Shape Your ConvictionTM

Asset Allocation In A Post-Pandemic World

February 2021

Juan Correa Ossa, CFA Associate Editor BCA Research [email protected] Shape Your ConvictionTM The Perfect Combination: Growth And Easy Policy y Over the next 12 months, growth will rebound… y …but monetary and fiscal policy will stay accommodative y This is a perfect combination for risk assets such as equities y Favor cyclical stocks, EM debt, inflation hedges y Long-term impact of COVID: positive for healthcare, bad for (most) real estate

2 Shape Your ConvictionTM Worst Of The Pandemic Is Probably Over

DAILY CHANGE IN COVID-19 CASES* CUMULATIVE COVID-19 VACCINATIONS 800 800 18 ADMINISTERED PER 100 PEOPLE*: 18 FOR BOTH PANELS: US 600 PER MILLION 600 16 UK 16 US FRANCE ITALY 400 UK ITALY 400 14 GERMANY 14 GERMANY CANADA FRANCE 200 200 12 CHINA 12

0 0 10 10 DAILY CHANGE IN COVID-19 DEATHS* 16 16 8 8

12 12 6 6

8 8 4 4

4 4 2 2

JAN APR JUL OCT JAN JAN FEB 2021 2021 2021 2020 2021 * SOURCE: OFFICIAL DATA COLLATED BY OUR WORLD IN DATA. * SOURCE: CCSE, SHOWN A 7-DAY MOVING AVERAGE.

3 Shape Your ConvictionTM Pent-Up Consumer Demand Will Be Released

%%Tn Tn US$ US$

30 SAVINGS RATE: 30 US US CUMULATIVE PERSONAL SAVINGS* EURO AREA* PRE-PANDEMIC TREND (2018-2019) 25 25 4 $1.5 4 trillion

20 20 3 3 15 15

2 2 10 10

1 1 5 5

2021 2021

2000 2004 2008 2012 2016 2020 2018 2019 2020 * SOURCE: EUROSTAT. * SOURCE: BUREAU OF ECONOMIC ANALYSIS. MONTHLY, NOT ANNUALIZED.

4 Shape Your ConvictionTM But There Will Be No Fiscal Austerity This Time

% Of35 5 GDP US: FISCAL STIMULUS AS A % OF GDP 0 30

-5 25 -10 Biden’s 20 American Rescue Plan -15 US: plus end-year BUDGET BALANCE PROJECTION omnibus bill BASELINE* 15 -20 DEMOCRATIC STATUS QUO** DEMOCRATIC (HIGH)*** 10 -25 REPUBLICAN STATUS 2021 QUO**** -30 5

* BASELINE IS THE CONGRESSIONAL BUDGET OFFICE'S SEPTEMBER 2020 BUDGET PROJECTIONS. 2021 ** ASSUMES THAT THE $900 BILLION COVID RELIEF PACKAGE, THE $1.4 0 TRILLION CONSOLIDATED APPROPRIATIONS ACT AND THE NEWLY 2008 -2010 2020 - 2021 * PROPOSED $1.9 TRILLION BIDEN AMERICAN RESCUE PLAN ARE ENACTED IN FY 2021. NOTE: CALCULATED AS THE ABSOLUTE VALUE OF THE CHANGE IN OVERALL BALANCE. *** ASSUMES THAT IN ADDITION TO THE DEMOCRATIC STATUS QUO, * INCLUDES THE $900 BN OMINIBUS BILL AND THE $1.9 TN PROPOSED BIDEN'S $5.6 TRILLION POLICY AGENDA (COMMITTEE FOR A BIDEN AMERICAN RESCUE PLAN. RESPONSIBLE FEDERAL BUDGET'S ESTIMATES) WILL ALSO BE ENACTED. SOURCE: IMF FISCAL MONITOR, OCTOBER 2020 AND BCA CALCULATIONS. **** ASSUMES THAT THE $900 BILLION COVID RELIEF PACKAGE AND THE $1.4 TRILLION CONSOLIDATED APPROPRIATIONS ACT ARE ENACTED IN FY 2021. 5 Shape Your ConvictionTM Central Banks Will Remain Dovish

%% CENTRAL BANK BALANCE SHEET: CENTRAL BANK MONITOR*: US ANNUALIZED 6-MONTH RATE OF EURO AREA 250 CHANGE UK US (LS) 2 2 EURO AREA (LS) AUSTRALIA 1500 CANADA 200 UK (LS) TIGHTER MONEY AUSTRALIA (LS) REQUIRED CANADA (RS) 0 0 150 1000

100 -2 EASIER MONEY -2 REQUIRED 500 50 -4 -4

0 0

2021 2021 2015 2016 2017 2018 2019 2020 2021 2015 2016 2017 2018 2019 2020 2021 * BCA PROPRIETARY INDICATOR. READINGS BELOW ZERO INDICATE EASIER MONETARY POLICY IS REQUIRED, AND READINGS ABOVE ZERO INDICATE TIGHTER POLICY IS NEEDED.

6 Shape Your ConvictionTM We Are A Long Way From Meeting The Fed’s Targets For Tightening

Ann% Ann% A Checklist For Liftoff Chg US: Chg CORE PCE* 12-MONTH MOVING AVERAGE

12-month PCE inflation must be 2% 2.0 2.0 or higher

Labor market conditions must have reached levels consistent with the Fed’s 1.5 1.5 assessment of maximum employment

PCE inflation must be on track to 1.0 1.0 moderately exceed 2% for some time 2021

2012 2014 2016 2018 2020 * EXCLUDES FOOD AND ENERGY. ** SOURCE: CONGRESSIONAL BUDGET OFFICE. NOTE: SHADED AREAS DENOTE PERIODS OF RISING FED FUNDS RATE. 7 Shape Your ConvictionTM Authorities Worry About The K-Shaped Nature Of The Recovery

20%% 30% US SHARE WHO SAID THE FOLLOWING FACTORS IMPROVED PERCENTAGE CHANGE IN EMPLOYMENT FOR THEM IN 2020 MINUS THE SHARE WHO SAID LOW INCOME FACTORS HAVE WORSENED 10%10 20 PERSONAL FINANCES MIDDLE INCOME TAKE-HOME PAY HIGH INCOME JOB SECURITY PERSONAL LIFE WORK-LIFE BALANCE 0%0 PHYSICAL HEALTH 10 MENTAL HEALTH

-10%-10 0

-20%-20 -10

-30%-30

-20 2021 -40% JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV 2021 2020 -30 "THE ECONOMIC IMPACTS OF COVID-19: EVIDENCE FROM A NEW PUBLIC DATABASE BUILT USING PRIVATE SECTOR DATA", BY RAJ CHETTY, JOHN FRIEDMAN, NATHANIEL HENDREN, MICHAEL STEPNER, AND THE OPPORTUNITY INSIGHTS TEAM. NOVEMBER 2020. AVAILABLE AT: HTTPS://OPPORTUNITYINSIGHTS.ORG/WP-CONTENT/ UPLOADS/2020/05/TRACKER_PAPER.PDF 8 SOURCE: MORNING CONSULT NATIONAL TRACKING POLL, DECEMBER 17-20 2020. Shape Your ConvictionTM BCA Research Global Asset Allocation Recommendations

Global Fixed Income** Alternatives Global Asset Allocation – + – + – + Government Hedge Funds Equities Investment Grade Real Estate Fixed Income High-Yield Private Equity EM Debt Cash Farmland/Timberland Duration Structured Products Portfolio Volatility – + Inflation-linked Commodities GAA Relative To Global Sectors – + Benchmark Gold Financials Global Equities* – + Currencies Info Tech – + US USD Healthcare EUR Euro Area Communications Serv. JPY Japan Industrials GBP Canada Consumer Disc. Consumer Staples AUD Australia Energy CAD UK Materials CHF China Real Estate EM Currencies EM Ex China Utilities Previous Current

* RELATIVE TO MSCI ACWI (UNHEDGED). ** RELATIVE TO BLOOMBERG BARCLAYS GLOBAL AGGREGATE. 9 Shape Your ConvictionTM Liquidity Is Very Positive For Risk Assets

Ann% Ann% Ann% US: Chg Chg Chg S&P 500 TRAILING PE (LS) MONEY SUPPLY GROWTH*: 30 30 80 EXCESS LIQUIDITY* (RS) 20 US JAPAN EURO AREA 60 CHINA

20 20 40 10

20

10 10 0 0

-20

0 0 -40 -10

2021 2021

1990 1995 2000 2005 2010 2015 2020 1980 1990 2000 2010 2020 * M2 IS SHOWN FOR ALL COUNTRIES EXCEPT CHINA WHERE M3 IS SHOWN. * CALCULATED AS ANNUAL GROWTH CHANGE IN MONEY SUPPLY LESS THE ANNUALGROWTH CHANGE IN BANKS" LOAN GROWTH.

10 Shape Your ConvictionTM Yes, Equities Are Expensive - But Not Relative To Bonds

%% US: US: 15 S&P 500 12-MONTH FORWARD 15 S&P 500 12-MONTH FORWARD PE EARNINGS YIELD 10 REAL 10-YEAR TREASURY YIELD* 10 25 25

5 5

20 20 0 0 S&P 500 12-MONTH FORWARD EARNINGS %%YIELD MINUS REAL 10-YEAR 10 TREASURY YIELD* 10 15 15 8 8 6 6

10 10 4 4 2 2 0 0 2021 2021

1990 2000 2010 2020 1990 2000 2010 2020 * DEFLATED BY CORE CPI.

11 Shape Your ConvictionTM Long-Term Rates Are Being Held Down By Central Bank Purchases % %% US: AS A % OF TOTAL OUTSTANDING: 4 10-YEAR TREASURY YIELD (LS) FED HOLDINGS OF TREASURIES BoE HOLDINGS OF GILTS MANUFACTURING PMI* (RS) 62 ECB HOLDINGS OF EURO AREA GOV'T BONDS BoJ HOLDINGS OF JGBs

3 58 40 40

54 2

50 20 20

1 46

42 0 0 2021 2021

2010 2012 2014 2016 2018 2020 2006 2008 2010 2012 2014 2016 2018 2020 * SOURCE: INSTITUTE FOR SUPPLY MANAGEMENT.

12 Shape Your ConvictionTM Buy Cyclicals But Not Deep Value

Bps WORLD: 250 250 GLOBAL: EQUITIES TOTAL RETURN*: FINANCIAL STOCK PRICES / 200 VALUE / GROWTH 200 120 BROAD MARKET* (LS) YIELD CURVE** (RS) 300 150 150 110

100 100 200 100

1980 1990 2000 2010 2020 90 100 160 SECTOR PROFITS**: 160 VALUE 80 GROWTH 80 80

40 40 0

20 20 2021 2021

1990 1995 2000 2005 2010 2015 2020 2010 2012 2014 2016 2018 2020 * SOURCE: MSCI INC. (SEE COPYRIGHT DECLARATION). * SOURCE: MSCI INC. (SEE COPYRIGHT DECLARATION). NOTE: SERIES REBASED TO JAN. 1975 = 100. ** G7 10-YEAR GOVERNMENT BOND YIELD ** SOURCE: DATASTREAM MARKET INDICES. MINUS 3-MONTH EURO RATE.

13 Shape Your ConvictionTM Tech Companies Are Not Going Ex-Growth Yet

10000 EPS GROWTH FROM 2015 AVERAGE ANNUAL EARNINGS GROWTH

2015-2020 2021-2025

APPLE 8% 11% 1000 FACEBOOK 60% 19%

AMAZON 128% 30%

APPLE 100 NETFLIX 102% 27% FACEBOOK AMAZON NETFLIX ALPHABET 18% 20% ALPHABET MICROSOFT 2021 MICROSOFT 20% 18% 10 2015 2017 2019 2021 2023 2025 SOURCE: BLOOMBERG FINANCE L.P. NOTE: SERIES REBASED TO 2015 = 100. 14 Shape Your ConvictionTM Bubbles Only Burst When Monetary Policy Is Tightened

ASSET CLASS 300 300 PRICE APPRECIATION 200 AT FIRST INTEREST 200 RATE HIKE 100 100

50 50 UK STOCK PRICES NIKKEI 225 UK RAILWAY STOCKS NADSAQ COMPOSITE DOW JONES US HOUSE PRICES % FIRST INTEREST NIFTY FIFTY STOCKS % RATE INCREASE 8 UK (MAY. 1719) JAPAN (MAY 1989) 8 UK (OCT. 1844) US (JUNE 1999) US (FEB. 1928) US (JUNE 2004) 4 US (MAR. 1972) 4

0 0

2021 T=-24 T=-12 T=0 T=12 T=24 T=36 T=48 T=60 TOP PANEL REBASED TO 100 ON T = 0. MONTHS BEFORE/AFTER RATE HIKE

15 Shape Your ConvictionTM EM Selectively Looks Interesting

EM STOCK PRICES* (LS) CYCLICALLY-ADJUSTED P/E*: US FINANCIAL CONDITIONS INDEX** (RS, INV) EMERGING MARKETS 98 2.2 RELATIVE TO US 2.2 1200 100 2.0 2.0 900 MEAN 102 1.8 +/- 1/2 STD 1.8 600 104 1.6 1.6 300 106 1.4 1.4

1.2 1.2 CYCLICALLY-ADJUSTED P/E*: 2.2 EMERGING MARKETS 2.2 1.0 1.0 2.0 2.0 RELATIVEMEAN TO US 1.8 1.8 .8 .8 1.6 +/- 1/2 STD 1.6 1.4 1.4 .6 .6 1.2 1.2 1.0 1.0 .4 .4 .8 .8 .6 .6 .2 .2 .4 .4 2021 .2 2021 .2

85 90 95 2000 05 10 15 20 1985 1990 1995 2000 2005 2010 2015 2020 * BCA CALCULATION; CALCULATED USING EM STOCK PRICES AND EPS * SOURCE: MSCI INC. (SEE COPYRIGHT DECLARATION); SHOWN IN USD TERMS. IN US DOLLAR TERMS, AND DEFLATED BY US CONSUMER PRICE INFLATION; ** SOURCE: GOLDMAN SACHS (VIA BLOOMBERG L.P.) SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)

16 Shape Your ConvictionTM But Maybe Debt More Than Equity

QATAR (Aa) Aa USD-denominated EM By country sovereign spreads versus UAE (Aa) credit rating and duration -matched US credit: SAUDI ARABIA (A) A By credit rating INDONESIA (Baa)

MEXICO (Baa) Baa RUSSIA (Baa)

COLOMBIA (Baa) Ba PHILIPPINES (Baa)

BRAZIL (Ba) B TURKEY (B)

ARGENTINA (Caa) Caa 2021 2021

-100 0 100 200 300 400 500 600 -200 0 200 400 600 SPREAD* (BPs) SPREAD (BPs) SPREAD* (BPs) SPREAD (BPs) * SOURCE: BLOOMBERG BARCLAYS INDICES. * SOURCE: BLOOMBERG BARCLAYS INDICES. 17 Shape Your ConvictionTM In The Short Term, Watch Signs Of Slowdown In China

% Of Ann% Ann% GDP Chg Chg CHINA: BCA ACTIVITY INDICATOR* (LS) 3 ANNUAL CHANGE OF ADJUSTED TOTAL SOCIAL FINANCING** AS A 0 0 PERCENT OF GDP (ADV 6-M, RS) 2 35 -20 -20

1 30 -40 -40

Slow 0 recovery -60 CHINA: -60 25 RETAIL SALES OF CONSUMER GOODS (YTD) CATERING (YTD) -1 -80 -80 PASSENGER TRAFFIC 20 2021 2021

2010 2012 2014 2016 2018 2020 2016 2017 2018 2019 2020 2021 * SHOWN AS 3-MONTH MOVING AVERAGE; BCA CALCULATIONS. ** BCA CALCULATIONS; TOTAL SOCIAL FINANCING EXCLUDING EQUITY, AND INCLUDING LOCAL GOVERNMENT BONDS.

18 Shape Your ConvictionTM Which Could Be An Issue For Industrial Commodities

Ann% Ann% Ann% Ann% Chg Chg Chg Chg 120 120 CHINA: IMPORTS IN VOLUME TERMS 140 140 100 100 COPPER AND COPPER PRODUCTS* CHINA: 120 120 IMPORTS IN VOLUME TERMS 80 80 100 STEEL PRODUCTS* 100

60 60 80 80

40 40 60 60

40 40 20 20 20 20 0 0 0 0 -20 -20 -20 -20 2021 2021

2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020 * SHOWN AS A 3-MONTH MOVING AVERAGE. * SHOWN AS A 3-MONTH MOVING AVERAGE.

19 Shape Your ConvictionTM Can The US Dollar Fall Further?

%% US TRADE-WEIGHTED DOLLAR INDEX* 20 US DOLLAR: 20 160 160 DEVIATION FROM PPP* 140 140

10 10 120 120

100 100

0 0 80 80 BPs 2-YEAR REAL YIELD** DIFFERENTIAL BPs 500 (US MINUS DEVELOPED COUNTRIES) 500

-10 -10 250 250

0 0 -20 -20 -250 -250

2021 2021 2000 2004 2008 2012 2016 2020 1980 1985 1990 1995 2000 2005 2010 2015 2020 * BASED ON DXY WEIGHTS. * SOURCE: BANK OF ENGLAND AND BIS. SOURCE: OECD. ** 2-YEAR NOMINAL YIELD DEFLATED BY CONSUMER PRICE INDEX. NOTE: SHADED AREAS DENOTE PERIODS OF MAJOR DOLLAR APPRECIATION.

20 Shape Your ConvictionTM In The Short-Term USD Might Rebound

60Bn Ann% USD Chg US BROAD TRADE-WEIGHTED DOLLAR* (LS, INV) 50 US DOLLAR LONG SPECULATIVE GLOBAL MANUFACTURING PMI** (RS) POSITIONS* 58 40 -10 54 30 -5

20 50 0 10 46 5 0

42 -10 10 EURO -20 38 JPY 15 -30 TOTAL

2021 2021 34 -40 2014 2015 2016 2017 2018 2019 2020 2021 2006 2008 2010 2012 2014 2016 2018 2020 * SOURCE: FEDERAL RESERVE. * NOTE BASED ON CFTC DATA. ** SOURCE: MARKIT.

21 Shape Your ConvictionTM US Dollar and Chinese Growth Are The Drivers Of Commodities Over 12-Month Horizon

Ann% Ann% % of Ann% Chg US TRADE-WEIGHTED DOLLAR* (INVERTED, LS) Chg GDP Chg CRB** RAW INDUSTRIALS (RS) CHINA 25 -15 25 CREDIT* & FISCAL** IMPULSE (LS, ADV) IMPORT VOLUME*** (RS) 40 -10 20 20

15 -5 15 20

0 10 10 0 5 5 5

10 0 -20 0

15 -5 -5 2021 -40 2021

2000 2004 2008 2012 2016 2020 2010 2012 2014 2016 2018 2020 * BROAD, NOMINAL. SOURCE: FEDERAL RESERVE. * CUMULATIVE AGGREGATE FINANCING EXCL EQUITY FINANCING, LGFV ** SOURCE: COMMODITY RESEARCH BUREAU, INC. SWAP FROM 2015 TO 2018 AND LOCAL GOVT. SPECIAL BONDS ISSUANCE ** GENERAL (CENTRAL AND LOCAL) GOVT., GOVT. MANAGED FUNDS 22 SPENDING AND SPECIAL INFRASTRUCTURE FUND FROM 2015 TO 2017 *** SHOWN AS A 12-MONTH MOVING AVERAGE Shape Your ConvictionTM How The World Will Change After COVID

% Of. % Of. %% GDP GDP US US: 10-YEAR BREAKEVEN INFLATION GOVERNMENT DEBT AS % OF GDP* 100 100 2.5 2.5

75 75 2.0 2.0

1.5 1.5 50 50

1.0 1.0

25 25 .5 .5

2021 0 2021 0 1920 1940 1960 1980 2000 2020 2004 2006 2008 2010 2012 2014 2016 2018 2020 * SOURCE: FLOW OF FUNDS. NOTE: DASHED HORIZONTAL LINES INDICATE 2.4% AND 2.5% LEVELS CONSISTENT WITH THE FED'S 2% CORE PCE TARGET.

23 Shape Your ConvictionTM High Risk Of Elevated Inflation In The Long Run

US$ US$ Thous Thous US: US CPI COMPONENT*: BY AGE COHORT*: CONSUMER PRICE INDEX INCOME SHELTER HEALTH CARE 60 CONSUMPTION 60 EDUCATION 300 PERSONAL CARE 300 PRODUCTS APPAREL 40 40 AUDIO & VIDEO PRODUCTS

200 200

20 20

100 100 0 0

2021 2021 190010 191020 192030 193040 194050 195060 196070 197080 198090+ 1990 1995 2000 2005 2010 2015 2020 * SOURCE: UNITED NATIONS, NATIONAL TRANSFER ACCOUNTS. * SOURCE: BUREAU OF LABOR STATISTICS. NOTE: ALL SERIES SHOWN REBASED TO JAN 1993 = 100.

24 Shape Your ConvictionTM Best Ways To Hedge Against Inflation Risk

0.16 0.16% US HEADLINE INFLATION PERIODS OF RISING INFLATION 0.140.14 RECOVERY RANGE (<2.3%) QUARTILE 1 2 3 4 0.120.12 STABLE RANGE (2.3%-3.3%) OVERHEATING RANGE (3.3%-4.9%) LOW MILD HIGH VERY HIGH UNANCHORED RANGE (>4.9%) NAME 0.10.1 INFLATION INFLATION INFLATION INFLATION DECREASING

0.080.08 LESS THAN BETWEEN 2.3% BETWEEN 3.3% MORE THAN THRESHOLD 2.3% AND 3.3% AND 4.9% 4.9% 0.060.06

ASSET COMMODITIES / COMMODITIES / 0.040.04 LEVEL EQUITIES EQUITIES U.S. TIPS U.S. TIPS HEDGE

0.020.02 EQUITY INFORMATION ENERGY / DEFENSIVE SECTOR ENERGY TECHNOLOGY MATERIALS SECTORS 00 HEDGE

--0.020.02 COMMODITY INDUSTRIAL ENERGY ENERGY GOLD HEDGE METALS 2021 --0.040.04 0 100 200 300 400 500 600 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

NOTE: PERIODS OF RISING INFLATION ARE DEFINED AS TRENDS OF MORE THAN 12 MONTHS OR CHANGES OF MORE THAN 1% IN THE INFLATION RATE. 25 Shape Your ConvictionTM Silver Looks Better Value Than Gold

RELATIVE PRICE: REAL PRICE OF GOLD* GOLD / SILVER 2.5 2.5 100 100

2.0 2.0 75 75

1.5 1.5

50 50 1.0 1.0

25 25 .5 .5

2021 2021

1900 1920 1940 1960 1980 2000 2020 1900 1925 1950 1975 2000 2025 * DEFLATED BY US HEADLINE CPI.

26 Shape Your ConvictionTM Bad For Commercial Real Estate, Good For Healthcare

70%% %%

SHARE OF THOSE NOT WORKING REMOTELY HEALTH EXPENDITURE AS % OF GDP*: 60 PRE-SHUTDOWN WHO EXPECT TO WORK US REMOTELY AFTER SHUTDOWN ENDS GERMANY ITALY 50 YES UNSURE NO 15 CHINA 15 SOUTH AFRICA BRAZIL 40

30 10 10

20

10 5 5

2021 2021 0% NEW YORK BOSTON SAN SEATTLE NATIONAL 1970 1980 1990 2000 2010 2020 FRANCISCO * SOURCE: OECD.

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