the FED embarks on hiking. Going back to the 1980s, we note there have been 6 distinct periods of rate
hikes. The curve (measured as the difference between 10Y and 2Y spreads) has flattened every single time.

...and the curve suggests it will continue. The yield curve has flattened more than 30 bp so far in 2017. Forwards imply a
further 30bps of flattening within 2 years and nearly 70bps in 5 years. We note, however, that forward markets have a strong
bias towards pricing in flattening over steepening (i.e. more than 75% of daily observations since 1996 imply curve flattening 2
years forward). Thus, to perhaps state the obvious, the forward curves arent necessarily good predictors.

Are investors prepared if the curve steepens? YTD market behavior suggests not While not taking a view on the
likelihood of curve steepening, YTD sector performance is largely aligned with curve-flattening. On page 9, we highlight
potential pockets of disconnect and areas where investors could be potentially caught offside should the curve steepen.

Exhibit 13: The forward market continues to price in yield curve flattening
Yield Spread 10yr vs. 2yr US Treasuries (blue line); Forward Pricing (black dotted line; 3-month through 5-year forwards are shown)
3.5 Fed Hike Cycle
Recession
3.0 10yr Yield vs. 2yr Yield
Forward Expectations - 10yr Yield vs. 2yr Yield
2.5 The forward curve is
pricing in another 30bp of
2.0 flattening in 2 years and
nearly 70bp in 5 years
1.5

1.0

0.5

0.0

-0.5

-1.0
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: Bloomberg, Goldman Sachs Global Investment Research. As of August 4, 2017.

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Key signposts to watch

1. Balance sheet Normalization could drive upward pressure on long-term rates, per the FED. In their July post-meeting
statement, Fed Chair Yellen and the FOMC cited expectations to begin balance sheet normalization relatively soon (GS
Economics expects a September announcement) and have acknowledged that this process could drive upward pressure on
long-term rates. With Fed guidance suggesting runoff will build up to a pace of $30bn/month for US Treasuries and
$20bn/month for MBS, this would mark the first meaningful balance sheet reduction.

2. The end of global central bank balance sheet expansion? We and others have made the argument in the past that low, and in
some cases negative, bond yields overseas have exerted gravitational pull on US bond yields. Indeed, following an
unprecedented era of global quantitative easing the combined balance sheet of the PBoC, BOJ, ECB and FED now amounts to
nearly $18 trillion (vs. $5 trillion pre-crisis) and continues to grow.

3. The state of foreign demand for US Debt. Foreign buyers, the largest holder in aggregate, account for nearly 40% share and
have increased their UST holdings from roughly $1.1 trillion 20 years ago to ~$6.1 trillion today. This rise in foreign ownership,
however, appears to have peaked in dollar terms and has been declining in terms of share in recent years (see Exhibit 14). China
and Japan, both of which own more than $1 trillion in treasuries, have cut their holdings by $168bn and $104bn respectively
over the past two years. We also note that the yield advantage to foreign investors of owning US Treasuries after accounting for
the rising cost of FX hedges is fading. Thus, per Bloomberg, a EUR-hedged 10 year US Treasury offers a lower yield than 10
year German Bunds. Similarly, the yield advantage for JPY-hedged 10yr Treasuries over JGBs is well below long term averages.

Exhibit 14: Ownership of US Treasury Securities in Pictures

Foreign Ownership of US Treasury Securities has The FED expects that Normalization will cause
Collectively, the FED & Foreign Buyers own more than half of all outstanding Treasury securities
started to decline modest upward pressure on long-term rates

Ownership of U.S. Treasury Securities Foreign & International Holders of U.S. Treasuries Foreign % Ownership of Total Treasury Securities Outstanding Size of Fed Balance Sheet
$ billions $ billions $ billions

Insurance
Companies, Other, $232
Banking $332 50% 5,000 May '17:
Institutions,
$4.5tn
$666 45% 4,500
State & Local
Japan, $1,111 Foreign % Ownership of Total
Gov't, $716
40% Treasury Securities Outstanding 4,000

Fed Balance Sheet ($ bn)

Other, $1,441
35% 3,500
Individuals,
Korea, $100 30% 3,000
$1,379
Foreign & Singapore,
Int'l, $6,187 GS Econ
$108 China, $1,102 25% 2,500 Estimated
Mutual Funds, Russia, $109
20% 2,000
$1,720 India, $127
Saudi Arabia,
15% 1,500
$134 Aug '08:
Pension Taiwan, $181 $0.9tn
10% 1,000
Funds,
$2,177 Monetary Hong Kong, Ireland, $296 5% 500
Authority, $196
$2,464 Luxembourg, Brazil, $270
0% 0
$208 United Switzerland,
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013
2017
Cayman

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Kingdom, $240 Islands, $266
$234

Source: SIFMA, Goldman Sachs Global Investment Research. Source: U.S. Department of the Treasury, Goldman Sachs Global Source: The Federal Reserve, Bloomberg, Goldman Sachs Global Investment Source: The Federal Reserve, Goldman Sachs Global Investment Research.
As of March 31, 2017. Investment Research. As of May 31, 2017. Research. As of March 31, 2017.

Source: Goldman Sachs Global Investment Research.

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Steepening vs. flattening: The portfolio view

While we acknowledge that every cycle is different and are not calling for history to repeat itself, below we measure GICS Level 2
sector performance during prior periods of yield curve steepening and flattening as a guide for investors.

Specifically, we identify all rolling 6-month periods since 1990 in which the 10yr vs. 2yr yield spread steepened or flattened by 30bps
or more, top and bottom-quartile moves respectively. We then calculate the median SPX-relative performance for each GICS Level 2
sector during these periods, the results of which are shown below in Exhibit 15.

Recent sector performance has, for the most part, followed the typical patterns of a yield curve flattening environment. We ask,
however, where might investors be caught offside should the curve start to steepen? To that end, we note that while Food, Beverage
& Tobacco, Transports, Materials, Banks, HHPC and Autos have all been laggards over the past 6-months, they typically outperform
during yield curve steepening. Conversely, Tech Hardware and Utilities, two outperforming sectors over the last 6 months, have
historically underperformed.

Exhibit 15: Will investors be caught offside if the yield curve shifts from flattening to steepening?
Median SPX-relative performance during rolling 6-month periods of >30bps curve flattening / steepening

Flattening Steepening

Yield Curve Yield Curve

Sector Name Last 6 months Sector Name Last 6 months
Flattening(1) Steepening(2)

Semi & Semi Equip. 4.8% 3.7% Retail: Discretionary 3.9% 1.4%
Real Estate 4.6% (2.6%) Food, Bev & Tobacco 3.4% (4.1%)
Utilities 3.8% 2.2% Transportation 3.0% (5.6%)
Tech Hardware & Equip. 3.5% 7.2% HC Equip. & Svcs 3.0% 5.0%
Food Beverage & Tobacco,
Consumer Services 3.1% 7.7% Materials 3.0% (3.3%) Transports, Materials, Banks,
HC Equip. & Svcs 1.8% 5.0% Pharma & Biotech 2.8% 2.5% HHPC and Autos have all
Food, Bev & Tobacco 1.6% (4.1%) Banks 1.9% (3.4%) lagged over the past 6 months
Software & Services 1.4% 9.3% HHPC 1.5% (2.8%) but typically outperform during
curve steepening
Retail: Discretionary 1.2% 1.4% Consumer Durables 1.3% 5.0%
Consumer Durables 0.4% 5.0% Consumer Services 1.2% 7.7%
Recent sector behavior has, HHPC 0.3% (2.8%) Autos 1.1% (9.8%)
for the most part, followed the Capital Goods 1.1% 1.4%
typical patterns of a curve
Energy (0.1%) (18.0%) Software & Services 0.8% 9.3%
flattening environment
Capital Goods (0.1%) 1.4% Semi & Semi Equip. 0.7% 3.7%
Telecom (0.1%) (11.8%) Energy 0.2% (18.0%)
Pharma & Biotech (0.2%) 2.5% Diversified Financials 0.1% 0.4%
Transportation (0.6%) (5.6%) Insurance 0.0% 3.6%
Media (0.7%) (6.0%) Media (0.2%) (6.0%)
Insurance (0.9%) 3.6% Food & Staples Retailing (0.8%) (3.6%)
Tech Hardware and Utilities
Food & Staples Retailing (1.2%) (3.6%) Tech Hardware & Equip. (1.8%) 7.2% have both outperformed over
Diversified Financials (1.6%) 0.4% Commercial Services (2.6%) (1.1%) the last 6 months but typically
Commercial Services (2.3%) (1.1%) Utilities (4.8%) 2.2% underperfom when the curve
steepens
Materials (2.3%) (3.3%) Telecom (5.4%) (11.8%)
Banks (3.0%) (3.4%) Real Estate (7.1%) (2.6%)
Autos (8.9%) (9.8%)

Notes on Methodology: 1.) Includes all rolling 6-month periods from Jan-1990 through today during which US Treasury Term Structure (10yr vs. 2yr) flattened by 30bps or more, which is roughly a bottom-quartile move; 2.)
Includes all rolling 6-month periods from Jan-1990 through today during which US Treasury Term Structure (10yr vs. 2yr) steepened by 30bps or more, which is roughly a top-quartile move.

Source: Bloomberg, Goldman Sachs Global Investment Research. As of August 4, 2017.

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Shifting notions of Low Vol and Carry: Can it last?

The ebbs and flows of the reflation narrative continue to exert a strong influence over sector and factor performance and have
created positioning extremes. Tech, which already holds heavy growth and momentum characteristics, is also acting like a low-vol
bond proxy, complete with positive correlation with Consumer Staples and Utilities and negative correlation with the 10Y UST. In some
ways, this comes at the expense of Health Care, which is no longer playing that role. Financials have become a rotational/ reflationary
proxy along with Industrials and Materials. These dislocations challenge the notion of what traditionally has been considered carry
and low vol; a current decomposition shows larger skews towards Growth and Strong Balance Sheets, while Value has the lowest
representation in five years.

Exhibit 16: One of These Doesnt Belong: the similar paths of Tech, Staples and Utilities
Relative Strength (X-Axis) vs. Momentum (Y-Axis); April 14, 2017 through August 4, 2017 (weekly observations)
103
Improving Leading
Trend in relative-strength is still negative but momentum Positive trend in relative-strength that is being bolstered
has turned positive. A bottom has formed. by strong momentum.

102
Financials

101 Energy Telecom

Materials
JdK RS-Momentum

Real Health
Estate Care
100
Industrials

Utilities
99
Staples Discretionary Info Tech

98

97

Lagging Weakening
Relative-strength is in a down-trend and still being Trend in relative-strength is still positive but momentum
pushed lower by negative momentum. has turned negative. A top has formed.
96
91 92 93 94 95 96 97 98 99 100 101 102 103 104 105
JdK RS-Ratio (Relative Strength)

How to Read this Chart: The JdK Relative Strength Ratio (x-axis) is a measure that quantifies sector performance relative to the both benchmark (e.g. S&P 500) as well as the other
securities in a given universe (e.g., the other GICS sectors). A number above 100 indicates a positive trend in relative strength, while below 100 below indicates a negative trend. JdK
RS-Momentum (y-axis) captures the rate of change or momentum of relative strength. When momentum crosses above 100 a low or a bottom has been formed. When
momentum crosses below 100 a top has been set. All observations are at month-end. All formulas and calculations are proprietary to RRG Research.
Source: RRG Research, Bloomberg, Goldman Sachs Global Investment Research.

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Tech exhibits a negative correlation with rates. This is the inverse of its historical positive relationship. With Tech having one
of the lowest dividend yields of any sector across the S&P 500, it is not often viewed as a bond proxy, but yet is acting like one.
Consumer Discretionary (where AMZN is the largest stock with a 15% weight) is also now modestly negative. So what changed?
In our view, the decline in Info Tech volatility (stoked by FAAMG outperformance) suggests it is being treated more like Staples
than a cyclical growth sector. For more details, see Is FANG mispriced?: A Factor, Portfolio and Risk Case Study, June 9, 2017.

Strong positive correlation with Staples and Utilities is relatively rare vs. history: Tech (XLK) is currently the most
correlated with Staples (XLP) and Utilities (XLU), and this correlation is the highest in 15 years. On the flip side, its negative
correlation with Financials, Industrials and Materials is near the lowest level over the same period.

What is Health Care? Health Care, which historically has been negatively correlated with rates, has shown virtually no
relationship recently. In addition, its correlation with Consumer Staples is near the lowest level it has been in 15 years.

Financial as a rotation/reflation proxy. Financials correlation with the 10Y is the most positive across the market. Its -70%
correlation with Tech is the most extreme reading of any sector pair that we track.

Exhibit 17: The Common Link: Yieldsbut Negative Correlation is Rare for Tech Exhibit 18: Tech is positively correlated with Staples and Utilities
Correlation between sectors (SPX-relative) and 10Y USD Yield Inter-sector correlation (SPX-relative)
Correlation vs. 10Y UST 15 YR %ile
(weekly returns, rolling 1Y)
XLK XLP XLU XLY IYR XLV XLB XLE XLI XLF
ETF Dividend 5Y 5Y
Sector Ticker Yield (%) Current Median %ile XLK 100% 100% 73% 91% 69% 1% 12% 1% 0%

Real Estate IYR 3.8% -66% -57% 29% XLP 32% 82% 81% 85% 2% 73% 78% 21% 10%

Current 1 YR Correl (weekly)

Utilities XLU 3.4% -61% -60% 45% XLU 29% 71% 85% 86% 16% 48% 20% 9% 5%
Cons Staples XLP 2.7% -55% -47% 34%
XLY 17% -2% -12% 28% 29% 83% 86% 33% 1%
Info Tech* XLK 1.6% -32% 3% 1%
Cons Disc XLY 1.4% -6% 2% 14% IYR -4% 47% 59% -2% 29% 43% 64% 9% 5%
Healthcare XLV 1.7% 0% -13% 94% XLV -14% -28% -5% -29% -11% 62% 51% 77% 80%
Materials XLB 2.0% 5% 17% 14%
Energy XLE 2.9% 18% 23% 26% XLB -28% -25% -25% 14% 1% -28% 16% 76% 84%
Industrials XLI 2.0% 38% 17% 97% XLE -40% -14% -26% -13% -2% -33% 23% 58% 98%
Financials XLF 1.8% 68% 39% 88% XLI -59% -45% -44% 8% -20% -12% 47% 12% 99%
* Note, XLK includes Telecom XLF -70% -62% -64% -19% -38% -5% 24% 25% 54%

Source: Factset, Goldman Sachs Global Investment Research. Source: FactSet, Goldman Sachs Global Investment Research.

Note: Real Estate was separated from the S&P 500 Financials sector beginning in September 2016. XLF historical data has not been restated.

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Decomposing Low Volpast, present and future

The shift lower in Info Tech volatility has also driven a shift in the composition of Low Vol factor strategies. This can be seen in
the weights of smart-beta ETFs such as the SPLV in which Tech is an increasing weight (12% vs. a 5-year average of 4% using
quarter-end weights) as well as our Investment Profile (IP) Factor model,1 in which Tech now has the largest representation across
the market (Exhibit 19). This current weight of 15% compares to an average weight of 6% over the last 5 years.

Factor characteristics have also changed. As we peer into Low Vol, we find stocks have high Size and Dividend Yield scores,
suggesting names tend to be larger than average and offer higher yields. However, relative to history, Low Vol stocks are more
skewed towards higher growth, stronger balance sheets and higher financial returns.

What is Low Vol not? Value. We find that Low Vols current skew towards Value is the lowest it has been in five years
(current score of 42% vs. an average of 49%).

Exhibit 19: Tech is now the largest sector in a Low Vol proxy at over 14% Exhibit 20: How Low Vol screens across other factors
Companies with the lowest realized volatility across GS coverage, rebalanced wkly Average percentile of companies that screen as Q1 Volatility (coverage relative)
16%
14% AverageFactorPercentileofMinVolQ1Constituents
% of Companies in Q1 Vol

12% Current Historical 5Y Range

20% 40% 60% 80%
Factor "Score" 5Y Avg. Diff 5 Yr %ile
10%
Growth 41% 35% 15% 99%
8% Balance Sheet 47% 39% 21% 99%
Size 77% 70% 9% 96%
6% Returns 57% 52% 10% 93%
4% Integrated 41% 39% 6% 76%
Momentum 59% 54% 9% 67%
2% Value 42% 49% -14% 1%
Dividend Yield 60% 68% -12% 0%
0% Range Current

A high current score How to read this chart: The difference and %ile
suggest Low Vol has show how high or low
elevated exposure to that this current score is
5 year Average Current factor. compared to history.
Note: for purposes of this analysis, we treat Real Estate as a separate sector from Financials
historically. In addition, sector weights can be impacted by our coverage footprint, which varies over
time.

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

While Low Vol characteristics have likely drawn incremental flows into the sector, these can just as easily reverse. Indeed,
there are some signs that we have seen the lows of Tech volatility as the recent underperformance of the sector has contributed to a
rise in both 3m and 6m measures though 12m realized levels remain below that of the S&P 500. Based on our calculations, if
volatility for the lowest quintile of stocks mean-reverts to the 5Y average, volatility would move above the level of the S&P
average. A caveat: the shock is likely to be muted as these companies would be removed from Low Vol strategies via rebalance.

1
Our volatility factor is calculated as the standard deviation of daily total returns over a trailing 12-month period. Q1: stocks across our coverage with the lowest volatility.
For our full IP factor methodology, see Is FANG mispriced?: A Factor, Portfolio and Risk Case Study, June 9, 2017.

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August 8, 2017 Portfolio Manager Toolkit

Exhibit 21: Should volatility mean-revert, Low Vol volatility would be higher than the S&P 500 average
12m realized volatility of the lowest 20% of names (Q1) and S&P 500 average stock

30% If Low Vol names mean-reverted to the 5yr

average, volatility would:
28%
1) be higher than the SPX average name
26% 2) would be towards the high end of history
(81st pecentile)
24%
22%
20%
18%
16%
14%
12%
Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Low Vol (Covg. Relative) Avg. Vol (1Y) S&P Avg. Realized Vol (1Y)

Source: Goldman Sachs Global Investment Research.

For those looking to take a negative view on Low Vol, we highlight Sell- and Neutral-rated companies that 1) screen as poor
Quality on our Integrated factor relative to both their sector as well as broader coverage and 2) where volatility is 15% or more
below its 5-year average.

Exhibit 22: Low Vol stocks with Low Quality scores vs. coverage and sector
Realized Volatility (12M)
5Y Integrated Integrated Mkt Cap
Ticker Company Name Current Average Difference (Covg Rel) (Sector Rel) Sector ($ mn) Rating Price
YUM Yum! Brands Inc. 13.7 24.6 -44% 4 5 Restaurants 27,911 Neutral 75.03
NDAQ Nasdaq Inc. 12.8 21.4 -40% 4 5 Asset Managers 12,731 Neutral 75.11
APH Amphenol Corp. 12.7 20.7 -39% 4 5 IT Supply Chain 24,548 Neutral 77.66
PSX Phillips 66 16.7 26.6 -37% 4 4 Integrated Oil & Refiners 44,526 Neutral 85.60
ECL Ecolab Inc. 11.6 18.2 -36% 4 5 Chemicals 39,086 Sell 132.90
TWX Time Warner Inc. 14.4 22.6 -36% 4 5 Media & Entertainment 80,991 Neutral 102.52
GIB__A.TO CGI Group 17.0 25.3 -33% 4 4 IT Services 15,477 Sell 65.09
FIS Fidelity National Information Services 13.6 20.1 -32% 5 5 IT Services 30,184 Neutral 90.37
GLW Corning Inc. 17.4 25.2 -31% 4 5 Hardware and CommTech 30,245 Neutral 29.25
RSG Republic Services Inc. 11.2 15.6 -28% 5 5 Environmental Svcs 22,008 Neutral 64.73
ROP Roper Technologies Inc. 13.6 19.0 -28% 5 5 Multi-Industry 24,215 Neutral 236.66
TEL TE Connectivity Ltd. 16.5 21.8 -25% 4 5 IT Supply Chain 28,776 Sell 80.38
MMM 3M Co. 12.2 15.8 -23% 4 4 Multi-Industry 127,248 Sell 207.65
WM Waste Management Inc. 11.4 14.7 -23% 4 5 Environmental Svcs 33,538 Sell 75.52
ANSS ANSYS Inc. 17.4 21.9 -20% 5 5 Security Software 10,803 Neutral 124.32
PKI PerkinElmer Inc. 18.1 22.6 -20% 5 4 MedTech 7,085 Sell 64.29
EQR Equity Residential 15.1 18.5 -19% 5 5 REITS 24,680 Sell 67.32
DHR Danaher Corp. 14.1 17.3 -18% 5 5 MedTech 57,169 Neutral 81.01
XOM Exxon Mobil Corp. 14.5 17.6 -18% 5 5 Integrated Oil & Refiners 331,933 Neutral 80.21
CME CME Group 17.0 20.4 -17% 5 5 Asset Managers 42,619 Neutral 125.83
BA Boeing Co. 18.0 21.5 -16% 5 5 A&D 144,908 Neutral 237.71
Source: Goldman Sachs Global Investment Research.

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The curious case of low high yield spreads

While much is rightfully made of the leadership of Tech, the promise of Financials and the conundrum of Low Vol, an area to
which we believe investors should pay closer attention is the High Yield (HY) space. A combination of the search for yield,
lack of supply and a benign default environment has driven HY spreads to near their tights. Meanwhile, much like the VIX,
these spreads are diverging versus increased Policy Uncertainty a historically strong relationship. Further, many equity
market factors are increasingly correlated with HY spreads while the options market suggests concern on the come (e.g.,
elevated skew versus other fixed income markets). It is against this backdrop that we showcase the extremes forming and
the historical playbook in terms of factor performance if spreads do widen. Hint: You sell growth.

Yield-to-worst (YTW) is
the lowest possible yield
earned on a bond assuming
all call dates prior to
maturity.
TINA, at least when it comes to yield: US HY spreads have tightened 60bp in 2017 and are near the lowest level since the
Great Recession. In yield terms, this equates to a yield-to-worst (YTW) of 5.5%, which is near multi-decade lows.
Fundamentals: Leverage stretched, defaults benign: Low rates have incentivized companies to raise debt and leverage is
elevated. That said, defaults have been benign at about 2% over the last year (ex Energy, Metals & Mining), which is
significantly below the 30-year average of 4.7% on the back of sustained, if uninspiring economic growth.
A word on technicals: The search for yield along with the recent lack of supply is also likely playing a role. Almost 1/3 of the YTD
tightening occurred in July alone as primary market issuance was basically nonexistent ($9 bn, the 2nd slowest July since 2010).
Equity investors are paying attention: While low yields/tight spreads indicate that credit investors do not see much risk in
their market, the strong performance of our Balance Sheet factor (Low Net Debt/EBITDA vs. High) this year suggests equity
investors are increasingly nervous. Notably, this has been driven by both legs of the trade working in plain English, this mean
that names with low leverage have outperformed the average stock while those with weak balance sheets have underperformed.

Exhibit 23: HY Spreads and Yields are low vs. history Exhibit 24: Balance Sheet Factor has outperformed even as HY remained tight
BAML US High Yield YTW (%) and Spread (bps; RHS) Performance of Balance Sheet Factor (Strongest vs. Weakest 20%), US HY Spreads
25 2500 18% 1000

20 2000 12% 850

15 1500 6% 700

10 1000 0% 550

5 500 -6% 400

0 0 -12% 250
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17

US HY YTW (%) US HY Spread (bps, RHS) Balance Sheet Factor (Strongest vs. Weakest 20%) US HY Spread (bps, RHS)

Source: FactSet, Goldman Sachs Global Investment Research. Source: FactSet, Goldman Sachs Global Investment Research

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What were watching

Factors are cueing off HY spreads: We note that a number of equity factors are cueing off HY spreads as indicated by higher-than-
average correlations vs. history. Indeed, correlation for each of Volatility, Financial Returns, Size, Short Interest and Integrated
factors is in the 90th+ %-ile relative to the last 5 years. Net, if spreads move, these factors have the potential for dislocation in
portfolios.

Evidence that investors are already positioning for wider spreads. Since the crisis, investors have increasingly used ETFs as a
way to trade high yield views, with trading volume of HYG (the largest by AUM) now 3x larger than CDS. We note that HYG skew
the difference between how much investors are willing to pay for puts vs. calls in the options market has increased over the course
of 2017 suggesting increasing nervousness. In addition, HY skew also screens as elevated vs. most other fixed income markets.

Exhibit 25: Equity market factors are increasingly correlated with HY Spreads Exhibit 26: Rising HY ETF skews suggest increasingly bearish positioning
3-m Correlation (daily) between Long/Short factors with 5 year HY CDS Spreads 3m Skew: (25 delta put implied vol-25 delta call implied vol)/ 50 delta call implied vol
0.70 Current 3m Skews - Selected Fixed Income ETFs
3 Month Correlation
High Yield (HYG)
1M 1M 5Y 5Y
Invest. Grade (LQD)
Factor vs. HY Spreads Current Ago Change Median %ile
0.60 Tot Bond Mkt (BND)

Volatility (Lowest vs. Highest) 62% 59% 3% 41% 92% 7-10Y Treasury (IEF)

0.00 0.20 0.40 0.60

Financial Returns (Highest vs. Lowest) 53% 46% 7% 25% 95% 0.50

Size (Largest vs. Smallest) 51% 48% 3% 21% 91%

0.40
Balance Sheet (Strong vs. Weak) 44% 38% 5% 18% 83%

Short Interest (Lowest vs. Highest) 39% 38% 1% 10% 98% 0.30

Integrated (Highest vs. Lowest) 29% 20% 10% 1% 98%

0.20
Momentum (Leaders vs. Laggards) 22% 11% 10% 3% 66%

Growth (Highest vs. Lowest) -12% -11% -2% -24% 73%

0.10
Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17
Value (Cheapest vs. Richest) -12% -11% -2% -1% 23%
HYG Skew (3m)

Source: Goldman Sachs Global Investment Research. Source: Bloomberg, Goldman Sachs Global Investment Research.

The upcoming legislative agenda. Historically, HY spreads moved directionally with Policy Uncertainty though similarly to the VIX,
the correlation has broken down more recently. With Debt Ceiling talks and potential tax reform on the near-term policy agenda, we
see potential for this relationship to re-assert itself. As we wrote in PM Toolkit: Worst-Case Survival Guide to Uncertainty, Taxes and
Trade (published on May 11, 2017), there are some signs that uncertainty is weighing on corporate spending, M&A and by extension
economic growth.

Better to navigate with a compass than without. We leverage our Macro to Micro Compass to analyze which factors have
historically been most sensitive to widening HY spreads. We find that during these periods, investors gravitated towards safety and
quality (e.g., solid financial returns, strong balance sheet, high integrated scores and large size).

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August 8, 2017 Portfolio Manager Toolkit

Exhibit 27: HY Spreads and Policy Uncertainty continue to diverge Exhibit 28: Historical Factor Performance during periods of widening HY
BAML US HY Spread vs. Economic Policy Uncertainty. As of July 31, 2017 Credit Spreads
2000 300 Widening HY CDS
(2) (1)
GS Investment Profile Factors Spreads
1800 270
Fundamental
1600 240 Financial Returns (High vs Low) 7.3%
Balance Sheet (Strongest vs Weakest) 5.7%
1400 210
Integrated (High vs Low) 2.6%
1200 180 Value (Cheapest vs Richest) -0.7%
Growth (High vs Low) -3.0%
1000 150
Technical
800 120 Momentum 6m (Leaders vs Laggards) 8.2%
Size (Largest vs Smallest) 7.0%
600 90
Short Interest (Lowest vs Highest) 6.0%
400 60 Volatility (Lowest vs Highest) 6.0%

200 30 Notes on Methodology: (1) Includes all rolling 6-month periods from Sep 2006-today during which 5yr HY
CDS spreads widened by 75bp or more, which is roughly a top-quartile move. (2) All performance figures are
0 0 based on our Investment Profile (IP) framework, which ranks and normalizes our analyst estimates into
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 specific style buckets. Companies are grouped into highest quintile (Q1 or top 20%) as Buys and lowest
US HY Spread (bps) Economic Policy Uncertainty Index (RHS) quintiles (Q5) in each coverage sector, and performance is equal-weighted.

Source: FactSet, Economic Policy Uncertainty, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research

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Single stock playbook: Own names on a firm fundamental footing

We leverage the GS Investment Profile framework to find names that fit the factor styles that typically perform well when HY
spreads widen.

Specifically, we look for stocks with strong balance sheets (i.e. Net Debt/EBITDA under 1.5x and stronger than sector peers) and also
screen well on our Integrated /Quality and Financial Returns factors. We exclude names with Quintile 1 Growth scores given the
factor typically performs poorly when spreads widen.

Exhibit 29: Names with Solid Balance Sheets, Quality Scores and Financial Returns
Buys and Neutrals with at least 10% upside to target price, Quintile 1 or 2 (i.e. top 40%) Balance Sheets, Financial Returns and Integrated Scores

Net Debt /EBITDA IP Factor Quintile Market Last Upside to

Ticker Company Name 2017E 2018E Bal. Sheet Fin. Returns Integrated Sector Cap ($ mn) Rating Close Target
BAX Baxter International Inc. -0.3x -0.6x 1 2 1 Medical Technology 33,233 Buy* 59.88 25%
CYBR CyberArk -5.7x -5.5x 1 1 1 Security Software 1,469 Buy 40.68 38%
LLY Eli Lilly & Co. -0.1x -0.3x 1 2 2 Major & Generic Pharma 86,866 Buy 82.31 12%
IPG Interpublic Group of Co. 0.3x 0.4x 1 1 1 Media and Entertainment 8,530 Neutral 21.31 17%
LRCX Lam Research Corp. -1.7x -2.0x 1 1 1 Semis and Semi Equipment 26,653 Buy 150.05 19%
MA MasterCard Inc. -0.6x -0.4x 1 1 2 IT Services 139,557 Buy 129.82 12%
MU Micron Technology Inc. 0.5x 0.0x 1 1 2 IT Supply Chain 32,638 Neutral 27.92 18%
PCAR Paccar Inc. -1.3x -1.5x 1 1 2 Machinery, E&C 24,188 Buy 68.58 22%
PXD Pioneer Natural Resources Co. 0.4x 0.4x 1 1 1 E&P 23,008 Buy 135.34 43%
TSE Trinseo SA 1.1x 1.1x 1 1 1 Chemicals 2,920 Neutral 64.45 16%
VRTX Vertex Pharmaceuticals Inc. -3.2x -3.0x 1 1 1 Biotech 37,011 Neutral 154.54 10%
AMAT Applied Materials Inc. -0.6x -1.0x 2 2 2 Semis and Semi Equipment 46,545 Neutral 42.82 14%
BMY Bristol-Myers Squibb Co. 0.0x -0.2x 2 2 1 Major & Generic Pharma 93,437 Buy 55.95 13%
BWLD Buffalo Wild Wings Inc. 1.3x 1.2x 2 2 1 Restaurants 1,934 Buy 112.55 31%
CAT Caterpillar Inc. 0.3x 0.0x 2 1 1 Machinery, E&C 68,084 Buy* 114.35 25%
CMI Cummins Inc. 0.0x 0.0x 2 1 2 Machinery, E&C 26,875 Buy 160.16 20%
DE Deere & Co. 0.3x 0.2x 2 1 2 Machinery, E&C 41,844 Buy* 129.75 27%
FB Facebook Inc. -2.1x -2.4x 2 2 2 Software 494,442 Buy 169.62 21%
PANW Palo Alto Networks Inc. -2.2x -2.3x 2 2 2 Security Software 12,173 Buy 130.47 21%
SBUX Starbucks Corp. 0.4x 0.5x 2 1 2 Restaurants 84,624 Buy* 55.44 24%
V Visa Inc. 0.4x 0.2x 2 2 2 IT Services 240,623 Buy* 100.89 11%
WDC Western Digital Corp. 0.5x 0.3x 2 2 2 IT Supply Chain 24,432 Neutral 81.17 15%
Note: (1) All data provided are fiscal year data; 2017 represents FY-end dates between July 2017 and June 2018, (2) for leverage we use a standardized Net Debt/EBITDA calculation and do not factor in sector-
specific adjustments, (3) we exclude Financials and Real Estate names, IPOs priced in 2017 and names with market caps below $1 billion, (4) * denotes stock is on the Americas Conviction List, (5) All price
targets have 12 month price target horizons.

Source: FactSet, Goldman Sachs Global Investment Research.

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Low Rates and the Leverage it Created

Corporate defaults remain near historically low levels, yet froth has been building in the form of corporate leverage. While
this may not present a near-term risk, the widespread increase in debt resulting in stretched leverage metrics bears
watching, in our opinion. We note:
While the pullback in Energy earnings in recent years has stressed aggregated Net Debt/EBITDA, even excluding that sector, the
ratio is at the highest point since the financial crisis. Given we are 8+ years into an economic expansion, we believe its prudent
to also view this via a normalized EBITDA lens (i.e., median NTM 2007Q1-2017Q1). On this basis, aggregate leverage (ex-
Energy) would move up to 2.1x, roughly 20% higher than current levels and 18% above the prior cycle peak.

However, we note that Interest coverage (particularly outside Energy) looks healthy on a relative basis as low rates offset
increased debt levels. However, with interest rates potentially moving higher, it appears less likely that companies will be able
to refinance their way to lower rates. At the same time those with floating rate debt may face incrementally higher interest costs,
and therefore coverage levels may be pressured.

Exhibit 30: Net Debt leverage is elevated, even more so on normalized Exhibit 31: interest coverage looks healthy on a relative basis
Aggregate Net Debt/EBITDA (LTM) for North America coverage (ex-Fins & Real Estate) Aggregate EBIT/Interest Exp. (LTM) for North America coverage (ex-Fins & Real Estate)

2.3X 9.0X
Net debt/
* Normalized EBITDA
2.0X (Ex-Energy) 8.0X

1.8X 7.0X

1.5X 6.0X

1.3X 5.0X
* Normalized EBIT/Interest
(Ex-Energy)

1.0X 4.0X

0.8X 3.0X
Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15
Net Debt/EBITDA (ex Energy) Net Debt/EBITDA Interest Coverage (ex Energy) Interest Coverage
*Normalized based on median EBITDA (LTM) from 2007Q1 - 2017Q1 *Normalized based on median EBIT (LTM) from 2007Q1 - 2017Q1

Source: FactSet, Goldman Sachs Global Investment Research. Source: FactSet, Goldman Sachs Global Investment Research.

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Single Stock Playbook: Beware of Weak Balance Sheets

In Exhibit 32, we provide a list of Sell-and Neutral-rated stocks with balance sheet risk measured as (a) Net Debt / Enterprise Value of
at least 50%, (b) Leverage, i.e., 2017E Net Debt/EBITDA of at least 2.5X and (c) Interest Coverage (as measured by EBIT/Interest
expense) of 4 or lower. We also layer in the risk of an EBITDA miss i.e. our analysts estimates are below those of consensus in 2018.
As a frame of reference, we also provide floating debt as % of floating rate debt and the first maturity (across debt types).

Exhibit 32: Names potentially at Risk?

Net Debt/ EV ND/EBITDA Int Coverage 2018E EBITDA % Floating First EV (2017E) Mkt Cap Short Int Last Upside to
Ticker Company Name 2017E 2017E 2017E GS vs. Cons Rate Debt Maturity Sector $ mn $ mn Days Close Rating Target
FRTA Forterra Inc. 66% 5.8x 1.3x 207 -22% 57% Oct-21 Machinery, E&C 1,641 553 9.7 8.67 Neutral -42%
CVE Cenovus Energy Inc. 55% 3.8x 2.8x 2,920 -21% 27% May-18 Refiners 20,185 10,224 7.7 8.32 Neutral 2%
GNC GNC Holdings 66% 5.5x 2.9x 212 -18% 81% Sep-18 Hardlines/Supermarkets 2,031 683 13.2 9.99 Sell -50%
HTZ Hertz Global Holdings 73% 11.2x 0.4x 424 -18% 13% Jan-19 Automobiles 4,463 1,214 3.9 14.32 Sell -30%
CLMT Calumet Specialty Products Partners 83% 5.7x 1.0x 262 -16% 2% Jul-19 Refiners 2,398 406 3.3 5.25 Neutral -5%
HRI Herc Holdings 62% 4.3x 0.5x 522 -9% 61% Jun-21 Machinery, E&C 3,392 1,283 6.8 45.32 Neutral -1%
AMC AMC Entertainment Holdings 69% 5.3x 0.8x 896 -8% 36% Feb-22 Media and Entertainment 6,689 2,131 8 16.25 Neutral 23%
NE Noble Corp. 67% 7.8x -0.3x 401 -7% 0% Mar-18 Oil Services 5,098 944 4.8 3.88 Sell 16%
OI Owens-Illinois Inc. 54% 3.7x 3.4x 1,297 -6% 33% Apr-20 Paper, Packaging, Env Svc 8,809 3,916 5.1 23.90 Sell -14%
APLP Archrock Partners 62% 5.4x 1.5x 291 -5% 50% Apr-21 MLPs 2,297 866 10.4 13.21 Neutral 36%
SEAS SeaWorld Entertainment Inc. 54% 4.3x 2.1x 363 -5% 20% May-20 Gaming, Lodging, Leisure 2,648 1,217 8.8 14.21 Neutral 13%
EIGI Endurance International Group 64% 5.7x 0.4x 333 -5% 83% Feb-23 Internet 2,936 1,053 11.5 7.60 Sell -8%
WSTC West Corp. 59% 4.4x 2.8x 644 -5% 38% Jun-21 IT Services 4,757 1,996 1.8 23.34 Sell -6%
REN Resolute Energy Corp. 51% 4.4x 1.7x 283 -3% 3% May-20 SMID E&P 1,355 674 6.3 30.03 Neutral 13%
DCP DCP Midstream LP 52% 5.2x 1.3x 1,092 -2% 0% Dec-17 MLPs 10,126 4,836 12.5 33.75 Sell 13%

Note: (1) For Leverage metrics we consider the total debt on a companys balance sheet including loans, revolvers outstanding and bonds. We do not factor in sector specific adjustments. (2) First maturity date
is across debt types, per Bloomberg data. For SEAS, WSTC and FRTA % floating rate debt is adjusted for hedges. (3) All data is fiscal yr data; 2017 represents FY-end dates between July 2017 and June 2018,
(4) We exclude Financials and Real Estate names and those with EV <$1B, (5) All price targets have 12 month price target horizons (except HTZ and CLMT: 6 months).

Source: Bloomberg, FactSet, Goldman Sachs Global Investment Research.

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Disclosure Appendix
Reg AC
I, Robert D. Boroujerdi, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify
that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

We, Jessica Binder Graham, CFA, Deep Mehta, Christopher Wolf, CFA and Ronny Scardino, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have
not been influenced by considerations of the firm's business or client relationships.

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

GS Factor Profile
The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its sector peers. The four key attributes depicted
are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using
normalized ranks for specific metrics for each stock. The normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each
metric may vary depending on the fiscal year, industry and region, but the standard approach is as follows:
Growth is based on a stock's forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a higher percentile indicating a higher growth
company. Financial Returns is based on a stock's forward-looking ROE, ROCE and CROCI (for financial stocks, only ROE), with a higher percentile indicating a company with higher financial returns.
Multiple is based on a stock's forward-looking P/E, P/B, price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher
percentile indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns percentile and (100% - Multiple percentile).
Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs for the fiscal year at least seven quarters in the
future compared with the year at least three quarters in the future (on a per-share basis for all metrics).
For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative.

Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make
comparisons between companies in different sectors and markets.

GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well
positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on
quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the
environmental, social and governance issues facing their industry).

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% 54% 14% 65% 56% 49%
As of July 1, 2017, Goldman Sachs Global Investment Research had investment ratings on 2,753 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.

Regulatory disclosures
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.

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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 generally prohibits its analysts, persons reporting to analysts or members of their households from serving as an
officer, director or advisor 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.
Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if
with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html.

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.
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 total return potential relative to its coverage. Any stock not assigned as a Buy or a Sell on an Investment List with an active rating (i.e., a stock that is not Rating Suspended, Not Rated,
Coverage Suspended or Not Covered), 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 analysts coverage group may vary as determined by the regional Investment Review Committee.
Additionally, each Investment Review Committee manages Regional Conviction lists, which represent investment recommendations focused on the size of the total return potential and/or the
likelihood of the realization of the return across their respective areas of coverage. The addition or removal of stocks from such Conviction lists do not represent a change in the analysts investment
rating for such stocks.
Total return potential represents the upside or downside differential between the current share price and the price target, including all paid or anticipated dividends, expected during the time horizon
associated with the price target. Price targets are required for all covered stocks. The total 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.

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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 Ttulos e Valores Mobilirios 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 fr 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.
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.
2017 Goldman Sachs.

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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.

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