SEB House View 13 June 2018

Transcription

1 SEB House View 3 June 8

2 Summary Decision variables Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

3 Summary - In expectation of a re-acceleration in global PMIs and that the Q earnings season will confirm the bullish 8 EPS estimates we keep risk utilization at 7% - We expect that the current strength in US soft data will halt the past months decline in European PMIs - I.e. we expect the US to once more be leading Europe - Historical lag of ~ months - Investor surveys indicate that the average investor has become less confident of this scenario (re-accelerating global PMIs) to materialize - We therefore expect it to be supportive for equities as it does not appear to be the base case scenario for the average investor - We expect an isolated return potential from rising PMIs of -3% as M forward valuations have to reflect the new rising volatility/yield environment and cannot/ should not revert to early 8 levels - Given the strong outlook for consumption, US infrastructure spending, rising CAPEX, and easing credit conditions we (as well as the FED) see M forward recession risk as very limited - In a low recession risk scenario we strongly believe equities will outperform all other fixed income assets given the very strong underlying earnings growth - The likelihood for a / Eurozone crisis redux over the next M is in our view very low - Geopolitical risks are as such not impacting our current level of risk utilization 7% The speedometer controls to what extent the portfolios should utilize their risk budgets. It is connected to the model portfolio (page 4) which at all times utilizes its risk budget in-line with the speedometer. In a very general sense it can be interpreted as equities on/off (with 5% being neutral). Slide 3

4 Multi Asset Model Portfolio - The model portfolio is unchanged from the extra House View meeting of May 3 rd - We have a significant overweight to equities against an underweight to government bonds - We expect yields to move higher in-line with the strong global growth outlook - We especially expect longer dated yields to be pushed higher by a normalization of the term premium - We expect equities to rise in-line with, or slightly above, the current expected earnings growth - Re-acceleration in global PMIs (driven by Europe) will be able to boost equity returns by some -3% - We do not expect the Q earnings season to surprise significantly on the upside - But just confirmation that the bullish 8 EPS estimates will hold will be more than enough for equities to outperform bonds - We reduced the allocation towards Emerging Market debt (local currency) to a neutral in late May - As a consequence of increased idiosyncratic risks in general and fears about Turkey in particular - While Turkey have addressed the Lira weakness by an accumulated 4.5%-point hike to the new official policy rate we have seen EM weakness spread to Brazil - We expect the risk of the asset class to remain heightened due to both domestic political factors but also due to the tightening US monetary policy Slide 4 Model Portfolio Government Bonds Equities Investment Grade High Yield Bonds Emerging Market Debt Commodities Cash -6% -6% -3% 3% 3% % 5% 5% % 4% 7% % % % 4% % 4% 4% % 59% 45% Allocation Strategic allocation Diff Long only portfolio. Yearly VaR(95%) ex. mean between 7% and %.No restrictions on the individual asset classes. The weights are set manually by the House View committee; i.e. they are not based upon an optimization model.

5 Equities VIX Oil Momentum (US) Quality (US) Value (US) Growth (EU) EM FX USDSEK EURUSD USDJPY USDGBP US Y Yield US Y Yield SW 5Y Yield DE 5Y Yield Momentum Risk contribution Idiosyncractic Bloomberg Com US HY Spread EU IG Spread EMD Spread EM Asia vs EM Other EM vs GL US vs EU JP vs GL SW vs GL Bloomberg Com US HY Spread EU IG Spread EMD Spread EM Asia vs EM Other Tracking error EM vs GL US vs EU JP vs GL SW vs GL Momentum (US) Quality (US) Value (US) Growth (EU) VIX EM FX USDSEK EURUSD USDJPY USDGBP US Y Yield US Y Yield SW 5Y Yield Oil DE 5Y Yield Momentum Idiosyncractic Equi... Multi Asset Model Portfolio Risk characteristics Value at Risk (95%) Tracking Error Source: SEB Source: SEB Slide 5

6 Return Multi Asset Class Risk and Return Estimates, M % % 8% 6% EM Equities Swedish equities Global Equities 4% % % Hedge Funds High Yield Investment Grade EMD LC Commodities Slide 6 -% Government -4% Bonds % 5% % 5% Source: SEB Risk

7 Regional equity model portfolio - All regional active positions are reduced to a neutral - I.e. we close the overweight to Emerging Market equities and we close the underweight to European equities - The uncertainty around the outlook for Emerging Market equities have increased over the last couple of months - 8 EPS local currency estimates have been revised lower over the last month - Estimated EM EPS growth for 8 is now close to that of Europe; and below that of the US - With reduced estimated EPS growth, heightened FX risk going into the H 8 FED rate hike cycle, and increased political risk in Turkey and Brazil we see the arguments for maintaining an overweight to EM as less compelling than just one month ago - We remain neutral on US equities - High valuations are being matched by very strong positive upward EPS revisions - Given the hike to 8 estimates over the past couple of months we see a potential for further upward revisions to 9 coming in already during the summer of 8 - We do not expect to see multiple contraction for the US - US equities (broad market) is trading at the lowest forward multiple since the election of Donald Trump - We do not see this as being in-line with our strong outlook for growth; but we do not expect multiples to revert to the late 7 highs either Regional equity positioning EM Ex. Asia EM Asia East Asia ex. Japan Sweden Japan Europe North America 5% 5% % 8% 8% % 5% 5% % % % % 8% 8% % % % Allocation Strategic allocation Diff 3% 3% 49% 49% Slide 7

8 Return Equity Risk and Return Estimates Slide 8 % EM China 9% 8% Europe LatAm DM Sweden 7% Japan 6% US 5% 4% 3% % % % 5% % 5% % 5% 3% Risk Source: SEB

9 Summary Decision variables Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

10 Change in positive/negative Positive/Negative House View decision variables - The very high global earnings growth is the primary factor behind our overweight to risk - On the back of the US tax reform we look set to receive the strongest earnings growth in 8 since the financial crisis - We do not expect the Q earnings season to surprise significantly on the upside - We are just looking for confirmation of already very bullish estimates - We see macro as the second most important and positive factor for the markets - In our view this contrasts the general market perception which appears to have turned more sour on the tactical growth outlook since the beginning of 8 - We read the pessimism as a consequence of the moderation in European PMIs - We do not expect Europe to start leading the global growth cycle, we see the decline as a fairly natural reaction to the stronger EUR, and we take note of the strong US leading indicators - Strong US leading indicators over May increases the likelihood that European macro will start to rise over the coming months - Sentiment has turned to a positive as the markets have been shaken by the political crisis in Italy and as the expectation to stronger macro over the coming months has fallen Slide Earnings and macro remain the main positive factors for our current risk utilization. Politics, valuations, and central banks are the main negatives Sentiment Politics Positioning Valuations Macro Central Banks Earnings Importance Source: SEB Sentiment has turned more important and more positive. This as investor sentiment in our view appears unappreciative of macro strength Politics Valuations Positioning Earnings Macro Sentiment Central Banks Change in importance Source: SEB

11 Summary Decision variables Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

12 Developments in the Markets - Late May was dominated by resurgent peripheral risks in Europe - Challenges in forming a government in Italy led to a significant spike in Italian yields and a sharp selloff in global equities - This selloff was quickly reversed however as the strong dose of financial reality led to the formation of a government with the important finance minister post being assigned to one of the less extreme candidates that were in the running - Although the crisis quickly evaporated it highlighted the underlying instability which continues to plague the Euro - Homogenous monetary policy being conducted on top of heterogonous fiscal policy - In our, and the markets, view it seems likely that at some point in the future we will see a spike in volatility once more due to Italy - But that it will not happen over at least the next 6 months - Despite the political shock to the market we have in general seen strong equity market performance - Strong performance in the tech sector brought NASDAQ back to all time highs - SP5 closed in on the local highs from early March and thereby only 3% away from all time highs - Despite already elevated 8 EPS estimates we saw further positive revisions over the month EPS estimates continued to be revised higher over May. The positive revisions were driven by Energy and tech. Italian government bond yields spiked higher following the challenges in forming a government. The shock was however quickly reversed. Slide

13 Economy Developed Markets - The convergence between European and US macroeconomic momentum continued over May - Continued fall in European indicators being contrasted by generally strong US PMIs - The US labour market continues to strengthen - Initial Jobless Claims hovering around decade lows - Employment components of the PMIs indicating further strength ahead - Despite the apparent labour market tightness we have yet to see a material rise in wages - Year-on-year wage growth came in at.7% in April - This is still up from the levels post the financial crisis, but far from the levels achieved prior 8 - While the so called Phillips-curve dynamics appear to be out of play we still foresee to see upward wage pressure over the coming months - If nothing else due to the fact that firms in the PMIs are indicating that they are increasingly likely to hike wages - US CAPEX continues to rise - Furthermore we are seeing rising CAPEX plans - Indicating that private investments should rise further from the already high current levels ISM Manufacturing rose to November 7 levels. US growth momentum continues to be at higher level than that of Europe. Slide 3

14 Economy Asia and Emerging Markets - The broad macroeconomic momentum for EM stalled in May - The GBI-EM weighted PMI fell to the lowest level in more than a year - The weakness appears driven by a fall in export orders - Following the slowdown in trade which we have seen over 8 - Turkey reacted to the weakness of the Lira by hiking the week repo rate - Generating clarity about the monetary policy and going largely against the recommendation of Erdogan - Despite the strong reaction uncertainty still exists going into the elections of late June - While we have seen de-accelerating growth in Chinese investments and production we have seen strong numbers for the consumer - Consumption is growing around % on a year-on-year basis - Consumer confidence is at the highest levels since 99 - We expect these numbers to ensure that the GDP forecasts for China will be reached in 8 (6.6%) and 9 (6.4%) - After a strong recovery in late 7 the slowdown in trade has continued over May - It is unclear to us what is driving this trend but we expect to see pressure on EM FX so forth the recovery in global trade story gets further challenged over the coming months Major EM PMIs declined in May. Lowest growth momentum since H 7. Turkey hiked the week REPO rate in order to address the Lira weakness. Slide 4

15 Summary Decision variables Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

16 Level Momentum Surprise House View US surprise indicator - US macro started to surprise more to the upside over May than during April - Magnitude of positive surprises is however for now still significantly below the levels reached in H 7 - The positive surprises have largely been driven by a resurgence in soft data in general and the PMIs in particular - In terms of macro momentum (change in macro data) we are seeing a mostly flat development - This is a pattern that has been in place for the whole of 8 and which largely were to be expected given the elevated levels of PMIs, consumer confidence, employment numbers and so forth US macro has started to surprise on the upside in late May and early June M MA M MA.3. - Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul The level of US macro remains very high. As momentum is largely flat the index has not moved in either direction. 5 Macro momentum remains largely flat. It implies that data has neither gained nor fallen..5 3M MA M MA 95 Macro data level 9 Q4-5 Q-6 Q-6 Q3-6 Q4-6 Q-7 Q-7 Q3-7 Q4-7 Q-8 Q Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul.. Slide 6

17 Level Momentum Surprise House View EU surprise indicator - For Europe we have seen a string of negative macro surprises - This has brought our aggregated surprise index for Europe down to the lowest level in more than a year - The weakness (in terms of surprises) in Europe has largely been isolated, or at least dominated by, Germany - For example we have seen negative surprises in IFO, ZEW, retail sales, and production - As such Germany has failed to deliver positive macro prints in-line with the expectations - Macro momentum has also fallen for Europe (in-line with the surprises) - This has brought the level of European macro down so that for the first time in a long while it seems reasonable to start expecting improving data European macro surprises continues to be negative M MA M MA Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul The level of EU macro has fallen back to the level of Q 7. There is now room for positive surprises once more Macro data level Macro momentum remains negative M MA M MA Q4-5 Q-6 Q-6 Q3-6 Q4-6 Q-7 Q-7 Q3-7 Q4-7 Q-8 Q Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Slide 7

18 Contribution to surprise Contribution to surprise Contribution to surprise Contribution to surprise House View macro surprise contributions Global hard data Contribution to 3 month surprise Global soft data Contribution to 3 month surprise Consumer Housing Industrial Labour 4 Consumer Housing PMI Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun -4 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun EU Contribution to 3 month surprise US Contribution to 3 month surprise 3 5 Consumer Industrial PMI 5 Consumer Housing Industrial Labour PMI Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun -5 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Slide 8

19 Contribution to momentum Contribution to momentum Contribution to momentum Contribution to momentum House View macro momentum contributions Global hard data Contribution to 3 month momentum Global soft data Contribution to 3 month momentum Consumer Housing Industrial Labour Consumer Housing.5 PMI Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun -.5 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun EU Contribution to 3 month momentum US Contribution to 3 month momentum Consumer Industrial.5 PMI Consumer Housing Industrial Labour PMI Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun -.4 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Slide 9

20 Summary Decision variables Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

21 In Focus #: Monetary policy in H 8 - We expect that market focus on central banks will increase over H 8; compared to a very small focus over 7 and H 8 - The ECB is projected to end its QE program - The FED will be reducing its balance sheet by 5 billion a month by October 8 - It increased by 8 billion a month under QE3 when it was as its peak - We think that the main focus for the markets will be the FED rate hike cycle - The current balance sheet reduction in the US has so far been out of focus - Given the lack of focus on the current FED balance sheet reduction, the strong performance of equity markets around the end of Q3, and the still relatively strong European growth outlook we do not expect to see a large negative reaction to the ECB ending its QE program - However given the very small sample (one) of historical precedents the uncertainty is naturally high - We see that the likelihood as skewed for a more hawkish FED rate hike cycle over the coming quarters - As our base case scenario is for accelerating growth in Q3 we do not expect this to hurt equities - But we do expect it to support the USD and put tactical pressure on EM FX - Even though current account deficits have improved since 6 The FED has already started bringing down the balance sheet. The full pace of balance sheet reduction will be in place in October 8: 5 billion a month. The market is fully pricing the official FED forecast for the 8 rate hike cycle. The pricing of 9 rate hikes have also increased. Slide

22 Return Return Return In Focus #: Monetary policy in H 8 - Looking at asset class performance in the last 5 rate hike cycles we note that equities in all of them have generated strong positive returns - The picture is more mixed for the USD - While the current rate hike cycle is getting long in a historical context it is still muted in terms of accumulated hikes - We believe that the current rate hike cycle mimics the 99 rate hike cycle the most - Hikes following a long period of strong growth, muted inflation, and strong asset markets - If history is any guide then we should see strong equity markets and a strong USD The last 5 rate hike cycles USD performance in the last 5 rate hike cycles to to to to to Days into rate hike cycle SP5 performance in the last 5 rate hike cycles to to to to to to to to to to Days into rate hike cycle Days into rate hike cycle Slide

23 Summary Decision variables Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

24 Developed Market Equities M Outlook - Developed Market equities will deliver a positive return over the coming months - The market transition into a regime dominated by both growth and inflation implies that valuations will be at lower levels than those seen over the past 4 years - I.e. we are not expecting to see equity returns being supported by significant multiple expansion that would bring us back up to the levels achieved in late 7 - However the correction has brought us down to levels which we are starting to view as attractive - We are looking for a year end level of closer to 7 than 6 - Positive returns will be generated mainly by earnings growth - We forecast M forward EPS growth for MSCI World around % (local currency) - Driven by margin expansion and strong topline growth - Tax reform in the US dominating negative impact from rising real rates and wages - Excess production capacity in Europe will ensure margin expansion as topline grows - Note that this estimate is inline with bottom-up consensus estimates - We note that the historical correlation between rates and multiples are very weak post the IT-bobble - We are therefore not overly concerned about rising rates from a pure valuation perspective Bottom-up consensus is looking for 4% earnings growth for MSCI World in 8. Given the strength of the current earnings season we see this as achievable. The historical correlation between yields and equity valuations (inverse earnings yields) is very weak. We do not fear rising rates from a valuation perspective. Slide 4

25 Emerging Market Equities M Outlook - We expect that Emerging Market equities will deliver a return in excess of Developed Market equities - In contrast to Developed Market equities we are expecting both strong earnings growth and a small multiple expansion - Note however that the expected EPS growth has been revised lower over the last month - Decreasing our conviction in the asset class outperformance of Developed Market equities over the coming months - Structural factors remains supportive for EM equities - GDP estimates for EM are being revised higher as the market is expecting positive spillover from the rise in DM growth - The stabilization in commodity prices will on aggregate support the universe - Bottom-up implied EPS growth for EM is pointing towards % for 8 and % for 9 - These numbers are however lower than what was expected back in March and April - Despite the positive structural factors we see a risk that the FX component will come under pressure as we enter H - This as we see the likelihood for the FED to be more aggressive in the communication around the future rate hike cycle as being on the rise There remain room (although small) for multiple expansion in EM equities. We expect EM equities to gain support from rising earnings. Bottom-up consensus is looking for % earnings growth in 8. Slide 5

26 High Yield Bonds M Outlook - We expect that global High Yield bonds will outperform Investment Grade and Government bonds over the coming months - But the absolute return will be low and the asset class will underperform equities - The upside is very limited to our strong growth environment - Structural factors which historically have been supportive for the asset class are still in place - The growth outlook remains stable and the likelihood for a recession in 8 is very low - The latter is our primary argument as to why we expect High Yield bonds to outperform - Expectations to gradually rising core government bond yields will continue to drive investors into less rate sensitive asset classes; such as High Yield - Credit conditions are being loosened in both Europe and the US - Note that this is a reversal of the trend which we saw for 6 as a whole - Free cash flows are improving rapidly at the moment - The high USD hedging costs makes the strongest tactical counter argument for US High Yield - A EUR (or SEK) based investor receives only a 45 bps spread to worst After correcting for hedging costs the spread to worst stands at 45 bps for US High Yield. This is in our view too low given the rising rates environment. Slide 6

27 Emerging Market Debt M Outlook - We still expect Emerging Market debt to deliver a return in excess of DM government bonds, Investment Grade and High Yield for the coming months - With that being said we do see the risk to the asset class as being elevated - The initial EM weakness for especially Turkey appears to have spread into Brazil - With elections coming up in October we do see a risk that the market will increasingly start to price in the political uncertainty hereof - Tactical growth momentum has started to falter for the broad EM space - We see this as coming at a critical time as we are about to enter a H 8 where we expect market focus on the FED to rise - We see an increasing likelihood for the FED to become more hawkish over the coming months given the strong current growth momentum and the very low US unemployment rate - Structurally the picture for EM still remains fairly positive outside of politics - The broad GBI-EM weighted inflation rate is extremely low and the scope for further broad EM monetary stimulus is still in place - Current account deficits have in general improved which on a broad level has reduced the sensitivity to a tighter US monetary policy Low EM inflation generates a scenario in which US rates can edge higher (due to strong growth) without denting EM FX. We have seen a noticeable decline in EM PMIs over the last month. Slide 7

28 Contribtion to score Energy IT Materials Health Care Financials Industrials Utilities TC Consumer D Consumer S Sector overview Sector UW N OW House View Sector Quant Score Financials Consumer Stables Consumer Discretionary UW UW OW Sentiment EPS Valuation Macro Momentum Energy N Industrials OW Telecommunication Materials Health Care N N OW Info Tech Utilities (X) Indicates last months positioning. UW OW House View Sector Quant Factor Sector Sentiment EPS Valuation Macro Momentum Financials POS NEG NEG NEG POS Materials NEG POS POS NEG NEG Industrials POS NEG NEG NEG POS Consumer D NEG POS NEG POS POS Consumer S POS NEG POS POS NEG Health Care POS POS NEG POS NEG Energy NEG POS POS NEG POS IT NEG POS NEG POS POS TC POS NEG POS POS NEG Slide 8 Utilities POS POS POS NEG NEG

29 Contribtion to score M Forward PE Standardized PE Financials - Overweight - We expect Financials to benefit from the normalization of monetary policy - Both due to a normalization in the term premium and due to increased market volatility - In terms of the former we note that we are still trading at negative levels - Despite the significant strength that we have seen in leading indicators post the election of Trump - 8 consensus forecast for EPS growth has been lifted to % - This is inline with our top-down model - Note that analysts have revised the 8 EPS estimate higher from 9% since the beginning of the year - Outside of momentum this is one of the key supportive factors in our quantitative scoring model Contribution to House View Sector Score Standardized relative valuation Absolute valuations 9 5 Sentiment EPS 4 Valuation 3 Macro Momentum Financials Market Slide 9

30 Contribtion to score M Forward PE Standardized PE Materials - Overweight - We are overweight materials - Primarily due to very attractive valuations - Following the last period of this depressed relative valuations we saw 7%-points outperformance of materials compared to the broader market - A normalization of the discount premium would generate approximately 9% outperformance - The biggest risk to the position is an escalation of the global trade war - While we due see a risk for the sector on the basis hereof we note that valuations are already reflecting it Standardized relative valuation Contribution to House View Sector Score Absolute valuations Sentiment EPS Valuation Macro Momentum Materials Market Slide 3

31 Contribtion to score M Forward PE Standardized PE Industrials Overweight - We maintain an overweight to industrials - In our view we are diverging from the market in terms of the tactical manufacturing outlook for the US - While PMIs in general have risen we have seen valuations for industrials fall - Thereby removing the close to only negative factor for the sector - We also note that EPS revisions have been positive for the sector and that momentum continues to be favorable Standardized relative valuation Contribution to House View Sector Score Absolute valuations 3 Sentiment EPS Valuation Macro Momentum Industrials Market Slide 3

32 Contribtion to score M Forward PE Standardized PE Consumer Discretionary - Underweight - We remain underweight to Consumer Discretionary - While momentum and macro remains positive the sector is constrained by trading at elevated levels compared to its historical premium - Consumer Discretionary are also relatively highly exposed to rising wages - As labour market shortages will continue to build for the US we expect this to erode margins and hamper the upside potential for upward revisions - Even though the sector is set to experience strong topline growth given the high levels of consumer confidence - On a technical level we note that sentiment has turned negative for the first time since 6 - Given tactical support to enter into an underweight Contribution to House View Sector Score Standardized relative valuation Absolute valuations Sentiment EPS Valuation Macro Momentum Consumer D Market Slide 3

33 Contribtion to score M Forward PE Standardized PE Consumer Staples - Underweight - As we believe all bond proxies should underperform on a relative basis as yields rise we underweight Consumer Staples - Although valuations are cheap we expect the sector to underperform as the macroeconomic environment continues to gather pace - The sector is trading more than standard deviations cheap compared to its recent history - As for Consumer Discretionary we expect the sector to face increasing margin pressures from rising labour costs - The underweight is primarily motivated by the defensive nature of the asset class Standardized relative valuation Contribution to House View Sector Score Absolute valuations 3 Sentiment EPS Valuation Macro Momentum Consumer S Market Slide 33

34 Contribtion to score M Forward PE Standardized PE Health Care - Neutral - We are neutral Health Care - The sector has historically underperformed in a rising yield and inflation environment - Making it hard to build a strategic case for the sector - We do not introduce an underweight since all the relative signals for the sector are relatively muted Standardized relative valuation Contribution to House View Sector Score 4 Sentiment EPS 3 Valuation Macro Momentum Absolute valuations Health Care Market Slide 34

35 Contribtion to score M Forward PE Standardized PE Tech - Overweight - We are overweight tech despite very stretched valuations - Positive momentum and EPS revisions are dominating expensive relative valuations - Over the last couple of quarters we have seen accelerating earnings momentum which has supported the relative performance of the sector - As we have gotten further confirmation of this in the Q earnings we are looking for continued strong performance at least into H 8 - The recent tax reform increases the likelihood for rising CAPEX in the tech sector which we expect to accelerate the already strong earnings growth - This is also slowly starting to be confirmed in earnings Standardized relative valuation Contribution to House View Sector Score Absolute valuations 4 3 Sentiment EPS Valuation Macro Momentum IT Market Slide 35

36 Contribtion to score M Forward PE Standardized PE Telecommunication - Neutral - We are neutral Telecommunication as we believe the recent relative selloff has made the sector relatively cheap - As for Consumer Staples the sector is in oversold territory and is trading close to standard deviation on the cheap side compared to its recent history - Although we are neutral on the sector we note that earnings revisions are a negative drag for the sector and we stress that its bond like proxy characteristics should cause it to underperform in the current strong macroeconomic environment - We are therefore inclined to sell into strength that eradicates the recent valuation cap Standardized relative valuation Contribution to House View Sector Score Absolute valuations 4 3 Sentiment EPS Valuation Macro Momentum TC Market Slide 36

37 Contribtion to score M Forward PE Standardized PE Utilities - Underweight - We are underweight utilities as we expect the sector to underperform due to its bond like characteristics once yields starts to rise - Momentum, relative earnings revisions, and macro are all supporting our negative stance - More than any other sector we expect utilities to underperform in the new growth+inflation scenario - While rates have moved higher over the last couple of quarters we do not expect the trend to settle as labour market shortages in the US becomes ever more pressing Standardized relative valuation Contribution to House View Sector Score Absolute valuations Sentiment EPS Valuation Macro Momentum Utilities Market 5.4 Slide 37

38 Summary Decision variables Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

39 Risk Environment - Our primary risk scenario is one in which macro momentum starts to falter significantly - The risk scenario reflects our view that we have entered a new regime in which growth and inflation both are of importance - Compared to the one of 6-7 where focus was solely on growth - The market is in our view developing as would be expected in the later stages of the business cycle - Rates, inflation, and volatility all rising - In such a scenario we believe that equities will also rise as long as growth remains strong - As we are accepting that inflation pressures will not ease from here we are therefore left with a scenario in which equities will only be able to sustain gains with positive macro - Therefore the focus has changed from inflation (which is here and which will rise) to macro - We do not have a global trade war as our primary risk scenario - Although the risk of it escalating has risen over May and early June - The current tariffs being in place still appears to be limited in scope and the market reaction has so far been negligent - We see the latter as a consequence of the very opaque discussion process which is currently driving everything Inflation appears ready to break out on the upside. The NY FEDs underlying inflation gauge is pointing towards a further acceleration. Recession risk indicators are still at very low levels. Slide 39

40 Disclaimer This report has been compiled by SEB Group to provide background information only and is directed towards institutional investors. The material is not intended for distribution in the United States of America or to persons resident in the United States of America, so called US persons, and any such distribution may be unlawful. Although the content is based on sources judged to be reliable, SEB will not be liable for any omissions or inaccuracies, or for any loss whatsoever which arises from reliance on it. If investment research is referred to, you should if possible read the full report and the disclosures contained within it, or read the disclosures relating to specific companies. Information relating to taxes may become outdated and may not fit your individual circumstances. Investment products produce a return linked to risk. Their value may fall as well as rise, and historic returns are no guarantee for future returns; in some cases, losses can exceed the initial amount invested. You alone are responsible for your investment decisions and you should always obtain detailed information before taking them. If necessary, you should seek advice tailored to your individual circumstances from your SEB advisor. This material is not directed towards persons whose participation would require additional prospectuses, registrations or other measures than what follows under Swedish law. It is the duty of each and every one to observe such restrictions. The material may not be distributed in or to a country where the above mentioned measures are required or would contradict the regulations in that country. Therefore, the material is not directed towards natural or legal persons domiciled in the United States of America or any other country where publication or provision of the material is unlawful or in conflict with local applicable laws. Slide 4