Portfolio Strategy · 2020. 12. 23. · EQUITY RESEARCH | DAILY EDGE Tuesday, December 1, 2020, Pre-market For Reg AC Certification and important disclosures see Appendix A of this

EQUITY RESEARCH | DAILY EDGETuesday, December 1, 2020, Pre-market

For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates are notregistered/qualified as research analysts with FINRA in the U.S. unless otherwise noted within this report.

1

Dissemination: December 01, 2020, 05:22 ET. Production: November 30, 2020, 18:14 ET.

Portfolio Strategy10 Themes for 2021 - Unleashing Excess Cash

OUR TAKE: [Positive]. Our strategy game plan entering 2021 is to stick to an equity-over-bond preference, with a long bias on cyclical-value sectors such as Financials,Industrials, Discretionary and Resources. Although it will take some time to distributevaccines and inoculate a critical mass, they are a game changer on account of theirexpected effectiveness. An economic rebound is broadly expected for 2021, but webelieve excess cash at the consumer, business and investors levels could boost growthand asset prices further in 2021. We provide below our 10 themes for 2021:

1. Piles of stacked cash could soon turn into hot money

2. Synchronized downturn, synchronized upturn

3. The road to US$200 EPS

4. Income scarcity: The hunt for yield intensifies

5. Bond yields: The great normalization

6. Go Global

7. Small could be big in 2021

8. Hard assets shining, CAD roaring

9. Sector rotation favors cyclicals

10. No Value left behind

11. Bonus - Capital markets spring back to life

ANALYST TEAM Link to ScotiaView

Hugo Ste-Marie, MSc, CFA | Analyst514-287-4992Scotia Capital Inc. - Canada

Jean-Michel Gauthier, MMF, CFA | AssociateAnalyst514-287-3661Scotia Capital Inc. - Canada

Simone Arel, MSc | Associate514-287-2967Scotia Capital Inc. - Canada

https://www.scotiaview.com/authors/hste-marie

mailto:[email protected]



10 Themes for 2021 – Unleashing Excess Cash

1. Piles of Stacked Cash Could Soon Turn Into Hot Money

An economic rebound is broadly expected for 2021, but we believe the US economy could exceed

expectations. Three factors could move the needle: consumer spending, an inventory re-stocking cycle, and

corporations opening the spending spigots.

Unleashing consumer demand. Quick and sizable fiscal transfers on top of a rapidly healing job market

explain why US consumers’ financial position remains relatively healthy. In addition, cash stacked under the

bed for rainy days has grown exponentially. As shown in Exhibit 1, cash held in US saving accounts has

increased by US$2T since February to almost US$12T (+22.5% YOY). To provide some perspective,

US$2T represents 13% of consumer spending in 2019. In our view, a strong appetite for some normalcy will

return with the vaccine inoculation, unleashing consumer demand for most things that have been put aside

for so long. Part of the extra cash will likely be spent, potentially boosting consumer spending more-than-

expected.

Inventory re-stocking coming. The YoY decline in US private inventories is one of the steepest on record

going back to the 1940s. See Exhibit 2. If consumers are back, businesses will have to replenish their stock

(positive for GDP). According to the latest NFIB survey of small businesses, the net percentage of owners

viewing current inventory stocks as “too low” stands at record levels.

Exhibit 1: Total Savings Deposits (U.S. Depository Institutions)

22.8%

11,855

0

2,000

4,000

6,000

8,000

10,000

12,000

-20%

-10%

0%

10%

20%

30%

40%

Dec-

87

Dec-

89

Dec-

91

Dec-

93

Dec-

95

Dec-

97

Dec-

99

Dec-

01

Dec-

03

Dec-

05

Dec-

07

Dec-

09

Dec-

11

Dec-

13

Dec-

15

Dec-

17

Dec-

19

Dec-

21

Dec-

23

Dec-

25

US Recession

Total Deposits YoY - LHS

Total Deposits (billions of US$) - RHS

Source: Scotiabank GBM Portfolio Strategy, FRED.


2

Corporate America also flush with cash. Based on several metrics, corporations have rarely set aside as

much cash for rainy days as they did in the current crisis. For instance, cash as a % of assets for all US

corporations hasn’t been this high since the 1950s, while cash as a % of total debt is at levels last seen in

the 1960s. See Exhibit 4. Although these high cash positions are skewed towards the mega cap names,

even the median S&P 500 company has seen its cash balances exceed the levels reached during the last

big scare of the financial crisis. Overall, we believe corporate America will face increasing heat to use that

excess cash in various ways (deleverage, capex, M&A, buybacks, or even higher wages). More capex and

higher wages would certainly give further boosts to the economy.

Exhibit 2: U.S. GDP - Real Private Inventories (YOY%)

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Jan-4

8

Jan-5

1

Jan-5

4

Jan-5

7

Jan-6

0

Jan-6

3

Jan-6

6

Jan-6

9

Jan-7

2

Jan-7

5

Jan-7

8

Jan-8

1

Jan-8

4

Jan-8

7

Jan-9

0

Jan-9

3

Jan-9

6

Jan-9

9

Jan-0

2

Jan-0

5

Jan-0

8

Jan-1

1

Jan-1

4

Jan-1

7

Jan-2

0

Jan-2

3

Source: Scotiabank GBM Portfolio Strategy, FRED.

Exhibit 3: Small Biz Saying Inventories are "Too Low"

-10

-8

-6

-4

-2

0

2

4

6

Dec-

73

Dec-

76

Dec-

79

Dec-

82

Dec-

85

Dec-

88

Dec-

91

Dec-

94

Dec-

97

Dec-

00

Dec-

03

Dec-

06

Dec-

09

Dec-

12

Dec-

15

Dec-

18

Dec-

21

More ow ners saying inventories are "too large"

More ow ners saying inventories are "too low "

Smoothed (3-M MA)

Source: Scotiabank GBM Portfolio Strategy, Bloomberg.

Exhibit 4: US Corporations are Flush with Cash

5%

10%

15%

20%

25%

30%

35%

40%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Q4 1

945

Q4 1

949

Q4 1

953

Q4 1

957

Q4 1

961

Q4 1

965

Q4 1

969

Q4 1

973

Q4 1

977

Q4 1

981

Q4 1

985

Q4 1

989

Q4 1

993

Q4 1

997

Q4 2

001

Q4 2

005

Q4 2

009

Q4 2

013

Q4 2

017

Q4 2

021

Cash as a % of Assets - LHS

Cash as a % of Debt (Bonds + Loans) - RHS

Cash as a % of Equity (at Market Value) - RHS

Source: Scotiabank GBM Portfolio Strategy, Bloomberg, Federal Reserve.

Exhibit 5: S&P 500 Companies - Cash as a % of Total Assets

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Jan-9

0

Jan-9

2

Jan-9

4

Jan-9

6

Jan-9

8

Jan-0

0

Jan-0

2

Jan-0

4

Jan-0

6

Jan-0

8

Jan-1

0

Jan-1

2

Jan-1

4

Jan-1

6

Jan-1

8

Jan-2

0

Jan-2

2

S&P 500 Aggregate

Median S&P 500Company

Top Quartile S&P500 Company

Bottom Quartile S&P500 Company



3

2. Synchronized Downturn, Synchronized Upturn

The global downturn experienced in Q1/Q2 has now morphed into a global upturn which should extend into

2021 (see Exhibit 6), underpinned by fiscal and monetary largesse around the world. The leading economic

indicator for OECD countries and six major non-OECD economies has indeed been spiking, hinting towards

firmer growth ahead. China could be the growth engine next year according to Scotia Economics, which

expects the economy to grow 8.5% – a pace of expansion not seen in years. See Exhibit 7.

3. The Road to US$200 EPS

We believe that a combo of above-average top-line growth and impressive resiliency in profit margins could

push S&P 500 EPS near the US$200 mark in FY 2022. As illustrated in Exhibit 8, S&P 500 revenue growth

is usually quite strong in the two years following a crisis. Moreover, the Q3/20 reporting season highlighted

the surprising resiliency of corporate profit margins. Corporate Canada (and America) has done a great job

of taking costs out of the system during the pandemic. Turbo-charged top-line growth in ‘21/’22 (7%-8%

CAGR) and profit margins reverting near pre-pandemic highs could pave the way to record earnings and

higher stock prices.

Exhibit 6: Global Leading Economic Indicator & GDP Growth*

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Dec-

80

Dec-

82

Dec-

84

Dec-

86

Dec-

88

Dec-

90

Dec-

92

Dec-

94

Dec-

96

Dec-

98

Dec-

00

Dec-

02

Dec-

04

Dec-

06

Dec-

08

Dec-

10

Dec-

12

Dec-

14

Dec-

16

Dec-

18

Dec-

20

Dec-

22

LEI (6-M chg. %) - LHS

GDP (6-M chg. %; 1-qtr lag) - RHS

*Our GDP/LEI basket includes OECD countries plus 6 major non-OECD economies.


Exhibit 7: Global GDP – From Contraction to Expansion (consensus estimates)

2%2%

1% 1%

6%

-4%

-6%

-7%

-5%

2%

4%4%

5%

3%

8%

3% 3% 3%

2%

5%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

US

CD

A

EZ

Japan

Chin

a

US

CD

A

EZ

Japan

Chin

a

US

CD

A

EZ

Japan

Chin

a

US

CD

A

EZ

Japan

Chin

a

2019 2020E 2021E 2022E



4

EPS & targets increased. We review our TSX and S&P 500 EPS forecasts and targets higher. See Exhibit

10. Keep in mind that our EPS forecasts are based-off a weighted-average of our bull/base/bear cases.

Based on Nov 30 levels, our new targets imply TR performances of about 9% for the S&P 500 and 12% for

the TSX. Equities could deliver more upside if our 2022 EPS “bull” case scenario were to materialize.

High valuation levels are well supported. Investors (US$4.3T in money market assets) have cash to

spend once the outlook clears. The Fed (along with other central banks) will also continue to print money.

With few alternatives given flattish to negative real yields, hot money could continue to find its way into the

stock market and inflate asset prices further.

Exhibit 8: S&P 500 Top-Line Growth Tends to Bounce

Strongly Post Crisis

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020E

2021

2022

Asian crisis

Recession& Tech-burst GFC

CAGR +8.7% in

99/00

CAGR +9.2% in

03/04CAGR +7.2%

in 09/10

Source: Scotiabank GBM Portfolio Strategy, Bloomberg, Factset.

Exhibit 9: S&P 500 Quarterly Profit Margins

5%

6%

7%

8%

9%

10%

11%

12%

13%

5%

6%

7%

8%

9%

10%

11%

12%

13%

Dec-

03

Dec-

04

Dec-

05

Dec-

06

Dec-

07

Dec-

08

Dec-

09

Dec-

10

Dec-

11

Dec-

12

Dec-

13

Dec-

14

Dec-

15

Dec-

16

Dec-

17

Dec-

18

Dec-

19

Dec-

20

Dec-

21

Dec-

22

Quarterly profit margins (%)

8-Qtr average

Peak: 12.6%in Q3/18

Source: Scotiabank GBM Portfolio Strategy, Factset.

Exhibit 10: Scotiabank GBM Financial Forecasts

Forecasts 2017 2018 2019 2020E 2021E 2022E

S&P/TSX 16,209 15,300 17,063 19,200

EPS 909 1,018 1,052 832 1,060 1,201

S&P 500 2,673 2,507 3,231 3,900

EPS 132 162 163 136 164 184

Equity (Year End)

Source: Scotiabank GBM Portfolio Strategy estimates.


5

4. Income Scarcity: The Hunt for Yield Intensifies

Interest rates on cash deposits and government bond yields should remain quite anemic next year. As

traditional sources of income can’t fulfill their role anymore, the hunt for yield will likely intensify and

investors will have to look for alternatives. Equities appear an obvious choice. After a challenging year,

dividend growth should resume in 2021 on the back of improving profitability trends. See Exhibit 11.

Moreover, dividend yields have rarely been this attractive versus government bonds in over half a century.

See Exhibit 12.

Buyback programs to restart. While not a direct source of income, buybacks are also set to recover,

juicing total yield generated by equities. As part of cash conservation measures announced in H1/20, most

corporations stopped their buyback programs while issuing shares. High cash balance in times of economic

recovery should see investors clamour for more return, one way or another. See Exhibits 13 and 14.

Exhibit 11: TSX Trailing EPS & DPS Growth (YOY%)

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Dec-

56

Dec-

61

Dec-

66

Dec-

71

Dec-

76

Dec-

81

Dec-

86

Dec-

91

Dec-

96

Dec-

01

Dec-

06

Dec-

11

Dec-

16

Dec-

21

Dec-

26

US Recessions

DPS Growth - LHS

EPS Growth - RHS

Income Trusts added to TSX

2020E: -20%

2021E: 27%

2022E: 13%

Source: Scotiabank GBM Portfolio Strategy estimates, CPMS

Exhibit 12: Bond Yields vs Dividend Yield Spread (bp)

-400

-200

0

200

400

600

800

1,000

1,200

1,400

-400

-200

0

200

400

600

800

1,000

1,200

1,400

Dec-

56

Dec-

61

Dec-

66

Dec-

71

Dec-

76

Dec-

81

Dec-

86

Dec-

91

Dec-

96

Dec-

01

Dec-

06

Dec-

11

Dec-

16

Dec-

21

Canada

U.S.

Dividend Yield above 10-Yr Yields

10-Yr Yields above Dividend Yield


Exhibit 13: S&P 500 Annualized Monthly Total Yield

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Jan-9

8

Jan-0

0

Jan-0

2

Jan-0

4

Jan-0

6

Jan-0

8

Jan-1

0

Jan-1

2

Jan-1

4

Jan-1

6

Jan-1

8

Jan-2

0

Jan-2

2

Dividend yield**

Net Buyback Yield*

Total Yield

*Measured using S&P 500 company level cash flow statements, netting equity issuance with equity retirement, including stock based compensation **Last 3M of dividend paid annualized to account for quarterly patterns of dividends Source: Scotiabank GBM Portfolio Strategy, Bloomberg.

Exhibit 14: TSX Composite Annualized Monthly Total Yield

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

Jan-2

0

Jan-2

1

Dividend Yield**

Net Buyback Yield*

Total Yield

*Measured using TSX company level cash flow statements, netting equity issuance with equity retirement, including stock based compensation **Last 3M of dividend paid annualized to account for quarterly patterns of dividends Source: Scotiabank GBM Portfolio Strategy, Bloomberg.


6

5. Bond Yields: The Great Normalization

From an asset mix perspective, we believe government bonds have the worst outlook and possess the

greatest risk of generating negative returns. Despite a broad normalization in macro data since last summer,

bond yields have remained well anchored near their lows until recently. If growth is firmer next year, LT

inflation expectations drift higher, and investors demand a higher premium to finance massive fiscal deficits

around the world, we believe bond yields could also normalize. Prior to the pandemic, US 10-yr yields were

hovering around 1.5%, as illustrated in Exhibit 15. Our US 10-yr bond yields model is even more aggressive,

pegging fair value near 1.8%. Since short-term rates remain anchored by central banks, rising LT yields

would imply a steeper curve. As shown in Exhibit 16, the steepening phase rarely stops at 75 bp: most of the

time, it steepens well in excess of 100 bp. Investors should also start discussing and pricing-in less

accommodative central banks by the end of 2021 if global growth is firmer and the COVID-19 stands in the

rear-view mirror. A 2013-style “taper tantrum” is thus an increasing possibility late 2021 / early 2022. SPY >

LQD > TLT (or IEF).

Exhibit 15: U.S. 10-Yr Yields: Normalization Expected

Source: Scotiabank GBM Portfolio Strategy, chart courtesy of StockCharts.com

Exhibit 16: YC Steepening Phases Rarely Peaked < 100 bp

-150

-100

-50

0

50

100

150

200

250

-150

-100

-50

0

50

100

150

200

250

Jan-7

0

Jan-7

4

Jan-7

8

Jan-8

2

Jan-8

6

Jan-9

0

Jan-9

4

Jan-9

8

Jan-0

2

Jan-0

6

Jan-1

0

Jan-1

4

Jan-1

8

Jan-2

2

Actual US Recessions

Avg. Yield Curve Level*

*Looking at all yield curve combinations between 3M, 2Yr, 5Yr, 10Yr, and 30Yr yields

Source: Scotiabank GBM Portfolio Strategy, Bloomberg, NBER, Federal Reserve.


7

6. Go Global

Our preference goes to international equities (TSX, EM, EAFE) over the US. After having underperformed

almost continuously since the GFC, a synchronized economic lift-off should stimulate risk-appetite and

provide more support to equity markets that have been left behind and trade at more compelling valuations

than the US. See Exhibit 17. Although MSCI EAFE and EM indices have surged of late, it is surprising to

see them still comfortably below their all-time high reached in 2007! A breakout to a new high would be,

technically-speaking, quite bullish after having traded sideways for over a decade now. Long EWC, EFA,

EEM over SPY / XIU, XIN > XSP in Canada.

7. Small Could Be Big in 2021

If U.S. small caps end 2020 behind large caps, it would mark their fourth consecutive year of

underperformance with six of the last seven years seeing underperformance. All U.S. small cap

underperformance cycles since the 1920s ended when the small cap to large cap ratio (using total return

indices) was in the vicinity of the ascending trend line shown in Exhibit 19. The ratio hit that trend line

recently, suggesting the underperformance cycle has likely run its course. Historically, large cap domination

cycle tends to last about six years on average. If the current cycle started in 2013 as we believe, its longevity

roughly matches the historical average. Moreover, small cap equities have not been this attractive in years

relative to large caps. While small caps’ profitability has contracted this year, the percentage of small

businesses losing money has likely peaked and should improve sharply next year. IWM > SPY; XCS > XIU

in Canada.

Exhibit 17: S&P 500 vs. MSCI DM World Ex-USA

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan-7

0

Jan-7

5

Jan-8

0

Jan-8

5

Jan-9

0

Jan-9

5

Jan-0

0

Jan-0

5

Jan-1

0

Jan-1

5

Jan-2

0

Jan-2

5

-1 St. Dev.

Uptrend: S&P 500outperforming DM World

Ex-USA

Inflection point ?

+1 St. Dev.


Exhibit 18: S&P 500 vs TSX: Fwd. EPS Ratio and Relative Performance

0.05

0.10

0.15

0.20

0.25

0.30

0.05

0.10

0.15

0.20

0.25

0.30

Dec-

86

Dec-

88

Dec-

90

Dec-

92

Dec-

94

Dec-

96

Dec-

98

Dec-

00

Dec-

02

Dec-

04

Dec-

06

Dec-

08

Dec-

10

Dec-

12

Dec-

14

Dec-

16

Dec-

18

Dec-

20

Dec-

22

S&P 500 fwd. EPS / TSX fwd. EPS (USD)

S&P 500 / TSX (USD)

?

Source: Scotiabank GBM Portfolio Strategy, Refinitiv, Bloomberg


8

8. Hard Assets Shining, CAD Roaring

Accelerating growth, dollar weakness, and a decade of falling capex in the mining industry (see Exhibit 21)

could offer decent support to commodity markets in 2021/2022. However, the backdrop could be more

supportive of base metals/energy than precious metals/gold. A wave of investment in green energy over the

next few years bodes well for copper. Regarding energy, we believe oil & gas stocks have probably much

more upside than the commodity. For the bullion, USD weakness should help, but lower uncertainty is

usually less friendly and real US 10-yr bond yields (while still extremely low) could face upward momentum.

We believe gold could trade sideways in a broad range unless inflation pressures accelerate. The

environment should help the CAD to reach, and potentially exceed, the US$0.80 mark next year. DBB (base

metals) > GLD (gold).

Inflation: Don’t hold your breath, but keep it on the radar. Inflation pressures should remain weak for the

time being: lack of demand or restrained appetite in several sectors as well as the idling of large parts of the

workforce should keep price increases in check. Still, the narrative could change later in 2021 if central

banks continue to contemplate extremely accommodative monetary policy at a time of closing output gaps

and rising commodity prices. Ongoing supply chain disruptions could exacerbate the issue. Interestingly, LT

inflation expectations have already started to move. The 5Y-5Y inflation swap forward, which measures

market expectations of the average level of inflation over five years five years from now, is standing at 2.2%

and rising. If consumer demand roars back to life, demanding normalcy and drawing down their cash

savings, supply bottlenecks could turn into run away prices.

Exhibit 19: U.S. Small Caps Relative to Large Caps Since 1925 (TR)

0

50

100

150

200

250

300

350

400

450

500

0

50

100

150

200

250

300

350

400

450

500

Dec-

25

Dec-

30

Dec-

35

Dec-

40

Dec-

45

Dec-

50

Dec-

55

Dec-

60

Dec-

65

Dec-

70

Dec-

75

Dec-

80

Dec-

85

Dec-

90

Dec-

95

Dec-

00

Dec-

05

Dec-

10

Dec-

15

Dec-

20

Uptrend: small caps outperformDown trend: large caps outperform

Normalized: Dec-1925 = 100

Shaded area is U.S. recession

Performance based on Ibbotson SC TR index from 1925 to 1978 and Russell 2000 (TR) thereafter.

Source: Scotiabank GBM Portfolio Strategy, Morningstar, Shiller.

Exhibit 20: S&P 600: % of Companies With Negative Trailing EPS

0%

5%

10%

15%

20%

25%

30%

Dec-9

8

Dec-0

0

Dec-0

2

Dec-0

4

Dec-0

6

Dec-0

8

Dec-1

0

Dec-1

2

Dec-1

4

Dec-1

6

Dec-1

8

Dec-2

0

Dec-2

2

Source: Scotiabank GBM Portfolio Strategy, Bloomberg


9

9. Sector Rotation Favors Cyclicals

We believe the economic revival should provide more support to “old economy” stocks/sectors relative to

their “digital” peers. Granted, cyclical sectors have enjoyed solid gains so far in November, but as illustrated

below, some remain down on a YTD basis. Taking a longer-term view, it’s worth highlighting that US

Financials are lagging Tech by 46% YOY, which still appears quite extended to us. If growth is visible,

cyclical-value sectors appear well positioned to lead next year.

Exhibit 21: Expansion Capex by Commodity vs. Equal-Weighted Commodity Price Index

80

90

100

110

120

130

140

150

160

170

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2009A

2010A

2011A

2012A

2013A

2014A

2015A

2016A

2017A

2018A

2019A

2020E

2021E

2022E

Co

mm

odit

y P

rice In

dex 2

009=100

Cap

ex in

US

D b

illio

ns

Lead & ZincNickelCoalCopperIron OreCommodity Index

?

Source: Scotiabank GBM estimates, Wood Mackenzie, Bloomberg.

Exhibit 22: US 10Yr Yields & Inflation Expectations (%)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

Dec-

14

Dec-

15

Dec-

16

Dec-

17

Dec-

18

Dec-

19

Dec-

20

"5Yr-5Yr" Inflation Swap Rate* - LHS

US 10-Yr Yields - RHS

*Expected inflation in 5-yr for the next 5-yr


Exhibit 23: S&P 500: Nov. Gainers Remain Down Big YTD

34%30%

19%17%

9%7% 6%

-2%-5%

-8%

-36%

11% 9% 10%13%

17%

7% 7%

2%

8%

19%

34%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Tec

hnolo

gy

Dis

cre

tion

ary

Com

munic

atio

n

Mate

rials

Indust

rials

Health

Car

e

Sta

ple

s

Util

itie

s

Real E

state

Fin

anci

als

Energ

y

YTD

MTD

FAANGM stocks account for the bulk of YTD gains in

their respective sectors.

Despite huge gains inNovember, FN + EN

remain dow n YTD


Exhibit 24: S&P 500 Tech Performance vs. Financials (YoY)

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Jan-9

1

Jan-9

3

Jan-9

5

Jan-9

7

Jan-9

9

Jan-0

1

Jan-0

3

Jan-0

5

Jan-0

7

Jan-0

9

Jan-1

1

Jan-1

3

Jan-1

5

Jan-1

7

Jan-1

9

Jan-2

1

+ 2 Std. Dev

- 2 Std. Dev

+ 1 Std. Dev

- 1 Std. Dev

S&P 500 Tech Outperforms Financials



10

10. No Value Left Behind

Value’s sharp gain in November could be hard to repeat in the short run, but the number of quantitative and

qualitative arguments for Value leadership in 2021 has never been greater. First, Value’s underperformance

cycle has rarely been this extended while relative valuation levels have rarely been as much in favour of

Value as they are today. The potential for mean-reversion is thus extremely high. Second, after such a long

run of underperformance, there are few true Value believers left. Institutional investors have been mostly net

sellers of Value names in 2020 (up to Q3/20), creating large UW to the style. Sell-side has also set the bar

extremely low in terms of consensus estimates. Positive surprises/performance in the sector could force a

positive feedback loop as investors try to close down their exposure gap. Finally, Value typically enjoys an

environment of rising yields and economic recovery. Overall, Value is extremely well positioned to

outperform in 2021. We will discuss this theme in greater detail in our SQoRE update note that will be

published later today. IWD (R1000 Value) > IWF (R1000 Growth); XCV > XCG in Canada.

Exhibit 25: SQoRE U.S. - Cumulative Outperformance Top 50 vs. Bottom 50 (Log scale)

a

0.5

1.0

2.0

4.0

8.0

16.0

0.5

1.0

2.0

4.0

8.0

16.0

Jan-9

4

Jan-9

6

Jan-9

8

Jan-0

0

Jan-0

2

Jan-0

4

Jan-0

6

Jan-0

8

Jan-1

0

Jan-1

2

Jan-1

4

Jan-1

6

Jan-1

8

Jan-2

0

Jan-2

2

Value

Growth

Momentum

Quality


Exhibit 26: SQoRE US Factor Exposure* by Style

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Value Growth Momentum Quality

Real Rates

Duration

Inflation

Credit Spreads

World Growth

Value benefit from credit

spreadstightening

Value has highest

exposure to w orld growth

Rising real rates positive for Value

Quality benefits from falling real yields

Rising inflation expectations benefits Momentum

Quality benefits fromw idening

credit spreads

*Using Last 2 Year of Monthly Total Return

Source: Scotiabank GBM Portfolio Strategy, Bloomberg, Haver Analytics, FRED.


11

11. Bonus Theme - Capital Markets Spring Back to Life

The March sell-off and capital market dislocation raised the spectre of an M&A drought as happened in 2002

and 2009. However, the number and volume of deals quickly jumped back near record highs (see Exhibit

27). Central bank support, cash burning holes in investors and companies’ pockets alike, battered asset

prices, as well as the need to rationalize or consolidate certain industries, have led to a flurry of M&A

activity. Multiples paid on deals have also jumped to some of the highest levels of the last 30 years. We

believe this trend will endure in 2021 as cash balances remain high, while debt financing is almost as cheap

as prior to the pandemic (looking at corporate spreads on IG US bonds). Regarding positioning, Precious

Metal miners in particular are in the midst of a merger boom. Energy could be the next sector in line. Finally,

banks are likely to benefit from a bumper year in capital market activity, especially with high refinancing

volume and a flurry of IPOs.

Exhibit 27: North American M&A - Deal Count & Volume (3M Rolling Sum)

0

100

200

300

400

500

600

700

800

0

1,000

2,000

3,000

4,000

5,000

6,000

Jan-9

8

Jan-0

0

Jan-0

2

Jan-0

4

Jan-0

6

Jan-0

8

Jan-1

0

Jan-1

2

Jan-1

4

Jan-1

6

Jan-1

8

Jan-2

0

Jan-2

2

Number of Deals - LHS

Value of Deals - LHS


Exhibit 28: US M&A - Multiple Paid on Transactions (Rolling 3M Basis)

5x

7x

9x

11x

13x

15x

17x

19x

21x

23x

25x

0x

10x

20x

30x

40x

50x

60x

70x

Jan-9

3

Jan-9

5

Jan-9

7

Jan-9

9

Jan-0

1

Jan-0

3

Jan-0

5

Jan-0

7

Jan-0

9

Jan-1

1

Jan-1

3

Jan-1

5

Jan-1

7

Jan-1

9

Jan-2

1

Jan-2

3

P/E (12M Trailing Earnings Before XO) - LHS

EV/EBITDA (12M trailing EBITDA) - RHS



12

Appendix A: Important Disclosures

I, Hugo Ste-Marie, certify that (1) the views expressed in this report in connection with securities or issuers that I analyze accuratelyreflect my personal views and (2) no part of my compensation was, is, or will be directly or indirectly, related to the specificrecommendations or views expressed by me in this report.

This document has been prepared by Research Analysts employed by The Bank of Nova Scotia and/or its affiliates. The Bank of NovaScotia, its subsidiaries, branches and affiliates are referred to herein as "Scotiabank." "Scotiabank" together with "Global Banking andMarkets" is the marketing name of the global corporate and investment banking and capital markets business of The Bank of NovaScotia and its affiliates. Scotiabank, Global Banking and Markets produces research reports under a single marketing identity referredto as "globally branded research" under U.S rules. This research is produced on a single global research platform with one set of ruleswhich meet the most stringent standards set by regulators in the various jurisdictions in which the research reports are produced. Inaddition, the Research Analysts who produce the research reports, regardless of location, are subject to one set of policies designed tomeet the most stringent rules established by regulators in the various jurisdictions where the research reports are produced.

Scotiabank relies on information barriers to control the flow of non-public or proprietary information contained in one or more areaswithin Scotiabank into other areas, units, groups or affiliates of Scotiabank. In addition, Scotiabank has implemented procedures toprevent research independence being compromised by any interactions they may have with other business areas of The Bank of NovaScotia. The compensation of the Research Analyst who prepared this document is determined exclusively by Scotiabank ResearchManagement and senior management (not including investment or corporate banking).

Research Analyst compensation is not based on investment or corporate banking revenues; however, compensation may relate tothe revenues of Scotiabank as a whole, of which investment banking, corporate banking, sales and trading are a part. ScotiabankResearch will initiate, update and cease coverage solely at the discretion of Scotiabank Research Management. Scotiabank Researchhas independent supervisory oversight and does not report to the corporate or investment banking functions of Scotiabank.

For Scotiabank, Global Banking and Markets Research Analyst Standards and Disclosure Policies, please visitwww.gbm.scotiabank.com/disclosures.

For additional questions, please contact Scotiabank, Global Banking and Markets Research, 4 King St W, 12th Flr, Toronto, Ontario,M5H 1A1.

Time of dissemination: December 01, 2020, 05:22 ET. Time of production: November 30, 2020, 18:14 ET. Note: Time of disseminationis defined as the time at which the document was disseminated to clients. Time of production is defined as the time at which theSupervisory Analyst approved the document.


13

Definition of Scotiabank, Global Banking and Markets Equity Research RatingsScotiabank has a three-tiered rating system, with ratings of Sector Outperform, Sector Perform, and Sector Underperform. EachResearch Analyst assigns a rating that is relative to his or her coverage universe or an index identified by the Research Analyst thatincludes, but is not limited to, stocks covered by the Research Analyst.

The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets Research Analyst’s12-month view on the security. Research Analysts may sometimes express in research reports shorter-term views on these securitiesthat may impact the price of the equity security in a manner directly counter to the Research Analyst’s 12-month view. These shorter-term views are based upon catalysts or events that may have a shorter-term impact on the market price of the equity securitiesdiscussed in research reports, including but not limited to the inherent volatility of the marketplace. Any such shorter-term viewsexpressed in research report are distinct from and do not affect the Research Analyst’s 12-month view and are clearly noted as such.Ratings

Sector Outperform (SO)The stock is expected to outperform the average 12-month totalreturn of the analyst’s coverage universe or an index identifiedby the analyst that includes, but is not limited to, stocks coveredby the analyst.

Sector Perform (SP)The stock is expected to perform approximately in line withthe average 12-month total return of the analyst’s coverageuniverse or an index identified by the analyst that includes, butis not limited to, stocks covered by the analyst.

Sector Underperform (SU)The stock is expected to underperform the average 12-monthtotal return of the analyst’s coverage universe or an indexidentified by the analyst that includes, but is not limited to,stocks covered by the analyst.

Focus Stock (FS)As of April 29, 2019, Scotiabank, Global Banking and Marketsdiscontinued the Focus Stock rating. A stock assigned thisrating represented an analyst’s best idea(s); stocks in thiscategory were expected to significantly outperform the average12-month total return of the analyst’s coverage universe or anindex identified by the analyst that included, but was not limitedto, stocks covered by the analyst.

Other RatingsTender – Investors are guided to tender to the termsof the takeover offer.

Under Review – The rating has been temporarilyplaced under review, until sufficient information hasbeen received and assessed by the analyst.

Risk RankingThe Speculative risk ranking reflects exceptionallyhigh financial and/or operational risk, exceptionallylow predictability of financial results, andexceptionally high stock volatility. The Directorof Research and the Supervisory Analyst jointlymake the final determination of the Speculative riskranking.

Scotiabank, Global Banking and Markets Equity Research Ratings Distribution*

Distribution by Ratings and Equity and Equity-Related Financings*

48.5%45.1%

6.4%

28.5% 26.5% 0.0%Sector Outperform Sector Perform Sector

Underperform

0%

20%

40%

60%

* As of November 30, 2020. Source: Scotiabank GBM.

Percentage of companies covered byScotiabank, Global Banking and Markets EquityResearch within each rating category.

Percentage of companies within each ratingcategory for which Scotiabank, Global Bankingand Markets has undertaken an underwritingliability or has provided advice for a fee withinthe last 12 months.

For the purposes of the ratings distribution disclosure FINRA requires members who use a ratings system with terms differentthan “buy,” “hold/neutral” and “sell,” to equate their own ratings into these categories. Our Sector Outperform, Sector Perform,and Sector Underperform ratings are based on the criteria above, but for this purpose could be equated to buy, neutral andsell ratings, respectively.


14

General Disclosures

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No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of theinformation contained in this document except with respect to information concerning Bank of Nova Scotia (TSX: BNS; NYSE: BNS).This document is not intended to be a complete statement or summary of the securities, markets or developments referred to in thisdocument. Scotiabank does not undertake to update or keep current the information contained herein, nor make any commitment as tothe frequency of publication.

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Any opinions expressed in this document may change without notice and may differ or be contrary to opinions expressed by otherbusiness areas or groups of Scotiabank. Any statements contained in this document attributed to a third party represent Scotiabank’sinterpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, andsuch use and interpretation have not been reviewed by the third party. Nothing in this document constitutes a representation that anyinvestment strategy or recommendation is suitable or appropriate to an investor's individual circumstances or otherwise constitutes apersonal recommendation. Investments involve risks, and investors should exercise prudence and their own independent judgement inmaking their investment decisions and carefully consider any risks involved.

The financial instruments that may be described in this document may not be eligible for sale in all jurisdictions or to certain categoriesof investors. Instruments such as options, derivative products, and futures are not suitable for all investors, and trading in theseinstruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile inresponse to fluctuations in interest rates or other market conditions. Foreign currency rates of exchange may adversely affect the value,price, or income of any security or related instrument referred to in this document. For investment advice, trade execution, or otherenquiries, clients should contact their local sales representative. The value of any investment or income may go down as well as up,and investors may not get back the full amount invested. Past performance is not necessarily a guide to future performance.

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The Research Analyst(s) responsible for the preparation of this document may interact with trading desk personnel, sales personneland other parties for the purpose of gathering, applying and interpreting market information.

In the normal course of offering investment and banking products and services to clients, Scotiabank may act in several capacities(including issuer, market maker, underwriter, distributor, index sponsor, swap counterparty, and calculation agent) simultaneously withrespect to a product, giving rise to potential conflicts of interest. Scotiabank uses controls such as information barriers to manageconflicts should they arise. Scotiabank and its affiliates, officers, directors, and employees may have long or short positions (includinghedging and trading positions), trade as principal and buy and sell in instruments or derivatives identified herein; such transactions orpositions may be inconsistent with the opinions expressed in this document.

Recipients of this document should expect that Scotiabank will from time to time perform services (including investment banking orcapital market services) in connection with the services and activities described in this document and that they may perform services forand engage in transactions with other market participants, including the issuers of certain of the investments underlying the transactionsherein.

The information in this document has been prepared without taking into account any investor's objectives, financial situation or needs,and investors should, before acting on the information, conduct independent due diligence when making an investment decision andconsider the appropriateness of the information, having regard to their objectives, financial situation and needs. For further information,please contact your sales representative.

Scotiabank specifically prohibits the redistribution of this document in whole or in part without Scotiabank's prior written permission, andScotiabank accepts no liability whatsoever for the actions of third parties in this respect. Images may depict objects or elements that areprotected by third-party copyright, trademarks and other intellectual property rights.


15

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As of April 29, 2020, in line with U.S. market practice and in compliance with all applicable regulatory requirements, Scotiabank, GlobalBanking and Markets discontinued its policy application of IIROC Rule 3400 (13), the site visit disclosure requirement, for Analystsemployed by Scotia Capital (USA) Inc., its U.S. affiliate.

A list of all investment recommendations in an equity security or issuer that have been disseminated during the preceding 12 months isavailable at the following location: gbm.scotiabank.com/disclosures.

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16

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Documents

Portfolio Strategy · 2020. 12. 23. · EQUITY RESEARCH | DAILY EDGE Tuesday, December 1, 2020, Pre-market For Reg AC Certification and important disclosures see Appendix A of this