House View Commitee - sebgroup.com · Macro Importance Earnings Positioning Valuations Politics Central Banks-10-8-6-4-2 0 2 4 6 8 10-8 -6 -4 -2 0 2 4 6 e Change in importance House

SEB House View04 March 2020

SummaryHouse View factorsMacro and MarketsMarket and Fair Value IndicatorsIn FocusAsset Class and Sector ViewsRisk Environment

Slide 3

Summary

- The markets will be dominated by the Covid-19 virus over the coming months- No (realistic) fiscal or monetary stimulus will be enough to stop

the correction in global equities if not the number of infections stabilizes; it is the timing of stabilization that determines whether this is a buying opportunity

- We expect significant global monetary stimulus over the coming months; with market focus being predominantly on the FED- The market is pricing, and we are expecting, FED cut(s) in March

- We assign a very low probability of the FED not cutting which would be a negative scenario for equities

- We expect monetary stimulus to be a positive on the announcement but only to have a sustained effect if the Covid-19 stabilizes given that monetary stimulus is a poor instrument to halt a supply driven correction

- If Covid-19 stabilizes and we receive monetary stimulus we expect a sharp bounce in equities- We expect equities to discount the upward leg of a V-shaped

recovery while monetary policy remains accommodative- If the stabilization comes later than mid-April we see a reduced

likelihood for a rebound in equities as second round effects on growth can have grown too large- The negative wealth effect from falling equities and the

sentiment shock slowing consumption- We will almost completely disregard Q1 macro and earnings

- In a world of low yields, and with an obviously idiosyncratic and temporary factor lying behind the slowdown, we expect the markets to look past most, if not all, Q1 data

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 50% being neutral).

55%

Slide 4

Asset Allocation

- The aggregated risk utilization is dominated by Covid-19 and central banks- It is futile to look for macro and/or earnings to support risk taking

on the upside- With the caveat that it matters on the downside given that

the recession likelihood is rising- In a relative perspective equities has significantly more upside

than all other asset classes so forth risk sentiment improves- Of the risky asset classes the spread between equities and high

yield is the most likely to expand- The late stage environment, the tight pricing of High Yield

and core government bonds, and the expected high volatility due to Covid-19 and the US presidential election will all favor equity outperformance relative to credits- Furthermore the decline in commodity prices, even prior

to Covid-19, is all else equal generating a negative pressure on High Yield

- Despite the lagging performance of 2020, due to the strong USD, Emerging Market Debt in Local Currency still looks relatively attractive- We see the underperformance as more of a reflection of the

general flight to safety rather than deteriorating fundamentals- When (if) Covid-19 stabilizes we expect strong EM FX

outperformance relative to the USD given that EM growth should lead and given our expectation of a dovish FED during 2020- This will in our view generate a soft 2017 scenario

which was beneficial for EMD LC

Model Portfolio

Long only portfolio. Yearly VaR(95%) ex. mean between 7% and 21%.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.

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45%

27%

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Cash

Emerging Market Debt

High Yield Bonds

Investment Grade

Equities

Government Bonds

PF

BM

Diff

Slide 5

Regional equity allocation

- EM Asia has, despite Covid-19, outperformed over the last couple of months- This outperformance will continue going into Q2 2020 due to:

- Attractive valuations following the 2019 underperformance- EM Asia is before Europe and the US in the Covid-19 cycle

- The number of infections is stabilizing, for now, in China while it is still rising in Europe and the US- As production picks up in Asia we expect to see

outperformance of the region- The fiscal and monetary stimulus will have a larger effect on

EM equities than FED stimulus will on DM equities - Given the valuation discount of EM equities

- US equities are supported by FED stimulus and a favorable sector composition- We expect a 50 bps cut from the FED in March

- Supporting the growth stocks that has driven the market higher over the last couple of months- I.e. it will support outperformance of US tech relative to

the rest of the world- It is premature to call for a bottom in aggregated risk taking prior

to a stabilization in Covid-19- However when we come out of the contagion phase we

expect the period to be driven by expectations to the upside leg of a V-shaped recovery and accommodative central banks- This will mimic the period of Q4 2019 and as such we

expect to see much the same factor, sector, and regional performance

Regional equity positioning

Benchmark is MSCI All Country

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Europe

Japan

Sweden

East Asia ex. Japan

EM Asia

EM Ex. Asia

PF

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Slide 6

Sector allocation

- It is premature to discount an aggregated bottom in risk sentiment prior to a stabilization in Covid-19- On a sector level it is however noticeable that there has not been

a larger factor rotation- We therefore see no reason to materially change our sector

allocation- The overarching theme of the market discounting a

growth recovery combined with accommodative central banks remains in place

- Utilities are overbought- The sector has more than any other, outside of growth stocks,

benefited from the significant fall in US yields over 2020- The sector is now overbought and we increase the

underweight to a maximum- The sector is trading at a premium of 3.6 forward PE units to

the broad market- This is the highest valuation premium since 2009

- We increase Communication Services to a neutral- We are increasingly viewing the sector as a defensive growth

sector which we prefer in this late stage environment- The valuation premium of the sector has fallen from close to

4 during early 2016 to now being in line with the market- Illustrating the changing nature of the sector

- We maintain our tech overweight- With the sector, on a relative basis, being supported by strong

expected earnings growth and currently strong earnings revisions

Sector positioning

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Utilities

Materials

IT

Industrials

Health Care

Financials

Cons Staples

Cons Discretionary

Comm Services

Slide 7

Swedish equities

EM EquitiesDM Equities

EMD LCHigh Yield

Investment Grade

Commodities

Money Market

Fixed Income

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-1MNow

DM Equities 7.00%

Fixed Income -0.50%

2012 2013 2014 2015 2016 2017 2018 2019 2020-5

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Commodities ( 1.4%/12.2%)

EMD LC ( 6.1%/ 8.4%)

High Yield ( 2.6%/ 4.2%)Investment Grade ( 1.9%/ 3.3%)

DM Equities ( 7.0%/14.5%)EM Equities ( 7.7%/13.7%)

Fixed Income (-0.5%/ 1.4%)Money Market (-0.3%/ 0.1%)

Swedish equities ( 8.0%/14.4%)

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NowBefore last change

Equity Risk and Return Estimates

Source: SEB

Figure 1: 12 month forward looking return expectations Figure 2: 12 month forward looking return expectations for equities and bonds

Figure 3: 12M expected risk and returns

Source: SEB

Source: SEB

Figure 4: Implied returns*

Source: SEB

* Implied returns are what would make the overlay portfolio mean variance optimal. For a further description see the whitepaper Implied Returns, SEB IM 2018

* High Yield and Investment Grade is 50% US and 50% EU

Slide 8A

ctiv

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eigh

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3%

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Historical House View Allocation

Figure 2: High YieldFigure 1: Equities

Figure 3: Emerging Market Debt Figure 4: Fixed Income*

* The 2014-2015 combined overweight to equities and fixed income was financed by an underweight to Investment Grade, Commodities, and EMD.

Source: SEB

Source: SEBSource: SEB

Source: SEB

Slide 9

Expected returns

Figure 1: Absolute expected returns Figure 2: Risk utilization since inception

Source: SEBSource: SEB

PF: 4.4%BM: 4.0%

2015 2016 2017 2018 2019 20202

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Slide 11

MacroEarnings

Positioning

Central Banks

Politics

Valuations

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House View decision variables

- If Covid-19 was a recurring factor in our House View survey it would be the dominating one- It is the key determinant for risk taking in the committee

- Equities will only be able to rally once we see stabilization in Covid-19 for Europe and the US- Still rising number of infections going into April and

stabilization will not necessarily be enough as second round effects on growth will be a headwind- This is a negative as we only expect equities to be

able to come back as long as a V-shaped recovery looks likely

- Macro, earnings, and valuations will not drive the markets over the coming months- We are in a traders market

- Equities will not be able to find support in positive expectations around growth and earnings- We expect little to no reaction of equites to Q1 macro or

earnings numbers- Equity valuations are still expensive in isolation but cheap

relative to fixed income- We do not expect valuations being supportive nor negative

and we therefore significantly reduce the importance hereof- Only caveat is that if Covid-19 starts to fade then

growth stocks looks set to rally once more given the drop in yields and the even more accommodative central banks

Figure 1: Central Banks and Positioning are the all-dominating factors in our framework. If Covid-19 was a recurring factor then it would had been the dominating one.

Source: SEB

Source: SEB

Figure 2: Macro and earnings have dropped in importance. As we are in a traders market it is Positioning, Covid-19, and Central Banks which are going to dominate.


Slide 13

Developments in the Markets

- Covid-19 spread to Italy, South Korea, and Iran going into the weekend of the 22nd-23rd of February- This sparked a significant correction in global equities bringing the

SP500 down some 12%- Although it started due to Covid-19 spreading to Europe it

was during the week taken over as a driving factor by the unwinding of leveraged long positions- The market was in particular commenting on the selling

of the CTA community- The correction did not force a large sector or factor

rotation- Being more orderly than what would have been

expected by the pure magnitude of it- Both growth and EPS estimates have been revised sharply lower

for 2020 due to the negative supply and demand shock- Expected 2020 MSCI World growth is now around 3%

- The equity correction led to a general flight to safety- The US 10Y dropped to a record low of 1.05%

- Supported by a significant repricing of the FED funds curve- With the market pricing in more than 3 cuts for 2020- The repricing of the FED funds curve followed a

statement by Powell on the 28th of February that the FED was monitoring the market and stands ready to act- This was further supported by similar comments

from BOE, ECB, and BOJ

Figure 1: The correction in the SP500 was the 9th largest over a span of 7 trading day since 1970.

Figure 2: As it is becoming increasingly clear that Covid-19 will have a large negative effect on growth we have seen negative EPS revisions to MSCI World.

87 10 08 10 08 11 08 11 11 07 08 10 02 07 01 09 20 02 98 08-30

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Slide 14

Economy – Developed Markets

- As the Covid-19 virus is disrupting global supply chains and playing havoc with demand we expect macro to be extremely volatile over the coming months- This implies that the numbers which are filtering in for early

January carries little value in predicting the development of global growth over the coming months- Despite this it is still worth noting some underlying trends

that were in place when we went into the correction and virus outbreak

- Going into the Covid-19 outbreak both the US and Europe were coming out of the trade war driven slowdown of 2019- The inventory destocking cycle was coming to an end

- Given the supply shock we have seen during 2020 this latent inventory demand has become all the more pressing

- CAPEX intentions were going up in the US- It remains uncertain how this will be affected by Covid-19

- In case of a fast recovery we expect little to no impact on the rising CAPEX trend we saw going into 2020

- European manufacturing momentum were slowly recovering- Driven in particular by Germany

- Of the positive factors this is looking the most vulnerable- Job openings in the US was starting to moderate before the Covid-

19 outbreak- While this is a concern it is worth noting that we are not seeing

any other indication that demand for labour in the US is falling

Figure 1: US Q1 growth has been revised down with 0.2%-points following the outbreak of Covid-19.

Figure 2: Job openings in the US started to moderate prior to Covid-19. This is for now still an outlier but it did have a lead going in the 2008 financial crisis.

Slide 15

Economy – Emerging Markets

- As a function of the Chinese production halt we have seen extreme macro prints for Emerging Markets over February- The Chinese PMIs of February dropped to the lowest levels since

the financial crisis of 2008- As we are exiting the trade war related slowdown this is

naturally a pure consequence of the Covid-19 induced production halt

- We expect a large negative shock to EM growth following Covid-19- But due to improving fundamentals over the past couple of

quarters and due to the resolve, at least partially, of the trade war we expect the region to weather the slowdown

- Entering the Covid-19 crisis we were looking at an Emerging Market universe which was recovering from the 2019 trade war- PMIs in most of the major EM regions were picking up

- Driven by rising new orders and low inventories- LatAm had appeared to be gather momentum despite the

moderating commodity prices- This in particular builds support to our overweight to EMD LC

- Current account deficits have improved over the last couple of quarters- Supporting EM FX rates that had been under pressure for most of

2019

Figure 1: Chinese PMI dropped to extreme levels following the production halt across the Country.

Figure 2: Prior to Covid-19 we were looking at a recovering EM universe. For the first time in more than a year we were seeing concerted strength in EM PMIs.


Slide 17

SEB House View - US macro indicator

Figure 2: The level of US macro close to the average of the last 5 years.

Figure 1: US macro surprises has turned significantly positive.

Figure 3: Macro momentum in the US is the most positive in over 2.5 years.

Source: SEB House View

Source: SEB House ViewSource: SEB House View

- Going into the Covid-19 outbreak we saw significant, positive, macro surprises in the US- Primary driver is the US Housing Market and Manufacturing PMIs

- The level of US macro has almost returned to the average of the last 5 years- Driven by the strongest macro surge in more than 2.5 years

- Note that this is naturally to be pause with the outbreak of Covid-19

- It remains the consumer and the housing market which is looking the strongest in the US

Surp

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Slide 18

SEB House View - EU macro indicator

Figure 2: Very low level of European macro.

Figure 1: European macro surprises have turned negative once more.

Figure 3: Macro momentum remains positive for Europe.



- European macro continues to surprise on the downside- As German manufacturing PMIs have failed to gather pace

- The level of European macro remains below the average of the last 5 years- But momentum has turned positive over the last 2 months

Source: SEB House ViewSu

rpris

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Slide 19

SEB House View – FED Monitor

Figure 2: Number of 25 bps cut priced by the Market

Figure 1: Market pricing of FED funds

Figure 3: Pricing of forward rates at upcoming FED meetings



- The market is pricing in 4 cuts during 2020- This is 2 more cuts than during the last House View meeting- The repricing is a direct consequence of the Covid-19 virus

- On February the 28th the FED by an extraordinary communication signaled that they were monitoring the markets and would stand ready to act- The market took this as a sign that the FED would cut

during March- Were the FED to cut rates by 50 bps that would bring the funds

rate back to 2017 levels


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Slide 20

SEB House View – Risk Indicator



Figure 2: SEB House View Risk Indicator

Figure 1: Extreme states plotted on S&P 500- Our risk indicator has triggered a “panic signal” signaling a buying opportunity- The fall in risk appetite can be explained by volatility shocks both

in the US and the European equity markets- Corporate credit with higher rating, BBB or higher, has

surprisingly enough been resilient to the latest sell-off- Note that we have not seen a significant factor or sector

rotation within the equity market- The last time our risk indicator were at these levels were during

late December 2018- The drop in our indicator has been one of the fastest on record

- Illustrating the fast shift from complacency to panic

Figure 3: House View Risk Indicator Short Time Horizon


Slide 21

SEB House View – EM FX Fair Value Indicator

Figure 1: Short term deviation from fair value

Figure 2: Deviation from fair value over time



- EM FX has sold off over Q1 2020 as a consequence of the Covid-19 outbreak- A premium is therefore starting to build up

- With the aggregated index trading 1.0% below our fair value estimate

- We see value, albeit volatile, in Turkish Lira and Brazilian Real- As a consequence of improving macro

- An improvement which has not been visible in FX given the risk off environment following Covid-19

- For both Turkey and Brazil we are looking at improving current account deficits and macro- Note however that the former is expected to come under

pressure with the escalating political conflict against the EUTurkey

BrazilColombia

South AfricaMexico

PeruMalaysia

HungaryRomania

Indonesia

ThailandPoland

Czech Republic

Russian Federation

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Slide 23

In Focus #1: COVID-19 Update

– The economic impact from the COVID-19 virus remains uncertain, as the effects from the virus could last longer than expected and could have larger downside risks to growth forecasts than anticipated– At the start of the outbreak markets were complacent as

expectations were that the virus could be contained– Outside of China, most cases are in South Korea, Iran and Italy

– It was the spread to Europe which sparked the correction of late February

– In terms of economics then several industries have been hit– In particular the airline industry and companies trading with

China– However, there are positive signs that the virus correction could

be short-lived and that markets could rebound going forward– The number of new Chinese cases reached a peak in early

February, and is now falling– The resumption of work in China has been rapidly increasing,

indicating a recovery in Chinese manufacturing– The number of people released from the hospital or recovered

has also increased as a share of the total number of cases– Markets seem to expect the impact will be contained to Q1 2020– Global central banks are pumping in liquidity into the markets,

and we expect the FED will support the US economy

Figure 1: There are more than 89,000 confirmed global cases of COVID-19. 90% of the cases are still found in China, but cases outside China increased the last week

Figure 2: The total number of new global virus cases per day is falling since the beginning of February. And the share of recovered cases has increased

Slide 24

In Focus #2: US election

– The run for the democratic nominee has kicked off, and betting odds are predicting who will be the next democratic nominee and who will be the next US president– Bernie Sanders had a strong start after first primaries and

caucuses, and is leading in most polls and betting odds – After Super Tuesday on the 3rd of March, when 16 states vote,

including California and Texas, we will have a good indication of the next democratic nominee– By then almost 40% of the democratic delegates will be

selected of the total pledged delegates – Sanders progressive policies include free college, Medicare-for-

all, higher minimum wage, and a top estate tax rate– Markets typically prefer a “non-event” election outcome, so a

Trump win will probably be the most market friendly – However, betting odds are predicting that Sanders would have

the best chance against Trump vs his peers– According to market bets, Congress will probably remain divided

after the 2020 election– Since only one third of the Senate is for re-election, most betting

markets are expecting the Senate to remain Republican– In the case of a divided Congress, the election will probably not

lead to a big shift in policy change as this would usually require a unified government– In particular, in order to pass legislation on transformative

healthcare this would require unified government – And a bipartisan government will probably not provide

potential for fiscal stimulus

Figure 1: Bernie Sanders popularity sky-rocketed after the first primaries and caucuses. Betting odds are now predicting he will be the next democratic nominee

Figure 2: Market odds of Trump remaining in power has increased the last weeks. After the Iowa caucus, Sanders overtook Biden as the frontrunner in the polls


Slide 26

Region Overview

Figure 1: SEB House View region score*Regional equity positioning

Benchmark is MSCI All Country

* Ranked by total score with highest score starting from left

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Slide 27

EM Asia - Overweight

Figure 2: Contribution to House View Region Score

Figure 1: Standardized relative valuation – Current constituents

Figure 3: Absolute valuations – Current constituents



- Sentiment has turned negative on the region following Covid-19- However as Covid-19 spread to Europe and as the number of new

infections started to stabilize in China we have seen relative outperformance of EM Asia relative to MSCI World- Fundamentals such as the continued stimulus from PBOC

supports the region- It appears that Covid-19 for now is stabilizing in China

- However we might get second round effects once the quarantines end

- Production coming back on line should support EM Asian equities

- For now we maintain the overweight to the region since we believe the worst of the spread of Covid-19 is behind us

EM Asia: 13.1

Market: 15.1

EM Asia (sector neutral): 13.8

2014 2015 2016 2017 2018 2019 2020 202111

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Slide 28

EM Ex. Asia - Neutral






- The outlook for EM ex. Asia has improved since late 2019- We expect business sentiment in the region to improve after the

signing of the “Phase One” trade deal- As the region will benefit from a general rise in global trade

- The region has shown resilience to the escalation of Covid-19 - Monetary policy is accommodative

- Brazil have reinitiated their easing cycle that they started in late 2016 and cut their key rate four times in 2019

EM Ex. Asia: 12.1

Market: 15.1EM Ex. Asia (sector neutral): 15.4

2014 2015 2016 2017 2018 2019 2020 202110

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war

d PE


2

4

6

8

10

Ran

k 1-

7 (7

bes

t)

7

6 6

2 2

7

1

5

3

2

2020-03-042020-02-05

Latest 0.4Mean -0.0

-2 std -1.0

+2 std 0.9

2016 2017 2018 2019 2020-3

-2

-1

0

1

2

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 29

Europe - Underweight






- We maintain our underweight to Europe- Macro has failed to pickup for Europe in line with the

improvements in the US- Despite the divergence in growth momentum bottom up

estimates are pointing towards similar EPS growth- This is in our view unrealistic and we expect larger

negative downward revisions in Europe than in the US- Once Covid-19 fades we expect a resumption of the factors that

have driven the markets during 2019- In that scenario we see greater upside potential for US and EM

equities than for EuropeLatest -1.4

Mean -1.1

-2 std -1.4

+2 std -0.8

2016 2017 2018 2019 2020-2

-1.5

-1

-0.5

0

0.5

12M

For

war

d PE

pre

miu

m to

mar

ket

Europe: 13.3

Market: 15.1

Europe (sector neutral): 13.7

2014 2015 2016 2017 2018 2019 2020 202111

12

13

14

15

16

17

18

12M

For

war

d PE


2

4

6

8

10

Ran

k 1-

7 (7

bes

t)

3

4

5

7

4

3 3

4

7

4

2020-03-042020-02-05

Slide 30

Japan - Underweight






- Global trade remains weak – and the Covid-19 virus is threatening key sectors in the Japanese equity market- Key sectors being export heavy manufacturers where stalling

supply chains could hurt these companies more than investors anticipate

- The Japanese economy contracted as much as 1.6% in Q4-19 versus the previous quarter- The decline was lead by private consumption – most likely

related to the hike in VAT that the government conducted during October 2019

- In addition we are skeptical to the pro-cyclical Japanese companies and prefer to take our cyclical exposure in Asian Emerging Markets

Japan: 15.5Market: 15.1

Japan (sector neutral): 13.2

2014 2015 2016 2017 2018 2019 2020 202110

12

14

16

18

20

12M

For

war

d PE


2

4

6

8

10

Ran

k 1-

7 (7

bes

t)

1

3

4

1

7

1

5

7

4

7

2020-03-042020-02-05

Latest -1.9Mean -2.4-2 std -3.1

+2 std -1.7

2016 2017 2018 2019 2020-4

-3

-2

-1

0

1

2

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 31

North America - Neutral






- We see the return potential of US equities as still positive but less attractive compared to Emerging Markets in Asia- US equities continues to trade with a premium to the broad

market- During the latest correction the premium has decreased with

one unit and is now trading more in-line with historical levels- We believe that the risk for a spread of the Covid-19

virus to the North American region is elevated- Bond yields have decreased sharply in the region – which

continues to support the larger bond proxy sectors such as Consumer Staples and Utilities- This should provide further support to the region

North America: 16.6

Market: 15.1

North America (sector neutral): 16.4

2014 2015 2016 2017 2018 2019 2020 202113

14

15

16

17

18

19

20

12M

For

war

d PE


2

4

6

8

10

Ran

k 1-

7 (7

bes

t)

5 5

7

6 6

4

6

2 2

6

2020-03-042020-02-05

Latest 1.3Mean 1.3

-2 std 1.1

+2 std 1.6

2016 2017 2018 2019 20200.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 32

Sector Overview

Figure 1: SEB House View sector score


* We do not take views on Energy or Real Estate. The former is too much of an oil call and the latter is too small a sector. (X) Indicates last months positioning.

Sector UW N OW

Communication Services (UW) N

Consumer Discretionary OW

Consumer Staples N

Financials N

Health Care OW

Industrials N

Information Technology OW

Materials UW

Utilities UW (UW)

Info

rmat

ion

Te...

Fina

ncia

ls

Hea

lth C

are

Cons

umer

Dis

...

Mat

eria

ls

Cons

umer

Sta

ples

Com

mun

icat

ion

Serv

ices

Indu

stria

ls

Util

ities

-10

-5

0

5

10

15

Cont

ribtio

n to

scor

e

Forward EPS %EPS revSentimentValuationMomentum

Slide 33

Communication Services - Neutral

Figure 2: Contribution to House View Sector Score





- We increase our allocation to a neutral in Communication Services- The model score is neutral and has on an aggregated level not

changed much during the start of 2020- The sector has performed in line with SP500 during 2020

- The sector has a high exposure to US domestic consumption and is less dependent on overseas supply chains- With a majority of the companies providing online services and

not dependent on producing and selling physical goods- In the case of an extended shut down in Chinese factories the

companies should be less exposed to frozen supply chains- Which in turn would support relative earnings

Communication Services 16.6Market 16.0

2017 2018 2019 2020 202112

14

16

18

20

22

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

2

3

6

3

6

4

6

4 4

7

2020-03-042020-02-05

Latest 0.6Mean 0.6-2 std 0.3

+2 std 0.9

2017 2018 2019 2020-1

0

1

2

3

4

5

6

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 34

Consumer Discretionary - Overweight






- We maintain an overweight to Consumer Discretionary- The short term valuation premium to the SP500 has decreased

lately – compared to the Staples sector where the premium has increased- The sector continues to show a strong score in our model –

with the 2nd highest EPS revisions over the Q4 earnings season

- We continue to believe in the strength of the U.S. consumer and households- Even though the equity market has taken a hit recently we

believe that the consumer will continue to be confident and will continue to consume more cyclical goods- With in particular the housing market having a strong

start to the year

Consumer Discretionary 20.0

Market 16.0

2017 2018 2019 2020 202112

14

16

18

20

22

24

26

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

7

8

1

9

3

8

2

7

8

1

2020-03-042020-02-05

Latest 4.0

Mean 4.7

-2 std 4.1

+2 std 5.4

2017 2018 2019 20203

4

5

6

7

8

9

10

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 35

Consumer Staples - Neutral






- We maintain our neutral allocation to Consumer Staples- Consumer Staples shows a neutral score in our sector scoring

- The valuation spread between the more cyclical consumer sector, Discretionary, has converged with Consumer Staples

- Recently we have seen strong macro data on the consumer side in the US- In particular consumer confidence and new housing starts,

where the latter most likely is related to the easing policy we saw FED pursue during 2019

- The short term valuation premium to the SP500 has increased, which has supported the sector during the recent drawdown

Consumer Staples 18.9

Market 16.0

2017 2018 2019 2020 202112

14

16

18

20

22

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

5

4

5

7

1

3

5

6

7

3

2020-03-042020-02-05

Latest 2.9Mean 3.3

-2 std 2.5

+2 std 4.1

2017 2018 2019 20200

1

2

3

4

5

6

7

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 36

Financials - Neutral






- Financials are starting to become a strong value case- Not only the absolute, but also the relative, valuation continues to

decrease- The sentiment score confirms the view that the short term

outlook for the sector is depressed- As for Consumer Staples, we believe that this is related to the

decreasing yield in the longer dated US treasuries- During the last few month we have seen a flattening of the

US yield curve and the FED has not communicated any change in policy in the coming months- This in turn hurts both the banks ability to increase their

profits but it also forces insurance companies in the sector to increase their exposure to risky assets

- With the above in mind we maintain a neutral allocation

Financials 11.7

Market 16.0

2017 2018 2019 202010

12

14

16

18

20

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

3

5

9

8 8

2

1

9 9

5

2020-03-042020-02-05


-2 std -4.5

+2 std -3.6

2017 2018 2019 2020-5

-4.5

-4

-3.5

-3

-2.5

-2

-1.5

-1

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 37

Health Care - Overweight






- The Health Care sector looks more and more like a value case- During the two recent market drawdowns we have seen due to

worry regarding the corona virus Health Care stocks has shown resilience

- We continue to argue that relative earnings will continue to improve and that investors will find this increasingly attractive

- Investors continue to discount the nomination of a democratic candidate that potentially could disrupt the US health care system- We believe that significant policy risk already has been

discounted – and that the odds of a disruptive health care legislation remains low- With the caveat that if the democrats takes control over the

senate after the 2020 presidential election then the risk for a new health care policy will increase

Health Care 14.6

Market 16.0

2017 2018 2019 202013

14

15

16

17

18

19

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

8

7

4

5

7

5

4

5

6

8

2020-03-042020-02-05


-2 std -2.5

+2 std -0.2

2017 2018 2019 2020-3

-2

-1

0

1

2

3

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 38

Industrials – Neutral






- We maintain our neutral allocation to Industrials- The sector shows a negative score in our model with moderate

EPS growth and a valuation in line with the SP500- For now, we do not have any confidence that Industrials will

either underperform or outperform- We have previously argued that the sector could see margin

pressure if global growth would decelerate- With the spread of the Covid-19 virus and plausible

interruptions of supply chains we believe the risk for margin pressure now has increased

- On the other hand easing of global trade conditions could provide support to the margins of companies in the sector

Industrials 16.1Market 16.0

2017 2018 2019 202013

14

15

16

17

18

19

20

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

4

1

8

1

4

6

8

3 3

4

2020-03-042020-02-05

Latest 0.2Mean -0.1

-2 std -0.6

+2 std 0.4

2017 2018 2019 2020-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 39

Information Technology - Overweight






- We maintain our overweight position in Information Technology- With nearly all companies having reported their Q4 earnings it is

clear why the IT sector deserves a valuation premium to the market- The sector with the highest earnings surprises, strong

balance sheets followed by positive earnings revisions by analysts all over the board

- The risk with the sector, in our view, lies in how much the companies in the sector will be affected by the coronavirus- With a large share of the sector being hardware dependent it

remains to see if we will see more companies lowering their revenue guidance, similar to what Apple did during February- Due to heavy reliance on Chinese supply chains – with

halt in production in Chinese factories

Information Technology 19.8

Market 16.0

2017 2018 2019 2020 202112

14

16

18

20

22

24

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

9 9

3

4

9

7 7

2

1

9

2020-03-042020-02-05

Latest 3.9Mean 3.8

-2 std 2.4

+2 std 5.1

2017 2018 2019 2020-1

0

1

2

3

4

5

6

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 40

Materials - Underweight






- We maintain an underweight to Materials- Based on a cautiously optimistic view of the outlook of the global

economy and with the deep cyclicality of the sector in mind we maintain our position- The steel and aluminum tariffs implemented on Argentina

and Brazil should all else equal be a positive for the sector- Virtually all companies in the sector are looking at EPS growth for

2020 – however we have seen negative EPS revisions lately- Our argumentation might sound a bit positive, but in the end we

are still skeptical to the sector – and we have seen the valuation premium decrease lately- We think the valuation premium will continue to decrease

and that the sector should be valued closer to the valuation of the SP500

Materials 16.7

Market 16.0

2017 2018 2019 202012

13

14

15

16

17

18

19

20

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

6

2

7

6

2

9

3

8

5

2

2020-03-042020-02-05

Latest 0.7Mean 1.0

-2 std 0.0

+2 std 2.0

2017 2018 2019 2020-3

-2

-1

0

1

2

3

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 41

Utilities - Underweight






- We see an increasing disconnect between the forward valuation of Utilities and the expected earnings growth- If we continue to see compression in US treasury yields and

flattening of the yield curve then Utilities might continue to outperform the SP500- On the other hand – a lot has been priced into the valuation

premium of the sector – and we expect this to reverse during the coming months

- The sector is looking at the lowest EPS growth in the SP500, among the sectors that we cover- As for Financials we believe that investors have discounted

“low for longer” when it comes to UST but that this is overdone on the short horizon- Hence we decrease the position to a maximum

underweight

Utilities 19.5

Market 16.0

2017 2018 2019 202012

14

16

18

20

22

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

1

6

2 2

5

1

9

1

2

6

2020-03-042020-02-05

Latest 3.6Mean 2.9

-2 std 1.8

+2 std 4.0

2017 2018 2019 2020-3

-2

-1

0

1

2

3

4

5

12M

For

war

d PE

pre

miu

m to

mar

ket


Slide 43

Risk Environment

- Further escalation of Covid-19 is the primary risk scenario- Irrespective of central bank action we require a stabilization in

the numbers of infected in order to put the negative market sentiment behind us- In our view we need the stabilization before mid-April

- Otherwise there is in our view an elevated risk that second round effects will take over- This in the form of lower consumption due to a

negative wealth effect from falling equities and a sentiment shock

- We note that Covid-19 is coming at the same time as growth is already low- This increases the likelihood of it pushing the global economy

into a recession- In our view the primary risk lies in Europe and the US

- At the number of infected in China is starting to moderate

Figure 1: We are looking for stabilization in the number of new cases before removing the Covid-19 outbreak as the primary risk scenario

Slide 44

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 UnitedStates 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.

Documents

House View Commitee - sebgroup.com · Macro Importance Earnings Positioning Valuations Politics Central Banks-10-8-6-4-2 0 2 4 6 8 10-8 -6 -4 -2 0 2 4 6 e Change in importance House