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.