Asset Allocation In A Post-Pandemic World - February 2021 Juan Correa Ossa, CFA - Prival
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Shape Your ConvictionTM Asset Allocation In A Post-Pandemic World February 2021 Juan Correa Ossa, CFA Associate Editor BCA Research juanc@bcaresearch.com
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
2Shape 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
2021
2020 * SOURCE: OFFICIAL DATA COLLATED BY OUR WORLD IN DATA.
* SOURCE: CCSE, SHOWN A 7-DAY MOVING AVERAGE.
3Shape 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
$1.5
4 trillion
4
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.
4Shape Your ConvictionTM
But There Will Be No Fiscal Austerity This Time
35
% Of 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**
-25 DEMOCRATIC (HIGH)***
10
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.
5Shape Your ConvictionTM
Central Banks Will Remain Dovish
% %
CENTRAL BANK BALANCE SHEET: CENTRAL BANK MONITOR*:
US
ANNUALIZED 6-MONTH RATE OF
CHANGE EURO AREA
250
US (LS) UK
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.
6Shape 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.
7Shape 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 Asset Allocation – + Global Fixed Income** – + Alternatives – +
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
Euro Area EUR
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.
9Shape 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.
10Shape Your ConvictionTM
Yes, Equities Are Expensive - But Not Relative To Bonds
% %
US:
US: S&P 500 12-MONTH FORWARD
15 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.
11Shape Your ConvictionTM
Long-Term Rates Are Being Held Down By
Central Bank Purchases
% % %
US: AS A % OF TOTAL OUTSTANDING:
4 FED HOLDINGS OF TREASURIES
10-YEAR TREASURY YIELD (LS)
MANUFACTURING PMI* (RS) BoE HOLDINGS OF GILTS
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.
12Shape Your ConvictionTM
Buy Cyclicals But Not Deep Value
Bps
WORLD: GLOBAL:
250 EQUITIES TOTAL RETURN*: 250
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.
13Shape Your ConvictionTM
Tech Companies Are Not Going Ex-Growth Yet
10000 AVERAGE ANNUAL EARNINGS GROWTH
EPS GROWTH FROM 2015
2015-2020 2021-2025
APPLE 8% 11%
1000
FACEBOOK 60% 19%
AMAZON 128% 30%
100 APPLE
NETFLIX 102% 27%
FACEBOOK
AMAZON
NETFLIX ALPHABET 18% 20%
ALPHABET
2021
MICROSOFT MICROSOFT 20% 18%
10
2015 2017 2019 2021 2023 2025
SOURCE: BLOOMBERG FINANCE L.P. NOTE: SERIES REBASED TO 2015 = 100.
14Shape 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
15Shape Your ConvictionTM
EM Selectively Looks Interesting
EM STOCK PRICES* (LS)
CYCLICALLY-ADJUSTED P/E*:
US FINANCIAL CONDITIONS INDEX** (RS, INV)
EMERGING MARKETS
2.2 2.2 1200 98
RELATIVE TO US
2.0 2.0 100
900
MEAN
1.8 1.8 102
+/- 1/2 STD
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
RELATIVE TO US
MEAN
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)
16Shape 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*
SPREAD(BPs)
(BPs) SPREAD* (BPs)
SPREAD (BPs)
* SOURCE: BLOOMBERG BARCLAYS INDICES.
* SOURCE: BLOOMBERG BARCLAYS INDICES.
17Shape 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)
-1 CATERING (YTD)
-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.
18Shape 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 STEEL PRODUCTS*
100 100
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.
19Shape 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.
20Shape Your ConvictionTM
In The Short-Term USD Might Rebound
60
Bn 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
10 42
-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.
21Shape 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 CREDIT* & FISCAL** IMPULSE 25
-15
(LS, ADV)
IMPORT VOLUME*** (RS)
40 20
-10 20
-5 15
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
SPENDING AND SPECIAL INFRASTRUCTURE FUND FROM 2015 TO 2017
22
*** SHOWN AS A 12-MONTH MOVING AVERAGEShape 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 2021
0 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.
23Shape Your ConvictionTM
High Risk Of Elevated Inflation In The Long Run
US$ US$
Thous Thous US CPI COMPONENT*:
US:
BY AGE COHORT*: CONSUMER PRICE INDEX
INCOME SHELTER
CONSUMPTION HEALTH CARE
60 60
EDUCATION
300 PERSONAL CARE 300
PRODUCTS
APPAREL
40 40 AUDIO & VIDEO
PRODUCTS
200 200
20 20
100 100
0 0
2021 2021
190010191020192030193040194050195060196070197080198090+
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.
24Shape Your ConvictionTM
Best Ways To Hedge Against Inflation Risk
0.16
0.16
%
US HEADLINE INFLATION PERIODS OF RISING INFLATION
0.14
0.14
RECOVERY RANGE (4.9%) NAME
0.1
0.1 INFLATION INFLATION INFLATION INFLATION
DECREASING
0.08
0.08
LESS THAN BETWEEN 2.3% BETWEEN 3.3% MORE THAN
THRESHOLD
2.3% AND 3.3% AND 4.9% 4.9%
0.06
0.06
ASSET
COMMODITIES / COMMODITIES /
0.04
0.04 LEVEL EQUITIES EQUITIES
U.S. TIPS U.S. TIPS
HEDGE
0.02
0.02
EQUITY
INFORMATION ENERGY / DEFENSIVE
SECTOR ENERGY
TECHNOLOGY MATERIALS SECTORS
00 HEDGE
-0.02
-0.02 COMMODITY INDUSTRIAL
ENERGY ENERGY GOLD
HEDGE METALS
2021
-0.04
-0.04
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
0 100 200 300 400 500 600
NOTE: PERIODS OF RISING INFLATION ARE DEFINED AS TRENDS OF MORE THAN 12
MONTHS OR CHANGES OF MORE THAN 1% IN THE INFLATION RATE.
25Shape 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.
26Shape 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
* SOURCE: OECD.
FRANCISCO
SOURCE: REDFIN.
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