SEB House View. 12 December 2018

Transcription

1 SEB House View December 8

2 Summary House View factors Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

3 Summary - We keep risk utilization at 65% despite the failure of global equities to rise from the lows - The likelihood for the FED to pause the rate hike cycle in H 9 has increased with the early December speech by Powell, the Q4 decline in commodity prices, and the slowdown in global growth - A more dovish FED strengthens the valuation argument which as of writing is our primary motivation to be overweight risk in general and equities in particular - We view the correction as having gone too far given the global strategic growth outlook and the strong US tactical macroeconomic momentum - The trade deal/truce between the US and China does not remove the risk stemming from the trade war - However it is not a negative and the correction following the G meeting is an overreaction and a misinterpretation by the market - Given the comments from Kudlow and China following the truce we assign a higher likelihood that a deal will be reached than what we did pre the G meeting - Sentiment is currently too negative given the economic fundamentals - Improving EM and Chinese PMIs are challenging the negative narrative which is currently dominating the markets - Economic fundamentals are not indicating a recession in 9 - And as such we should be presented with another year of strong enough earnings growth for equities to outperform bonds 65% 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 positioned for a non-recession, but still late cycle, 9 - It is therefore tilted towards carry/value in equities and EM FX instead of High Yield - The equity carry is to be interpreted in the sense that we still foresee earnings growth to be higher than bond yields - And as MSCI World is trading at the lowest forward PE levels since 3 we do not expect to see further multiple contraction - We maintain the view that MSCI World can and should trade with a 5.X handle measured on a M forward PE basis; as long as US Y yield remains below 3.5% - For EMD we are seeing not only attractive carry but also value following the 8 correction - The correction has brought valuations of EM FX down too far relative to economic fundamentals - This argument is being further supported by the repricing of the FED rate hike cycle - While this has yet to lift EM FX in earnest it has ensured that the asset class has weathered the December correction well - The idiosyncratic risks that have dominated EM over 8 have fallen out of focus and we see no obvious EM related geopolitical events which during H 9 could come to dominate EM FX Model Portfolio Government Bonds Equities Investment Grade High Yield Bonds Emerging Market Debt Commodities Cash -% -3% % % % 54% 45% 9% 3% 3% % % % 8% 5% 3% 4% 7% % % % PF BM Diff Slide 4 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 Regional equity model portfolio - We maintain an overweight to Emerging Market Asia financed by an underweight to Developed Markets - Bottom-up EPS estimates have been revised significantly lower for Emerging Markets over the last couple of quarters - Downward revisions have pushed 8 and 9 estimated EPS growth below that of DM - With EM FX at significantly lower levels we see the downward revisions as overdone - We expect that stabilization in EM FX will lead to positive EPS revisions and that this in itself will support EM equities - Sentiment on EM equities has taken a larger hit by the trade war than sentiment on DM equities - Largely as a consequence of the more export oriented nature of EM relative to DM - Given that various investor surveys are pointing towards a very defensive positioning of TAA money to EM equities we see the trade war as largely priced for EM - We expect EM equities to be supported by the recently announced reforms in China and the fiscal and monetary stimulus - We are hesitant to put too much weight on the hard landing scenario for China and see the current growth moderation as controllable and a consequence of a shifting growth contribution; thereby taking comfort in the stimulus measures Regional equity positioning EM Ex. Asia EM Asia East Asia ex. Japan Sweden Japan Europe North America -% -% -% 5% 5% % % 8% 4% 3% 3% % % % % 8% 8% 9% % PF BM Diff 53% 55% Strategic allocation follows MSCI All Country Slide 5

6 Expected return, % Expected 3M return, % Expected return, % Expected return, % Equity Risk and Return Estimates Figure : month forward looking return expectations Slide Swedish equities Figure 3: M expected risk and returns EM Equities DM Equities Investment Grade (.%/.%) Money Market (-.4%/.%) - Fixed Income (-.8%/.%) EMD LC High Yield Commodities Investment Grade Money Market Fixed Income Source: SEB Swedish equities ( 9.5%/.3%) DM Equities EM Equities ( 8.%/ ( 8.3%/.%) 9.3%) EMD LC ( 5.%/ 9.4%) High Yield ( 3.8%/ 4.5%) Commodities ( 3.3%/ 6.4%) M Now Expected risk, % Source: SEB Figure : month forward looking return expectations for equities and bonds Figure 4: Implied returns* Commodities.4.3 High Yield EMD LC Investment Grade 3..9 Equities -.-. Fixed Income * Implied returns are what would make the overlay portfolio mean variance optimal. For a further description see the whitepaper Implied Returns, SEB IM 8 DM Equities 8.% Fixed Income -.8% Source: SEB Now Before last change.. Cash Source: SEB

7 Active weight, % Active weight, % Active weight, % Active weight, % Historical House View Allocation Figure : Equities Figure : High Yield 6 5 9% % Figure 3: Emerging Market Debt Figure 4: Fixed Income* % 5 -% Slide 7 * The 4-5 combined overweight to equities and fixed income was financed by an underweight to Investment Grade, Commodities, and EMD.

8 Risk utilization Expected outperformance BPS Expected return, % Expected returns - The M return expectation is 4.3% - The bulk of the return is expected to be delivered by equities - The return expectation is lower now than last month - Driven by a lower return expectation on equities, credits, and Emerging Market Debt Figure : Absolute expected returns PF: 4.3% BM: 3.7% Figure : Risk utilization since inception 9 Figure 3: Relative expected return* % 5 Relative: 58 bps Slide 8 * Shows the M forward expected outperformance of the model portfolio compared to the strategic allocation.

9 Summary House View factors 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 - Valuations as a factor has been lifted to one of the primary drivers of our tactical overweight to risk - The correction following the trade truce between the US and China has brought forward valuations down to the lowest levels since 3 - While the truce/deal does not solve the trade war we fail to see it as a negative and something which ensures that the risk premia stemming from the trade war should be increased - On the basis of comments from Kudlow and China we conversely reduce our estimate of the risk premia created by the trade war - I.e. we see the correction as being a misinterpretation by the markets - On a strategic horizon valuations are not a positive - As we are entering the later stages of the business cycle we expect a gradual downward pressure on multiples - But on the tactical horizon and with the dovish FED talk we have gone too far, too fast - Central banks as a factor has increased in importance since the last House View meeting - We expect to see speculation about a possible pause in the rate hike cycle influencing markets over Q 9 - This follows the dovish speech by Powell on the FED being close to the neutral rate Slide Figure : SEB House View judges positioning and valuations as being the primary drivers of our overweight to risk. The correction has run too far given the economic fundamentals Earnings Sentiment Positioning Valuations Macro Politics Central Banks Importance Source: SEB Figure : Central Banks have resurfaced as an important factor for the markets. We expect speculation about a FED rate hike pause to be dominating markets over Q Valuations Positioning Macro Earnings Sentiment Central Banks Politics Change in importance Source: SEB

11 Summary House View factors Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

12 Developments in the Markets - As optimism on the trade truce between the US and China turned to dismay global equities retested the lows of November - The market rout following the G meeting was accelerated by a range of idiosyncratic events such as Trump tweets and the arrest of Huawei s CFO - The latter being seen and feared as an escalation in the trade war; despite the truce being signed just a few days prior - Due to the funeral of former US president George Bush Sr. US markets were closed Wednesday the 5 th of December - The reduced liquidity on Tuesday the 4 th of December was in our view also a contributing factor to the market rout - Powell indicated that the current funds rate was close to the long term neutral level - As a consequence the market went from pricing ~ to less than hike for 9 - US Y rate fell to.8% and the US yield curve flattened such that the 5Y-Y spread went negative for the first time since 7 - We note that the FED is projecting 3 hikes for 9 - But expect to see downward revisions to the dots if not in December then in Q 9 - EM assets have despite all the market volatility faired relatively well - Indicating that as predicted it had been the asset class which had discounted the trade war the most Figure : Following Powell's speech on the FED funds rate being close to neutral we saw a significant repricing of the FED 9 rate hike cycle. Figure : For the first time since 7 the US 5Y-Y curve inverted. This is usually seen as a harbinger for recession. Slide

13 Economy Developed Markets - Both Manufacturing and Non-Manufacturing ISMs surprised on the upside - The reacceleration in tactical growth momentum for the US goes against the pessimism that is currently dominating financial markets - New orders rose to a healthy 6. for the manufacturing index despite a drop in exports - Indicating that the domestic growth momentum of the US so far is strong enough to mitigate the negative pressures from Europe and Emerging Markets - Non-farm surprised on the downside for November - Weaker than expected wage growth was seen as a positive given that it could give cover to a more dovish FED - Anecdotal evidence is still highly indicative of a tight labour market but the divergence between hard and soft data on wages has been in place for years and predicting when the Phillips-curve kink kicks in has so far been a dangerous endeavor - European data have remained weak over November in general - PMIs have continued to decline as the uncertainty regarding BREXIT and Italy continues to dominate the economic agenda - While German industrial production rose by less than expected it still appears that the negative trend for now has been broken - The positive surprise in factory orders indicates that we could see a rebound in German growth, which has been held back by especially the auto industry, during Q3 Figure : Both ISM Manufacturing and Non-Manufacturing rose last month. The reacceleration in US tactical growth momentum goes against the current market pessimism. Figure : The strength in ISM Manufacturing new orders should translate into strength of hard data over the coming months. Slide 3

14 Economy Asia and Emerging Markets - Tactical growth momentum for the EM space improved over November - This is building on the gains from October and it is therefore starting to look like the growth moderation of 8 is coming to an end - For China we note that the composite Caixin PMI rose driven by services - EM Inflation rose over November - The rising inflation is largely driven by Turkey and South Africa which both have seen severe pressure on their FX rates over 8 - For especially Turkey we see the inflation rate as having reached a peak - With the stabilizing Lira reducing the inflationary pressure from import prices - The rising EM inflation reduces the likelihood for monetary stimulus over the coming months - However with the repricing of the FED funds curve the universe will import free stimulus from the US - Trade numbers out of China and South Korea continues to look weak - A reversal herein on the back of a trade deal with US is needed in order for the market to significantly change its outlook on EM growth Figure : The broad EM PMI improved for the second consecutive month. Indicates that the 8 growth moderation is coming to an end. Figure : The improving PMI for EM was driven by strength in Brazil, Russia, and India. The strength in Brazil follows the October elections. Slide 4

15 Summary House View factors Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

16 Contribution to surprise ISM Non-Manufacturi... Personal Spending Chigaco FED Conference Board Cons ISM Manufacturing Empire Factory Orders Leading Indicator MoM FED Labor Market Con Kansas FED Housing Starts Building Permits Personal Income Existing Home Sales Michigan Consumer Durable Goods Non-Farm NAHB IJC Philly FED NFIB New Home Sales SEB House View - US surprise indicator - SEB House View s US surprise indicator dropped back into negative territory over November - The weakness in surprises has in large part been driven by weakness from the housing market - Both of the ISMs are contributing positive to the headline index - The level of US macro has started to moderate following a stellar 8 - It has long been our view that the 8 growth would moderate going into 9 as the tailwinds from the tax reform and the infrastructure spending package would ease - We note however that the level of macro is still ~ standard above what it has been at the last 5 years Figure : US macro surprises have turned negative. Driven by weak numbers from the housing market Max: 8-4- Min: Mar Apr May Jun Jul Aug Sep Oct Nov Dec Figure : SEB House Views macro surprise indicator has converged down to the equity market. 3 Figure 3: Consumer confidence and ISM Non-manufacturing are the primary drivers behind the positive surprises Surprise -. - SP Slide 6 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan *Surprises vs. rolling 3 month return of SP

17 Spain Manu Markit DE Factory Orders Spain Serv Markit FR Serv Markit Spain Production IT Business Conf. IT Consumer Conf. IFO Current GFK Consumer Conf. Consumer Conf. IT Manu Markit FR Consumer Conf ZEW Expectation IFO Expect DE Retail Sales DE Production IFO Business ZEW Current Markit EU Service DE Manu Markit Contribution to surprise FR Manu Markit Markit EU Man DE Serv Markit SEB House View - EU surprise indicator - SEB House View s European macro surprise indicator remain in negative territory - Driven primarily by a series of negative PMIs for Germany and France - The correlation between European equities and European macro surprises have been low over 8 - European equities have trade more in line with the level of macro; which have been eroding for the region throughout the year - While European macro continues to fall it is important to note that momentum have improved since the summer and actually has started to stage an attempt to turn positive Figure : European macro surprises remains negative. The improvement in our indicator in early September turned out to be a false dawn Max: 8--5 Min: Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Figure : The correlation between European macro surprises and equities remains very low. Figure 3: It is primarily the German and French PMIs which have surprised on the downside..5 - Surprise - Stoxx Slide 7 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan *Surprises vs. rolling 3 month return of Stoxx 6 -

18 NFIB Retail Sales Deviation from long term level Philly FED ISM Non-Manufacturing Conference Board Cons ISM Manufacturing ISM Manufacturing New Orders Factory Orders Durable Goods Personal Income Construction Contribution to momentum ISM Non-Manufacturing Retail Sales Personal Income Conference Board Cons Factory Orders ISM Manufacturing New Orders ISM Manufacturing Construction Durable Goods NFIB Philly FED SEB House View - US macro monitor Figure : Level of US macro Figure : US macro momentum.5 Max: Max: Min: Q3-6 Q4-6 Q-7 Q-7 Q3-7 Q4-7 Q-8 Q-8 Q3-8 Q4-8 Q Q3-6 Q4-6 Q-7 Q-7 Q3-7 Q4-7 Q-8 Q-8 Q3-8 Q4-8 Q-9 Min: 8-- Figure 3: US macro indicators deviation from level of 5 last years Figure 4: Contribution to US macro momentum Slide 8-8

19 Deviation from long term level IFO Current GFK Consumer Conf. IT Consumer Conf. Consumer Conf. IFO Business IT Business Conf. ZEW Current FR Serv Markit DE Factory Orders FR Consumer Conf DE Retail Sales IFO Expect DE Production FR Manu Markit Markit EU Service Spain Manu Markit Spain Production DE Serv Markit Spain Serv Markit Markit EU Man DE Manu Markit ZEW Expectation IT Manu Markit Contribution to momentum Spain Manu Markit DE Production DE Factory Orders Spain Serv Markit Spain Production GFK Consumer Conf. FR Serv Markit IT Consumer Conf. IT Business Conf. DE Retail Sales Consumer Conf. FR Consumer Conf IT Manu Markit ZEW Expectation ZEW Current IFO Current Markit EU Man FR Manu Markit IFO Expect IFO Business DE Manu Markit Markit EU Service DE Serv Markit SEB House View EU macro monitor Figure : Level of EU macro Figure : EU macro momentum.5 Max: Max: Min: 6--5 Q3-6 Q4-6 Q-7 Q-7 Q3-7 Q4-7 Q-8 Q-8 Q3-8 Q Min: Q3-6 Q4-6 Q-7 Q-7 Q3-7 Q4-7 Q-8 Q-8 Q3-8 Q4-8 Figure 3: EU macro indicators deviation from level of last 5 years Figure 4: Contribution to EU macro momentum Slide 9 *Surprises vs. rolling 3 month return of Stoxx 6 -.5

20 Summary House View factors Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

21 In Focus #: A welcomed US-China Trade Truce A 9-day truce was agreed between the US and China that halted the escalation of tariffs on $ BN Chinese goods, which would have otherwise risen to 5% on January st 9 Although we are far from an actual trade deal, the success of the meeting was the prevention of an escalation of the trade war, as well as the first steps of significant negotiations with the outcome of finding some sort of trade agreement The markets have been jittery since the latest correction, and any communication from either the US or Chinese administrations will be read in too much Use of social media by the US president catches the attention of the broad public, and is used in order to assert his influence and reinforce his image of a strong man to the public Whilst the use of social media is to communicate with the broad public, any meaningful bilateral relations from the WH will rather take place over a two-way communication Nevertheless, we are aware that any tweets in this jittery market will add to short-term volatility The Chinese response has been rather mute, however, they are willing to find an agreement, and have expressed a favourable disposition to the demands by the US It is still a long way to go if there are going to be any structural changes to the Chinese trade policies, such as stopping the transference of intellectual property rights Still the Chinese have characterized the meeting as being very successful, and have welcomed the trade truce What was agreed? What are the longterm effects? A ceasefire of the trade war until the st of March 9 China agreed to purchase American products in order to reduce the trade imbalance Although there is much uncertainty about what was agreed, significant negotiations can now start on the trade disputes Bilateral relations will begin immediately, and negotiations will set the tone for future policies on intellectual property rights and non-tariff barriers Easing trade tensions will have a positive impact on equities Overall there was a positive incentive to find a de-escalation of the trade dispute, but the details of a deal will likely face large hurdles Slide

22 In Focus #: Upcoming political events Dec. 3-4: EU Council February: US Debt April: Likely Indian Elections South African elections Italian PM presents amended budget deficit to EU The debt ceiling suspension bill comes to a halt by the end of February, and this will also lift the debt limit The outcome of Indian general elections could rise market concerns in case of an unstable coalition Elections in South Africa will be held most likely early summer January March May December February April Summer Jan. : Brexit In case MPs refuse to ratify the Brexit agreement, the government will have to present its next steps to parliament March st : Trade truce DL US and China trade truce deadline March 9 th : Brexit deadline UK officially leaves the EU if there is no extension of the deadline May 3-6: EU Elections Elections to the European Parliament Slide

23 Summary House View factors Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

24 Developed Market Equities M Outlook - Developed Market equities will be supported by strong earnings growth over the coming months and will deliver a positive return in excess of all fixed income asset classes - On a month horizon we expect to see downward pressure on multiples - We expect equities to rally into year end and thereby lifting multiples from current levels - But over 9 the range in which multiples are to trade in will slowly decline in line with the maturing business cycle and the FED rate hike cycle - 9 earnings growth is projected at 8.8% for MSCI World - This estimate is down from September where the expectation stood at % - The downward revision reflects an increasing margin pressure from both higher financing costs and wages - We expect earnings growth to come in between 6%-% - Sufficient to compensate for multiple contraction pressure over 9 - The bulk of the earnings growth to global equities will come from the US - Although soft data is rolling over for Europe and the US the levels of the latter are still highly supportive for continued equity gains - We see the likelihood for an earnings recession as very limited - 8 presented peak earnings growth but not peak earnings Figure : MSCI World is projected to deliver earnings growth of 8.8% in 9. This includes downward revisions to the estimates over October and November. Figure : A simple regression of tactical US indicators on the SP5 indicates that equities have lagged macro over 8. Slide 4

25 Emerging Market Equities M Outlook - We expect positive absolute returns of Emerging Market equities over the coming year - We see the downward revisions to EPS estimates over 8 as overdone - The weakness in EM FX over 8 will mitigate the negative impact of the trade war - Investor surveys are indicating a very defensive allocation among TAA managers towards EM equities - EM equities is the market which to the largest decree have priced in the trade war - Any kind of soft resolution to the trade war will in our view therefore create a positive repricing of the region - I.e. limited downside but significant upside to EM equities in relation to the trade war - Our positive return expectation is built primarily on a constructive view towards earnings growth - Correcting for sector composition then MSCI EM Asia is trading at roughly the same level as MSCI World - The EM risk premium is only to be found in LatAm - The Chinese stimulus will in our view support EM equities as a whole Figure : Correcting for sector composition then MSCI EM Asia is trading at a roughly the same levels as MSCI World Figure : The real EM equity premium is to be found in LatAm Slide 5

26 High Yield Bonds M Outlook - High Yield bonds still looks set to deliver higher returns than Investment Grade and government bonds - But its relative attractiveness to equities is increasingly diminishing the further we move into the later part of the business cycle - While earnings growth continues to look strong (favoring equities) we are seeing increased leverage (in isolation negative for credits) - On the basis of loan officer surveys, soft data, and the Q3 earnings reports we expect to see the trend of increasing leverage continuing in 9 - As the credit market is currently not pricing in a significant rise in defaults the upside to a strong/positive EPS growth scenario is limited - Historically High Yield has trailed equity returns the further ahead the cycle has gone - We expect the same pattern to materialize this time around - We expect that higher US rates will lead to spread compression for US High Yield - But not enough to avoid a negative impact from aggregated duration in 9 - Despite our increasingly cautious stand towards High Yield we stress that we do still not foresee a significant repricing of default risk - Credit conditions are still light which historically has been a good predictor of default risk Figure : The absolute yield on US high yield is standing at the lowest levels in years after hedging costs. Figure : The relative return of High Yield to equities is usually the strongest following a slowdown. In the later stages of the last 3 cycles we saw underperformance of HY to EQ. Slide 6

27 Emerging Market Debt M Outlook - Our view on Emerging Market debt is very much a two fold story - While we on a tactical horizon see potential for a bounce back following the 8 correction we stress that fundamentals have yet to improve significantly - Current account balances have stopped improving and are now deteriorating for some of the big EM countries - GDP growth in Brazil, Turkey, and South Africa continues to look weak and is showing few signs of turning - Although fundamentals have yet to turn for the better we see the 8 correction as overdone for now - Many of the idiosyncratic risks which dominated the index during 8 have stabilized (for now at least) - Brazil is past its election with a new pro-business government and Turkey has tried to normalize relations with the US and has hiked rates in response to the Lira weakness - One of the many culprits behind the correction was the repricing of the FED rate hike cycle - As we are getting increasingly closer to the neutral rate we expect to see a reduced pressure on EM from the FED - Historically the pressure on EM FX from the FED has always been strongest in the initial stages of the rate hike cycle; a stage which has been prolonged by the very gradual increase in US rates Figure : Many of the strategic fundamentals for EM still lacks momentum. For example we are now starting to see deteriorating current account balances. Slide 7

28 Consumer D Utilities TC IT Health C... Industrials Financials Consumer S Materials Sector overview Sector UW N OW Figure : House View Sector Quant Score Financials Consumer Staples Consumer Discretionary UW N OW 3 Sentiment EPS Valuation Macro Momentum Energy N Industrials Telecommunication Materials UW N N - Health Care OW - Info Tech Utilities UW OW Figure : House View Sector Quant Factor Sector Sentiment EPS Valuation Macro Momentum Financials POS POS POS NEG NEG Materials POS NEG POS NEG NEG Industrials POS NEG POS POS NEG Consumer D POS POS NEG POS POS Consumer S NEG POS NEG NEG POS Health Care NEG POS NEG POS POS IT POS NEG POS POS POS TC NEG NEG NEG NEG POS Utilities NEG POS NEG NEG POS Slide 8

29 Contribtion to score M Forward PE Standardized PE Financials - Overweight - Despite the weak performance of Financials we maintain an overweight - We still think that a strong US economy will benefit the sector over 9 - Valuations and EPS revisions are currently the most positive factors for the sector - Fighting the negative pressure from momentum Figure : Standardized relative valuation Figure : Contribution to House View Sector Score Sentiment EPS Valuation Macro Momentum Figure 3: Absolute valuations Financials Market Slide 9

30 Contribtion to score M Forward PE Standardized PE Materials - Underweight - We are underweight materials - Large valuation discount is not strong enough to mitigate the large negative pressure stemming from negative EPS revisions and large negative momentum - The sector has more than anything discounted the trade war and has underperformed significantly over 8 - The sector trades at the lowest relative and absolute valuation levels in years - The valuation discount is however fast being eroded by negative EPS revisions - We recommend to stay underweight until momentum turns more positive Figure : Standardized relative valuation Figure : Contribution to House View Sector Score Figure 3: Absolute valuations Sentiment EPS Valuation Macro Momentum Materials Market Slide 3

31 Contribtion to score M Forward PE Standardized PE Industrials Neutral - We are neutral industrials despite a high isolated model score - Despite the neutral stance we note that the sector is trading relatively cheap compared to the market - At the same time we are seeing positive EPS revisions and sentiment being relatively negative - Momentum is the only factor which is negative for industrials - And this is only by a slight margin Figure : Standardized relative valuation Figure : Contribution to House View Sector Score Figure 3: Absolute valuations 4 3 Sentiment EPS Valuation Macro Momentum 9 8 Industrials Market Slide 3

32 Contribtion to score M Forward PE Standardized PE Consumer Discretionary - Neutral - We are neutral Consumer Discretionary - Despite the high valuations we think that the sector still has room to outperform relative to the market - We note that momentum and macro are the primary supportive factors for the sector Figure : Standardized relative valuation Figure : Contribution to House View Sector Score Figure 3: 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 are underweight Consumer Staples - The defensive nature of the asset class has led it to outperform over the December correction - However the outperformance has not been as strong as would have been expected in a full bear market and it is still lacking discretionary YTD - Furthermore we note that negative EPS revisions, combined with the correction of December, has led to sector to trade at expensive levels Figure : Standardized relative valuation Figure : Contribution to House View Sector Score 3 Sentiment EPS Valuation Macro Momentum Figure 3: Absolute valuations Consumer S Market Slide 33

34 Contribtion to score M Forward PE Standardized PE Health Care - Overweight - We are overweight Health Care - Strong momentum and positive EPS revisions are supporting the sector - The sector is trading at a historical high premium to the market - But the momentum and EPS revisions are dominating it - Health care is the sector which has the highest score in our model Figure : Standardized relative valuation Figure : Contribution to House View Sector Score Sentiment EPS Valuation Macro Momentum Figure 3: Absolute valuations Health Care Market Slide 34

35 Contribtion to score M Forward PE Standardized PE Tech - Overweight - We are overweight tech despite the rout which we have seen over Q4 8 - We still note that the sector as a whole has delivered the 4 th highest return over 8 - Although the sector has not trade on the back of valuations previously we note that they have now come down significantly compared to its own history - Furthermore our model indicates that sentiment has turned too negative and is therefore now becoming a positive factor Figure : Standardized relative valuation Figure : Contribution to House View Sector Score 4 Sentiment EPS 3 Valuation Macro Momentum Figure 3: Absolute valuations IT Market Slide 35

36 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 - Valuations, 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 Figure : Standardized relative valuation Figure : Contribution to House View Sector Score 4 3 Sentiment EPS Valuation Macro Momentum Figure 3: Absolute valuations Utilities Market Slide 36

37 Summary House View factors Macro and Markets Market Indicators In Focus Asset Class and Sector Views Risk Environment

38 Risk Environment - Our primary tactical risk scenario is an escalating trade war - Not in the sense that we expect it to significantly hamper global GDP growth in a way which will be strong enough to erode earnings - More in the sense that it will drive volatility and thereby lead to further multiple contraction than what we have seen up until now - Although the trade truce which was negotiated at the G meeting in Argentina in isolation should be seen as a positive it does not remove the risk for the trade war completely - As we have seen over December the market is currently captured by idiosyncratic risks such as the arrest of Huawei's CFO - Unless these risks dies down we fear that the market sentiment will translate itself into reduced business investments and lower consumer confidence - The likelihood for this scenario is currently the highest it has been ever since the election of Trump - The risk for a policy mistake by the FED has been reduced on a tactical horizon - The early December speech by Powell indicates that the current FED projection of the rate hike cycle is too optimistic and that we could see a pause in the cycle - This is in our view a significant shift from the early October speech where it seemed that the FED was intending to look past market volatility and continuing hiking into 9 Figure : The NY FEDs recession indicator have edged up over the last couple of months. It is however still not a levels seen prior to the 99 and 8 recessions. Figure : The significant repricing of the FED indicates that the market has taken away the likelihood for a policy mistake from the FED. Big change compared to early October. Slide 38

39 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 39