Market Strategy: A Systematic Approach to Recession Investing April 2, 2020

Amid extremely elevated market and the prospect of a extremely severe recession, are seeking guidance on how to best take advantage of cheap assets and the prospect of an eventual recovery. We reiterate our view (discussed most recently in our publication from April 1, Kathryn Rooney Vera here) that we will continue to see extremely ugly economic data Head of Research & Strategy [email protected] (underscored by today’s record-high initial jobless claims), and that given the +1 786.871.3758 inherent uncertainty surrounding a virus that scientists still do not fully understand, pinpointing a precise bottom is virtually impossible. As a result, Gregan Anderson, CFA Macroeconomic Strategist we recommend dollar-cost averaging, putting money to work on an iterative [email protected] basis. +1 786.871.3743

Relative Performance - Market Vs Roll-In Strategy

Market Benchmark (SPX Index) Roll-in Portfolio - FOLLOW SCHEDULE Roll-in Portfolio - BUY DIPS

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Taking the next step, drilling down below index-level , requires evaluating likely earnings impacts of the virus on a sector, industry and company level. We highlight three strategies that can help in this regard, with each becoming progressively more important as the pandemic and associated recession evolves. 1. Find the babies thrown out with the bath water 2. Find Sectors that that will benefit from the crisis itself/can help to meet the radical change in immediate needs 3. Imagine the world post-crisis – what will have changed, how will tastes, priorities, and ultimately consumer behavior evolve?

1. Find the babies thrown out with the bath water

There have been bouts of indiscriminate selling, where everything was sold simultaneously, without regard to the likely impact of the pandemic on earnings. This is either due to an irrationality borne of panic, a natural result of now-prevalent passive investing (when investors dump the SPY, for example, they by definition dump all securities within that ETF), or the need to sell even high-quality investments to provide cash or liquidity. In any case, investors can take a closer look at industries and companies whose earnings will not suffer to the same degree as others, either from the recession or from the radical change in the way we have suddenly begun to live our lives. To the extent that these companies have sold off along with the rest of the market, they may provide value. These include consumer staples, utilities, and other defensive generally. From a valuations perspective, Consumer Staples largely avoided much of the sell-off, but Utilities are still trending largely in line with the benchmark, which we believe is too low. We also believe that there has been a visceral reaction against banks, which are much better-capitalized and better-positioned to weather the storm than they were in the 2008-2009 financial crisis. Banks are the third-worst performing industry after autos and energy (whose drawbacks in the present environment are much more obvious), and are being punished to an unjustifiable extent.

Industry Price Returns Between Market Top and Today

Staples Retail -10.4% Pharma & Biotech -12.1% Personal Products -12.9% Telecoms -18.5% Food & Beverages -20.0% Retail -20.1% Software & Services -22.7% Health Care Equipment -22.7% S&P 500 INDEX -23.0% Semiconductors -24.1% Technology Hardware -24.1% Utilities -24.9% Media -25.4% Materials -27.2% Diversified Financials -29.8% Real Estate -30.1% Transportation -30.3% Professional Services -30.4% Capital Goods -33.3% Consumer Durables -35.0% Insurance -35.3% Consumer Services -39.1% Banks -42.8% Autos & Components -44.3% Energy -47.6%

Source: Bloomberg, Bulltick

2. Find Sectors that that will benefit from the crisis itself/can help to meet the radical change in immediate needs

This crisis is costing the world literally trillions of dollars. As a result, there is an enormous financial incentive to deal with its consequences (mitigating this cost), as well as make the ordeal as as possible. One of the most significant changes to American lifestyles is a sharp, drastic reduction in travel, as we are ordered to stay at home and limit interpersonal contact. Companies that are able have begun to adapt by having employees work from home, while consumers are adjusting their spending habits towards more in-home services. All of this benefits streaming services, internet providers, providers of teleconferencing, telecommunications more broadly, delivery services (including food and medicine delivery), and online retail. Some companies involved in this space include, but are not limited to Citrix, DocuSign, Microsoft, Advanced Micro Devices, Amazon, Five9, Zoom, Slack, Netflix, Hulu, and others. While consumer staples largely avoided the worst of the sell-off (see chart below, where the y-axis shows the decline from Feb 19 highs through the March 23 bottom), this online space still shows value, with Software & Services, Tech Hardware and Semiconductors still lagging the S&P 500 since the March 23 bottom.

In terms of shortening the length of the ordeal itself, that has always leaned heavily on the science of public health, and this will continue to be the case moving forward. As the chart above demonstrates, health care has been among the best-performing sectors, both in terms of avoiding the worst of the sell- off, as well as seeing some of the strongest post-March 23 bounce. Finding value in the space will require more parsimonious consideration, looking particularly at the fight against the virus, and later, the strongest players in establishing a more robust telemedicine infrastructure for the future. Dozens of companies have sprung into action to fight COVID 19 on a number of fronts, and healthcare services will be front and center in the fight against the virus. While we do not advocate directly investing in these or any other single-name stocks, below we provide a few examples to illustrate the trend which in our view is only just beginning:

Testing: Abbott Laboratories has developed a 5-15 minute point-of-service testing kit which has received the enthusiastic endorsement of the administration, and even demonstrated at one of the now-daily White House press briefings on the coronavirus response. The company is now ramping up production and shipping tests across the country. Cepheid has another test which takes 45 minutes, and will begin shipping tests this week. Quick turnaround in testing is crucial, so that authorities are better able to target treatments, and, eventually, target stay-at-home orders or other major life disruptions to those that are known to be infected. Tests for the antibodies of coronavirus, called serological tests, are being developed by the CDC, the Mayo Clinic, SureScreen Diagnostics, and Ideal Rehab Care Inc, which will also allow individuals with natural immunity to be identified. Once these tests are available, the plasma of such individuals may be used to develop treatments, and such individuals may be subject to fewer restrictions of movement and interpersonal contact. Vaccines: There are many companies developing various forms of vaccines, which should help those who have not yet been exposed from contracting the disease in the future. Vaccines typically take several years to authorize, and even with the accelerated timetable, it is likely that we will not have a vaccine for at least another year. Nonetheless, prospects for an effective preventative treatment are good, if only for the sheer amount of resources devoted to the effort. Following is a partial list of companies working on a vaccine: • Gilead Sciences (beginning phase 2, testing on infected human subjects, with control groups) • Moderna (set to begin phase 1, testing on healthy human subjects to ensure safety) • Novavax (set to begin phase 1 in June) • Johnson & Johnson (pre-clinical, but announced highly promising candidate, set to begin phase 1 in September) • Sanofi and Translate Bio (pre-clinical) • Regeneron Pharmaceuticals (pre-clinical) • Takeda Pharmaceutical Company (pre-clinical) • Vaxart (pre-clinical) • Inovio Pharmaceuticals (pre-clinical)

Treatments (for individuals already infected with coronavirus): The US FDA has approved the use of chloroquine, an anti-malarial drug also used to treat some forms of arthritis, for emergency use in the treatment of COVID-19. In China, an antiviral drug called Favilavir has also been approved to help treat the disease. Other treatments are in development by private companies, including the following • Gilead Sciences (phase 3, final phase of human testing) • Roche (phase 3) • Regeneron Pharmaceuticals and Sanofi (phase 2/3 of human testing)

3. Imagine the world post-crisis – what will have changed, how will tastes, priorities, and ultimately consumer behavior evolve?

Post-crisis, we are unlikely to go back to the level of interpersonal interaction pre-crisis, both due to the fact that coronavirus will not be completely eradicated (meaning that social distancing procedures remain

prudent), as well as the demonstrated ability of many companies to employ remote work on a much greater scale.

The basket of assets held by global investors should therefore reflect this change in behavior. Mass gatherings at stadiums, amusement parks, and even cinemas may be avoided by consumers after the crisis has passed. Air travel and cruise travel is also likely to see a prolonged dip in demand as consumers seek to limit their health risks. In contrast, individual modes of travel should see demand come back potentially stronger than before, as months of social distancing changes the mentality of households towards greater isolation, at least at the level of the family. Auto manufacturers’ stocks have been hit hard, as production has completely shut down, but we expect a long-term renaissance of the family car, slowing longstanding trends towards ride sharing and public transit. Low oil prices, which are also likely to persist following the crisis given soaring global production levels and a series of blows to the long-term viability of OPEC as a relevant player in global energy markets, will help to support such trends. On a related note, the years-long trend towards urbanization may also slow as households re-evaluate their priorities, and begin to place a greater emphasis on personal space and self-reliance. High-density real estate may see a prolonged underperformance compared to suburban real estate, while firms facilitating home gardening and food production may see a resurgence. The demand for quality health care and a much broader appreciation of the importance of public health infrastructure will be a driving force in the policy arena, with significant implications for both public and private priorities. While these potential trends are speculative and subject to substantial revision over the coming months, the bottom line is that the investment landscape post-coronavirus will be different, in some areas significantly different, than the landscape pre-crisis. Prudent investors should not simply expect a ‘return to normalcy’, but rather fundamental, persistent changes to lay the groundwork for a ‘new normal’, or what’s known among professional investors as a ‘regime change’. We expect the nature of this regime change to become more clear as we being to emerge from the emergency measures currently in place, and will continue to monitor developments closely.

Fixed Income Capital Returns Between S&P 500 Market Top and Today

US Treasuries 6.1%

Mortgage Backed Securities 0.9%

International Treasuries -0.8%

Investment Grade Corp -7.4%

High Corp -15.5%

Emerging Market Debt -19.6%

Source: Bloomberg, Bulltick

About Bulltick Capital Markets

Bulltick Capital Markets is a full-service investment bank specialized in Latin America. The firm offers a variety of diversified financial products and services with local know-how and international expertise. Its client base is comprised of established financial institutions and qualified investors in Latin America, as well as of the international financial community with investment interests in the region. Bulltick is headquartered in the United States, with offices in Miami, Mexico City, and Bogota.

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With Bulltick's vast Latin American in-roads, resources and networks, our research team is strategically positioned to provide value-added research on local and regional companies, markets and industries. With analysts in the region, along with management road shows, we are able to track the pulse of the leading markets in Latin America. We make it our business to know the business of the region, so we can help our clients manage volatility with in- depth coverage of macroeconomic leading sectors and market-moving events.

Global Macro & Emerging Markets Fixed Income Sales & Trading Research (+1) 305-533-1541 (+1) 305-533-1541 Rodrigo Covian Victor Gutierrez Kathryn Rooney Vera, Head of Research [email protected] [email protected] [email protected]

Gregan Anderson, CFA, Strategist Klaus Spielkamp Joaquin Almeyra [email protected] [email protected] [email protected]

Equity Sales & Trading Argentina Institutional Sales & Trading Klaus Spielkamp(+1) 305 - 533 - 1541Joaquin Almeyra (+1) 305-533-1541

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Eduardo Saenger [email protected]

Klaus Spielkamp Joaquin Almeyra

Bulltick Colombia (+57) 1- 317-9638

Carlos Daniel Ruiz [email protected]

Klaus Spielkamp Joaquin Almeyra

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