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Multi-Asset perspectives

Principal Global Asset Allocation

Asset Allocation Solutions

Multi-Asset Perspectives

November 2020

Binay Chandgothia Managing Director Portfolio Manager, Principal Global Investors (Hong Kong) Ltd. The piece was composed with contributions from my colleagues, Han Peng and Raj Singh


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Links to sections

I. Highlights Link II. Macro-economic summary Link III. Monetary policy, flows & other developments Link IV. US Election Outcome Link V. COVID-19 chartbook Link VI. Looking ahead & key risks Link VII. macro-economic & technical models Link VIII. cross-asset valuation models Link IX. Equity markets Link X. Fixed income markets Link XI. Currency markets Link XII. Commodity markets Link XIII. Disclosures Link

Multi-Asset perspectives


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I. Highlights Macro

• New COVID-19 cases rose at a rapid pace forcing Governments to reimpose localized lockdowns. Vaccine news, however, was extremely positive. Fatality rates continued to decline.

• Economic recovery stayed on track. Global manufacturing outlook was strong though PMIs moderated from extremely high levels, industrial output recovered further, financial conditions eased even more, and economic surprises stayed positive for a seventh month. Earnings estimates ticked up too. However, rising lockdowns could stall

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• Global inflation eased to 1.5% from 1.6% as base effects in food prices caused China s CPI to drop sharply. US reading softened too. However, our leading indicator continues to predict inflation moving towards 2% in 2021.

• Implied volatilities crashed below their long-term average on positive US election and vaccine news.

Bottom-up

• expected EPS growth for 2020 improved to -17%yoy for 2020 from -19% the month prior but 2021 expected growth dropped to 24% yoy from 26%. Earnings revisions remained positive. The 3Q 2020 earnings season posted strong beats globally.

• The ratio of global credit rating upgrades to total rating changes ticked up to 17% from 16%. The level remains low.

Valuations • US Treasuries remained expensive; IG and HY spreads moved into expensive zone from fair value.

• Equities became even more expensive on earnings-based measures as market gains outpaced earnings upgrades. Some, however, were cheap on P/B. Very low nominal and real rates can prolong market richness.

Markets

• Multi-Assets: Our global multi-asset index (details here) returned a whopping 7.6%, propelling 20 return to 7.8%. All segments fired, with equities/commodities taking the lead. Cross-asset correlations remained high.

• Global equities had one of their best months ever! All 40 markets gained. The median local currency return was 12.7%, the second-best month in the last 25yrs! Small Caps and deep cyclicals soared. Breadth improved. Median

20 drawdown narrowed to -2% (-12% the month prior), with 18 markets in the green (just 7 the month prior).

• Fixed income: Policy rates remained abysmally low ( Global policy rate indicator was at 1.02%, with DMs at -0.01% and EMs at 2.69%). Global 10-yr yields were stable despite the distinct risk-on tone. Credit spreads narrowed, particularly in high yield.

• Currencies: The US$ struggled in the face of the risk-on move. Recent gains have made the EUR more expensive than the US$, though cyclical tailwinds (reduced hard Brexit probability, recovering account surplus) are likely to keep it supported unless ECB cuts its key interest rate deeper into negative territory.

• Commodities: The GS commodity index zoomed 13% to cut -12%. All sub-components gained barring precious metals, with Energy taking the lead as oil prices shot up 27%. Industrial metals (11%) had another solid month.

Looking Ahead

• Policy makers are still in a panic mode, though there is a when Main street and Wall street may take differing paths. For the time being though, the sheer weight of risk-on flows, riding positive vaccine news should grind markets higher.

Key risks

• Monetary/fiscal policy turns reactive from proactive.

• COVID-19 resurgence hurts return-to-work strategies deeply, stymying the recovery.

• Prolonged unemployment payouts disincentivize workers, impacting potential labor supply.

• Increased regulation of the technology sector.

• Restrictive policies on corporate distributions or stipulation of minimum localized content in goods/services.

• Social stress caused by COVID-19 manifests itself in bouts of unrest, dampening the recovery.


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II. Macro-economic summary It was a massive month for risk assets. Key factors at play were

• New COVID cases jumped, driven by US, EMs and several smaller countries. Vaccine developments were extremely positive, pushing rising infections into the background. Our COVID pack can be accessed here.

• Monetary support (very low nominal/real rates) stayed strong. ECB will extend asset purchases soon (details here).

• Growth recovered further (details here and here) though momentum moderated. A more pertinent question is the damage that rising incidence of lockdowns A fiscal cliff too can present headwinds.

o US elections are truly behind us despite clutter about unfairness (details here). o Equity flows made a strong comeback (details here). We expect more strategic reallocation towards equities given

very low return potential from bonds. Table 1: Summary of key Fundamental, Valuation and Technical indicators

Model Link Indicator 1 month YTD

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1 PGAA Global Manufacturing PMI Index 54.2 54.9 48.5 52.0

2 PGAA Leading Industrial Production Indicator2 53.2 54.0 49.1 52.1

3 PGAA Global Inflation Index1 1.5% 1.6% 2.3% 2.3%

4 PGAA Global Financial Conditions Index 0.71 0.57 0.42 0.00

5 PGAA Global Economic Surprise Index3 0.20 0.26 0.23 -0.09 =

6 PGAA Global 3-month Earnings Revision Ratio 0.57 0.54 0.41 0.38

PGAA Global 3-month EPS change (in US$) 4% 2% -1% -3%

Global 2020 EPS growth expectation -17% -19% 10% 10%

7 Global Credit Rating Upgrade/Downgrade Ratio 17% 16% 43% 52% =

Va

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n 8 PGAA Equity Valuation Composite (MSCI AC World) -2.6 -1.7 -0.9 0.5

9 PGAA High Yield Spread4 -0.5 0.3 -1.2 -0.1

PGAA Investment Grade Spread4 -1.0 -0.4 -1.4 -0.1

PGAA 10-yr Treasury Valuation4 -2.0 -2.0 -0.8 0.4 =

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10 PGAA Cross Asset Implied Volatility Index 64 93 52 81

11 PGAA Cyclical Risk Environment Index -1.1 -1.4 -0.7 -0.8

12 PGAA Cyclical Risk Positioning Indicator 0.3 0.3 -0.2 -0.6 =

Note: indicates positive for markets, indicates negative, = indicates stable momentum, red indicates -ve level; green +ve; direction of arrow shows if change is for better or worse; 1= 3-month average as of prior month, 2= 3m average, 3 = 3m time-weighted average, 4 = rolling 10-yr Z score

o Our global multi-asset index (45% equities, 5% commodities, 20% global govt. bonds, 15% Global IG, 10% global HY and 5% EM$ bonds) returned 7.6% in Nov to propel 0 return to 7.8% ( -14.7%, ,

6.2%). All segments were positive (equities commodities , while sovereign yields stayed flat). As risk-assets rallied, anti-fragile assets (gold in particular) gave back gains made in the early part of the year. However, the traditional, almost expected set-off from higher sovereign bond yields in response to higher risk asset values never happened, keeping asset class correlations extremely high.

Exhibit S1: Cross-asset Returns (in US$)

Source: Bloomberg/Factset/Principal Global Asset Allocation; Equity indices, other than S&P500 are from MSCI. Bond indices are from ICE BofAML. Commodities represent GS Comm Index. +ve readings = $ gains in currencies.

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III. Monetary policy, flows & other important developments Monetary Policy o Global: Three cuts and a hike took the global policy cut-hike scorecard to 75:4 for 2020, 79:5 for the last 12 months,

21:2 for the last six and 5:2 for the last three. Rate cut momentum has unmistakably ebbed. o US Fed: The November FOMC left rates and QE targets ($80bn treasuries, $40bn MBSs monthly) unchanged. Minutes

revealed Fed may specify an outcome-based QE framework. Maturity extension could be atop their agenda to ease more.

o ECB: They will expand their asset purchase and bank funding programs in December. Unlikely they will cut rates. o BOE: the stock of Govt. bonds held by it by £150bn to £875bn (~40% of GDP), while maintaining the stock of

corporate bonds at £20bn. The policy rate was kept unchanged @0.10%. o cash rate and 3-yr yield target -15bps each to 0.10% and promised more QE if required. o EMs: Philippines and Indonesia ( 25bps each) resumed rate cuts to spur growth. Turkey finally did the right thing in

475bps to 15% to ward off significant currency weakness due to negative real policy rates. President Erdogan was forced to bite the bullet, reshuffling his economic administration to get economic policies back on track.

Fiscal Policy o US treasury-Fed spat: US treasury extended the Commercial Paper & Money-market fund facilities for 3 months but

will recover the $415bn unspent under Fed emergency facilities (mainstreet lending, corporate bonds, municipal debt and asset-backed purchases). The new administration will need Congressional approval to restart them, though a much smaller stabilization fund could be used without fresh approval.

o Euro-Area budget: Illiberal govts of Hungary & Poland are holding disbursements are being linked to fundamental principles like independent

judiciaries being followed in a member country. We think it delays but stop the recovery fund from coming.

Politics o US-China: President Trump banned US investors from investing into 31 companies (more may be added) with links to

Chinese military w.e.f 11 Jan . Existing investments have to be unwound by 11 Nov , creating about US$10bn of selling primarily from telecom (75%) and industrial stocks listed in HKSAR ($8bn) and China ($2bn).

o Brexit: EU and UK are moving with just three main issues staying unresolved. Capital Markets o Fund/ETF Flows: Equities stole the show from bonds, gaining a massive $110bn, led by US and Asia-Pac as markets

embraced the US electoral outcome and progress on the vaccine. China onshore markets gained $8bn through stock-connect ($22bn ). Onshore investors added $8bn ($77 to HK-listed stocks. Bond flows remained positive, biased towards US, EMs and credit. Commodities faced outflows (gold lost luster). Money Market funds saw -$24bn outflows as investors stepped up their pursuit of return enhancing assets.

Exhibit S2: Fund Flows

Flows (US$ Bn) Nov-20 YTD

2020 2019 Flows (US$ Bn) Nov-20 YTD

2020 2019 Bonds 30 338 485 Equities 110 98 (150) DM 20 344 445 DM 89 115 (134) EM 10 (6) 40 EM 20 (18) (16) US 17 296 311 US 72 68 (39) Other DM 3 48 134 Europe 8 (11) (96) IG Corp 3 96 62 Japan 11 - (5) HY Corp 4 51 44 AsiaPac 51 (37) 4 Sovereign IG (2) 31 58 Commodities (8) 68 14 Bank Loans - (24) (30) Energy (1) 11 (1) Inflation Protected 1 9 (6) Precious Metals (5) 40 15 Money Markets (24) 896 491 Others (2) 17 -

Source: Jeffries Equity Research, As of 11/30/2020

o From Hero to Zero: Ant Financial, the payment processor and peer-to-peer lender owned 33% by Alibaba, was forced

to shelve its US$37bn IPO in HKSAR/Shanghai a day before listing despite huge interest which saw its price jump 50% in grey markets. The stated reasons were potential changes in financial technology regulations (higher capital and antitrust concerns), though a speech critical of state-owned banks and regulators by Jack Ma played its own role.


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IV. US Elections 2020 The Outcome: A democratic President but no Blue Wave o On 3 November, United States voters elected their new President, all 435 members of the House of Representatives,

and 35 out of 100 Senators. o In the Presidential race, results see-sawed with President Trump taking the early lead before challenger Joe Biden

scored a series of late wins as mail-in votes got counted. He won 232, flipping 73 votes in 5 states (Wisconsin, Michigan, Pennsylvania, Georgia and Arizona). He got 51% of the popular vote (80m) versus 47% for President Trump who got 73.9m. 157m people voted, making it the highest turnout election in US history. Voting was polarized with President Trump and Joe Biden garnering 98% of total votes. In contrast, the two lead contestants, Donald Trump and Hillary Clinton had got 94% in 2016.

o In the House races, the Democrats retained control 208, losing a net of 9 seats. o In the Senate races, while Democrats flipped a seat each in Arizona and Colorado, Republicans pulled one back in

Alabama. Georgia, which had both its Senate seats up for grabs, will hold run-off elections on 5th between the Republican and Democratic nominees, as neither could grab the 50% majority that Georgia requires (9 other states have similar rules). Pre run-off, Republicans have 50 senators, Democrats 46 and 2 independents who support the Blues. We seem headed towards a 51-49 senate in favor of the Republicans.

President- o Despite a slew of court challenges , it is almost certain that Joe

Biden will be the 46th and oldest President of the U.S.A. and Kamala Harris its first female Vice-President. The transition team is being assembled. Long-time Biden confidante Antony Blinken will be the Secretary of State, with former Secretary John Kerry becoming a special Presidential enjoy for Climate. Former Fed Chair, Janet Yellen will be Treasury Secretary. Generally perceived as apolitical, her knowledge of the economy is intricate and she will push hard for continuation of fiscal measures to stimulate growth, going by her past assertions as Fed Chair that fiscal policy had to play a bigger role than it has in recent years, if benefits of growth are to reach all sections of the society.

Market Impact o We have been believers in discounting election volatility, focusing on fundamentals instead. Heading into elections,

we had found no statistically significant correlation between the Party in office and US Equity performance, with median annualized return over the three-year period following elections at a strong 13% in the post-WWII era.

o With election uncertainty out of the way, risk assets rallied strongly (November turned out to be one of the best months ever for equities and high yield corporate credit), driven by positive news on vaccines (details here) even as a new global wave of infections hit the global economy.

o Markets welcomed the sharing of power between Democrats and Republicans, which would keep the new administration closer to the center and reduce the probability of onerous regulation and higher corporate/individual taxes. On the other hand, chances of a significant fiscal package, the base market case under a Blue wave, also declined. That did play a role in soothing US treasury yields, which at one point, were threatening the psychologically important 1% mark.

A tricky path ahead o The ability of the Biden administration to work with a divided Congress to get additional stimulus will be really

important. That will be particularly relevant if the ongoing wave of new infections starts hurting economic growth. A bipartisan proposal for a $908B stimulus seeks middle ground and includes US$300/week in federal unemployment benefits for four months, US$240B in funding for state and local governments, US$300B in Paycheck Protection Program funding, and $50B in healthcare and vaccine distribution funds. However, it leaves out a second round of $1,200 stimulus checks. We entirely sure if the proposal will get through the Congress as Senate Majority Leader McConnell is working on another deal which includes US$333bn in new spending and $140B in repurposed CARES funds.


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V. COVID-19 chartbook o Global infections rose 39% to 63 million by end- The 7-day average of daily new cases touched a new high

of 609k before dropping to 586k, with US at 160k (high 178k), Europe at 77k (high 140k), EMs at 104k (high 144k) and smaller countries (169k, a new high). The sheer volume forced Governments to revisit lockdowns.

o Global Fatalities rose at a slower pace, rising 24% to 1.5 million. The global mortality rate eased to 2.3% from 2.6% with improvements across the board. Among populous countries, India (1.5%) remained the lowest. US was at 2%.

o Our Global Stringency Index that uses Oxford data, rose to 71 (100=highest stringency) as Governments responded with increased restrictions (but not total lockdowns) to curb the viral spread.

o Medical Progress: We are getting a vaccine for use before the end of the year. Pfizer/ BioNTech (UK became the first major country to approve its vaccine) and Moderna vaccines proved to be 95% effective, well above the 50% efficacy FDA threshold for emergency authorization. Moderna vaccine can be shipped and stored for 6 months at -20C, remaining stable for 30 days between 2C and 8C once thawed. The Pfizer/BioNTech vaccine has to be transported at -75C and can survive in a normal fridge for 5 days. While the US will be able to distribute 40m vaccines in Dec 2020 itself, a lot depends on the 5 other vaccines in Phase 3 trials as EMs are primarily dependent upon them. The AstraZeneca/Oxford vaccine, whose Phase-3 trial results came under a could (those erroneously given ½+1 dose showed 90% efficacy, way above that of the intended 2 doses, with the overall efficacy at 70%), is likely to supply 1/3rd of the global commitment of 3.2bn doses and 40% of vaccines going to emerging countries. Manufactured in multiple locations from India to Brazil, it could cost <$5 due to its non-profit commitment during the pandemic versus $39 for a two-shot immunization for Pfizer and $32-$37 for Moderna. Covax, the global initiative for equitable global vaccination, is targeting 2bn doses for 2021, though it has secured only 700 million doses thus far. It needs $5bn in funding to supplement the $2bn it has secured thus far. Large countries like USA and Russia have not signed up for it thus far. The World bank is committing $12bn to vaccine funding but global spending needs are estimated to be $35bn. Developed countries need to step up support for weaker countries.

Exhibit CV1: Rising new cases

Source: Bloomberg/Factset/Principal Global Asset Allocation; EMs=India, Indo, Brazil, Mexico, Chile, China, HKSAR, Malaysia, Singapore; As of 11/30/2020;

Exhibit CV2: Dropping Fatality rates Exhibit CV3: Reopenings at Risk

Source: Bloomberg/Factset/Principal Global Asset Allocation; Data from Oxford for stringency index (GDP weighted). As of 11/30/2020.

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VI. Looking Ahead 1. Growth The global economy continues to recover from the COVID-19 related shock (details here and here). The recovery, however, could stall in due to resurging COVID cases which has brought back localized lockdowns in many parts of the world as detailed here. Another element worth watching is the appetite among policymakers to provide additional stimulus, particularly in light of the positive vaccine news. It is possible that both monetary and fiscal policy become reactive i.e. used incrementally to backstop growth rather than to promote it, though that yet our base case. On the bottom-up side, aggregated bottom-up earnings estimates show that several markets are projected to exceed their pre-COVID (2019) EPS by end-2021. The leaders and laggards for annualized EPS growth between 2019 and 2021 are - Exhibit LA1: Projected 2-yr Annualized EPS Growth (2019-2021)

Leaders Laggards Country/Region EPS Growth (%) Country/Region EPS Growth (%)

South Korea 29% Russia -17%

Brazil 22% Philippines -14%

Taiwan 14% Thailand -12%

US Growth 10% Singapore -10%

Asia-x-Japan 9% UK -9%

EMs 9% Australia -6%

India 7% Europe -6%

Mexico 7% Japan -5%

Chile 6% US Value -4%

Sectors (ACWI) Sectors (ACWI)

Materials 17% Energy -23%

Technology 11% Financials -4%

Health Care 9% Industrials -4%

Comm Services 7% Real Estate -1%

Source: Bloomberg/Factset/Principal Global Asset Allocation; Regional indices are in US$, As of 11/30/2020;

2. Inflation Our Leading Indicator continues to predict higher inflation in 2021 (details here), but nowhere near levels that will cause policy makers to turn hawkish. Structurally, from a supply side perspective, inflation is likely to get legs if corporate consolidation leads to market share concentration as weak players shut shop or get acquired. Restrictive trade policies too can provide support. The demand side though will remain challenged till wages start seeing a meaningful rise and unemployment goes back to pre-pandemic levels.

3. Monetary policy & global financial conditions Global monetary policy remains as easy as it has ever been (details here and here) and will remain so in the near future. Negative real interest rates, forward guidance and balance sheet will be used to keep term/risk premia suppressed. Balance sheets of G3 (Fed, ECB and BOJ) will rise from 38% of their GDP in 2019 to 59% in 2020 (US$7.3 trillion in current currency terms). The number will likely exceed 65% by end-2021. Fed will remain dovish till it sustainably hits its inflation target. ECB will ease more in December, BOE already eased in November while BOJ is too far from tightening policy.

4. Valuations

• Anti-fragile assets like global safe-haven treasuries and gold remain firmly in the expensive camp.

• Equity valuations remain very rich (our equity valuation composites can be accessed here). Extremely depressed safe haven yields (sovereign bonds) are pushing investors into equity assets, providing great support despite richness. However, valuations should start normalizing as the recovery matures, given that a lot of it is already priced in. Of course, if growth exceeds expectations, either on its own course or induced by additional stimulus, the valuation normalization will be delayed.

• Corporate spreads too moved into an expensive zone in November, though they are not as expensiveness as equities (details here). With Central bank support by way of asset purchases intact, they could tighten a tad more but not a great deal. in our base case.

• In Currencies, the recent rally in EUR has made it a tad expensive. The US$, after underperforming in the past several months, is nudging closer to fair value from expensive (details here). A key condition for the US$ to weaken further is


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stronger growth recovery outside the US, which will move money into under-owned assets in Emerging economies and ex-US developed markets. A risk-off move, however, will propel it higher.

Exhibit LA2: Expensive Equity Valuations

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 11/30/2020; NTM=Next Twelve-Month EPS for MSCI AC World in $ terms

5. Sentiments & technical indicators Markets moved towards euphoria at the end of November (details here), leaving US election uncertainty behind and baking in substantial upside linked to positive news on the vaccine. Volatility crashed as risk assets rallied strongly, putting them in the extended momentum zone. The missing animal spirits showed signs of returning with very substantial flows into equities (details here). 6. Summarizing our thoughts on risk assets: Our checklist of various factors stacks up as under-

a. Return-to-Work strategies: Rising new COVID cases are bringing renewed localized lockdowns though the progress on vaccine is a very big positive. Overall, this factor stays a little gative in the near term though vaccine developments make it very supportive in the medium term.

b. Growth: Both macro and bottom-up growth environments have improved. Growth, however, is likely to slow in the near term ( neutral ) though the medium-term outlook has improved ( supportive ).

c. Monetary policy Central banks still seem . We keep rating this factor as . However, as growth recovers, central banks could become reactive rather than staying proactive, which is a risk. If there is one factor that underpinned the massive market recovery, it was monetary policy; we remain watchful for signs of a possible change in stance on this one.

d. Fiscal policy A divided Congress will limit the size of incremental fiscal stimulus in the US, though we still expect one that is 3-4% of GDP including unutilized funds from the first round. Janet Yellen s nomination as treasury secretary gives us hope of persistent efforts to this end. We rate this factor .

e. Valuations Almost all assets are expensive. In a world of scarce value, risk factors will still keep attracting capital, as long as the forward-looking outlook stays positive. While the short-term, we are cognizant of risks, which causes us to retain the valuation factor at

f. Technical factors: The November rally has worsened market technicals. A correction in coming months (1Q 2021) would be justified. A better sense of President-elect Joe Biden s economic/foreign policies could trigger it.

g. Could economic recovery herald bad news for markets? Policy makers are still in a panic mode, though there is a risk that they become reactive as growth recovers. That s when Main street and Wall street may start taking differing paths. For the time being though, the sheer weight of risk-on flows on positive vaccine news is likely to grind markets higher.

7. Key risks The key risks to our pro-risk stance are-

• Monetary/fiscal policy turns reactive from proactive.

• COVID-19 resurgence hurts return-to-work strategies deeply, stymying the recovery.

• Prolonged unemployment payouts disincentivize workers, impacting potential labor supply.

• Increased regulation of the technology sector.

• Restrictive policies on corporate distributions or stipulation of minimum localized content in goods/services.

• Social stress caused by COVID-19 manifests itself in bouts of unrest, dampening the recovery.

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Valuation Composite MSCI AC WorldHigher=Cheaper


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VII. PGAA macro & technical models

Growth & inflation

• Our provisional global manufacturing PMI index eased to 54.2 from a 2-yr high of 54.9. Breadth weakened with 77% of the countries in expansion from 85%, and 38% showing sequential improvement from 77% in the month prior.

• Our Leading Global IP Indicator eased to 52.5 from 52.7 (3m average @53.2 vs 54.0). Global Industrial Output stopped contracting in September (worst was -16%yoy in April). Lockdowns, however, near-term downside risks.

• Inflation: Global inflation dipped to 1.5%yoy (3m average) in Oct 2020 0.5%). EM-DM gap eased to 1.9% (DMs 0.7%, EMs 2.6%). Our leading indicator continues to project higher inflation in 2021.

Exhibit M1: Global Manufacturing PMIs

Source: Bloomberg/Factset/Principal Global Asset Allocation; EM=Emerging Markets, DM=Developed Markets. As of 11/30/2020.

Exhibit M2: PGAA

Source: Bloomberg/Factset/Principal Global Asset Allocation; 3MA = 3 month moving average; As of 11/30/2020

Exhibit M3: Inflation

Source: Bloomberg/Factset/Principal Global Asset Allocation; projected inflation uses constant input prices; As of 11/30/2020

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Global Financial Conditions reached a new high. Credit (significantly tighter spreads), equity momentum (very strong), volatility (sharply lower), rates (marginally lower), and monetary growth (stable at a very high level) contributed positively to push our FCIs to all-time highs. We believe that while financial conditions will remain super easy, the bar for them to ease significantly more is rather high. At some point, higher rates will start offsetting the credit impulse and momentum too will start rolling-off. Exhibit M4: Global Financial Conditions

Source: Bloomberg/Factset/Principal Global Asset Allocation; PGAA FCI=PGAAEconomies; Higher=easier financial conditions; As of 11/30/2020

PGAA Global Macro Economic Surprise Index (PGAA Global ESI) stayed positive for a seventh month running, though the magnitude of beats remained low. In US, Housing returned to beats Industrial releases were slightly ahead but consumption was slightly behind. China releases were broadly in line. European beat was driven by the Euro Area (consumption and industrial) while UK missed (monetary, industrial and monetary misses wiped out a beat in consumption). Japan beat was led by trade, employment and industrial while consumption disappointed. We continue to expect a moderation in macro surprises. Global inflation surprises were negative, with a particularly large miss in China due to base effects and lower food prices. Exhibit M5: Macroeconomic Surprise

Source: Bloomberg/Factset/Principal Global Asset Allocation; ESI=PGAA 3WMA=3m weighted average; As of 11/30/2020

Global volatility: PGAA Cross-Asset Implied Volatility index dived below its long-term average, as markets were buoyed by an end to the US election outcome uncertainty (details here) and the tremendously positive news on vaccines (details here). All segments saw sharply lower volatility, with equity volatility 41%, commodity 30%, fixed income 20% and currency 14%. 21%. However, realized 30d Volatility moved higher, crossing its long-term average, as markets swung higher in joy.

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PGAA Global FCI PGAA Global FCI PGAA FCI Nov-20 1M Chg 3M Chg 12M Chg

Global 0.71 0.14 0.09 0.31

U.S. 1.03 0.18 0.16 0.71

China 0.06 0.04 (0.06) (0.01)

Euro Core 0.70 0.16 0.03 0.03

Euro Periphery 0.87 0.22 0.16 0.13

UK 0.64 0.05 0.05 0.18

Japan 0.61 0.10 0.08 0.11

India 0.55 0.11 0.18 0.32

Korea 0.33 0.04 (0.02) (0.05)

Brazil 1.18 0.09 0.12 0.53

Mexico 0.52 0.19 0.12 0.53

DM 0.85 0.16 0.12 0.36

EM 0.37 0.08 0.02 0.17

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PGAA Global ESI PGAA Global ESI 3WMAPGAA Economic

Surprise Index (ESI) Nov-20 Oct-20 Sep-20 Aug-20

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MA

Global 0.18 0.12 0.40 0.38 0.20

U.S. 0.11 0.16 0.29 0.65 0.16

China 0.03 0.38 0.15 (0.15) 0.17

Europe 0.13 0.13 0.38 0.56 0.17

Japan 0.47 (0.21) 0.79 0.47 0.30PGAA Inflation

Surprise Index Nov-20 Oct-20 Sep-20 Aug-20

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MA

Global (0.31) (0.02) 0.18 0.72 (0.13)

U.S. (0.44) 0.14 1.23 1.32 0.03

China (0.89) (0.95) (0.11) 0.45 (0.78)

Europe 0.20 0.04 (0.29) 0.94 0.07

Japan (0.11) 0.68 (0.11) 0.16 0.16


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Exhibit M6.1: Implied Cross-asset Volatility

Source: Bloomberg/Factset/Principal Global Asset Allocation; Implied Volatility is re-based to 100 as of end- As of 11/30/2020

Exhibit M6.2: Realized 30-day Cross-asset Volatility

Source: Bloomberg/Factset/Principal Global Asset Allocation; Volatilities are re-based to 100 as of end- As of 11/30/2020

PGAA marched higher, with breadth recovering to 92% from 50%. Equities made a sharp move higher with cyclicals (energy, financials) crushing defensives (utilities, staples and health care). Recovering oil prices, lower gold and higher industrial commodities sent commodities into a prominent risk-on. Credit stayed in risk-on as spreads tightened considerably. The currency segment was driven by broad-based $ weakness. Slightly higher German bund yields nullified a similar drop in treasury yields to keep the fixed income component stable. EM equities underperformed DMs slightly despite the upward move in our CREI as Europe stole the show.

Exhibit M7: PGAA Cyclical Risk Environment Index

Source: Bloomberg/Factset/Principal Global Asset Allocation; CREI=PGAA As of 11/30/2020

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Tactical positioning indicators

Systematic investors: systematic indicators are pointing to the following flows-

• Multi-asset rebalancing: November strong equity performance is likely to generate $90bn out of equities into sovereigns ($55bn), IG corp (-$25bn) and HY corp ($9bn), based on our monthly rebalancing model.

• Volatility targeting multi-asset: Realized volatility was almost unchanged at 90% for both unlevered and levered funds (93% the month prior), based on our model. Estimated flow impact is meagre at -$8bn.

• Risk Parity: Realized fixed income volatility rose relative to equities, which is likely to cause an inflow of 6% of EQ-FI risk-parity AUMs ($30bn) into equities.

• Momentum: Short, medium and long-term momentum indicators jumped as risk assets had a stellar month.

• Cyclical risk positioning ticked up marginally through commodities ( oil & copper bets). Exhibit T1: Rebalancing Flows Exhibit T2: Volatility Targeting Strategies

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 11/30/2020. Both Exhibits pertain to hypothetical systematic multi-asset portfolios

Exhibit T3: EQ/FI Risk-Parity Funds Exhibit T4: Reflation Positioning Index

Source: Bloomberg/Factset/Principal Global Asset Allocation; Higher implies an increase in reflation positioning; As of 11/30/2020

RSI and Bollinger bands: US small caps, Japanese EQ and Asian currencies were overbought using Bollinger bands.

Equity breadth was super strong. All the 40 markets we track ended in the green. All closed above their 50 DMA (day moving average) and their 200 DMA! 87% (10-year median 56%) of NYSE stocks closed above their 200 DMA versus 48% the month prior. Historically, it was hard to sustain such levels of breadth. Other indicators: The AAII retail investor bull-bear ratio for equities jumped to 20 from NIL (10-year median of 3) though it yet in euphoric zone. The US equity Index put/call ratio dropped to 0.80 from 1.03 (10-year median 0.98) as hedges were taken off (the election and vaccine effects). The NYSE short interest was stable. Overall, technical factors moved into an overbought zone from neutral.

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VIII. PGAA valuation indicators (a) Equity valuations

Absolute: Markets turned even more expensive, particularly on earnings-based measures which comprise 60% of our valuation composite. Nothing was cheap on this measure, with only a few not expensive enough . Some markets were cheap on P/B, particularly in the emerging world. Relative: US remained almost as expensive as it has ever been vs. ex-US markets (Europe, Japan, Asia & EMs). US Value remained super cheap relative to Growth, despite a strong month. Small and Mid-caps remained cheap relative to Large caps.

Exhibit V1: Equity Valuations

Source: Bloomberg/Factset/Principal Global Asset Allocation; Valuation Composite (-ve = overvalued) is uses earnings, book and dividend yield indicators. Data goes back to June 2003. Green cells represent cheapness, Red cells expensiveness; As of 11/30/2020.

Exhibit V2: Relative Equity Valuations

Source: Bloomberg/Factset/Principal Global Asset Allocation. Data goes back to June 2003. Green cells represent cheapness, Red cells expensiveness. As of 11/30/2020.

November-20 Composite 1M Chg 3M Chg 12M Chg Times

Cheaper

Price to

NTM EPS

1M Chg 3M Chg 12M Chg Times

Cheaper

Price to

Book

1M Chg 3M Chg 12M Chg Times

Cheaper

MSCI AC World -2.6 (0.9) (0.4) (1.9) 100% 19.7 7% -2% 23% 99% 2.6 9% 4% 11% 94%

MSCI World Index -2.7 (0.9) (0.4) (1.9) 100% 20.7 8% -2% 24% 99% 2.8 10% 4% 11% 100%

MSCI EAFE -1.5 (0.9) (0.7) (1.5) 100% 17.6 10% 0% 22% 99% 1.7 12% 7% 2% 66%

MSCI EM (Emerging Markets) -1.8 (0.4) (0.3) (1.9) 98% 14.7 4% -1% 20% 98% 1.8 5% 4% 14% 62%

MSCI AC Asia ex JP -1.7 (0.4) (0.3) (1.6) 94% 15.5 3% 0% 19% 96% 1.8 4% 3% 16% 66%

MSCI World ex USA -1.5 (0.9) (0.7) (1.4) 100% 17.4 10% -1% 21% 99% 1.7 12% 7% 2% 65%

MSCI EM Latin America -0.9 (0.8) (0.4) (1.3) 91% 13.7 6% -12% 7% 87% 2.0 14% 11% -2% 55%

MSCI EM Eastern Europe -0.2 (0.5) (0.4) (0.9) 66% 9.4 19% 2% 34% 79% 1.0 17% 16% 0% 48%

MSCI BRIC -1.7 (0.1) (0.1) (1.6) 96% 14.9 0% -3% 28% 96% 2.0 1% 1% 16% 74%

MSCI USA -3.1 (0.9) (0.2) (2.0) 100% 22.9 7% -3% 25% 99% 4.2 9% 2% 17% 100%

MSCI Europe -1.6 (0.9) (0.7) (1.3) 100% 17.2 11% -1% 21% 99% 1.9 13% 8% 0% 66%

MSCI Japan -0.5 (0.5) (0.3) (0.8) 79% 18.3 8% 1% 29% 89% 1.4 10% 7% 6% 67%

MSCI Germany -1.0 (0.8) 0.0 (0.6) 94% 16.1 13% -5% 17% 97% 1.7 13% 1% 2% 55%

MSCI United Kingdom -0.2 (0.7) (0.7) (0.7) 54% 14.4 11% -2% 14% 77% 1.6 17% 11% -8% 9%

MSCI China -1.2 0.0 (0.0) (1.2) 91% 15.0 -1% -1% 31% 91% 2.1 -1% -2% 22% 67%

MSCI USA Large Cap -3.1 (0.8) (0.0) (1.9) 100% 22.8 7% -4% 25% 99% 4.4 9% 0% 20% 100%

MSCI USA Mid Cap -2.3 (1.0) (0.8) (1.6) 100% 23.3 6% -1% 22% 98% 3.1 11% 11% 7% 100%

MSCI USA Small Cap -1.7 (0.9) (0.8) (1.8) 99% 27.4 5% -10% 27% 93% 2.4 15% 14% 12% 92%

MSCI USA Value -1.6 (0.9) (0.5) (1.0) 100% 16.7 9% 0% 14% 99% 2.4 11% 5% 5% 98%

MSCI USA Growth -3.8 (0.4) 0.3 (2.3) 99% 33.0 5% -6% 34% 99% 10.6 6% -3% 38% 99%

MSCI India -1.5 (0.6) (0.5) (1.3) 96% 22.3 3% -2% 20% 98% 2.9 -1% 1% 0% 29%

MSCI Korea -1.0 (0.5) (0.4) (1.2) 92% 12.5 10% 2% 12% 97% 1.2 13% 14% 26% 46%

MSCI Hong Kong -0.6 (0.7) (0.8) (1.4) 79% 17.1 10% 2% 19% 86% 1.3 11% 6% 5% 33%

MSCI Taiwan -1.3 (0.4) (0.3) (1.0) 95% 17.3 5% 1% 9% 94% 2.4 7% 7% 23% 99%

MSCI Singapore 0.2 (0.8) (0.5) (0.4) 37% 14.4 10% 2% 14% 83% 1.1 16% 10% -12% 6%

MSCI Thailand -1.4 (1.3) (0.6) (0.5) 100% 19.6 23% 7% 27% 100% 1.7 19% 6% -14% 11%

MSCI Malaysia -0.9 (0.2) (0.6) (1.3) 90% 15.2 -1% -12% -2% 61% 1.7 5% 7% 6% 20%

MSCI Philippines -0.1 (0.5) (0.8) (0.0) 56% 17.8 5% 13% 13% 75% 1.8 6% 13% -14% 13%

MSCI Indonesia 0.2 (0.6) (0.4) (0.1) 32% 16.5 8% -1% 11% 96% 2.3 8% 2% -8% 6%

MSCI China A Onshore Large Cap -1.1 (0.2) (0.1) (1.3) 86% 15.3 4% 4% 36% 95% 2.3 2% 1% 27% 81%

MSCI Brazil -1.4 (0.6) (0.1) (1.1) 97% 12.8 4% -19% 1% 86% 2.2 13% 9% 1% 77%

MSCI Russia -0.1 (0.3) (0.3) (0.8) 67% 8.7 15% 1% 38% 81% 1.0 16% 17% 4% 57%

MSCI Mexico 0.5 (0.6) (0.4) (0.7) 29% 14.6 9% 1% 9% 53% 1.9 15% 15% -5% 5%

November-20 Price to NTM EPS 1M Chg 3M Chg 12M Chg Times

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MSCI USA VS MSCI AC World 1.2 0% -1% 1% 97% 1.6 0% -2% 6% 98%

MSCI Europe VS MSCI AC World 0.9 4% 2% -2% 12% 0.7 4% 4% -10% 2%

MSCI Japan VS MSCI AC World 0.9 1% 4% 5% 29% 0.5 0% 3% -4% 4%MSCI EM (Emerging Markets) VS MSCI AC World 0.7 -4% 1% -2% 26% 0.7 -4% 0% 3% 9%MSCI AC Asia ex JP VS MSCI AC World 0.8 -4% 2% -3% 23% 0.7 -4% 0% 5% 14%MSCI USA VS MSCI Europe 1.3 -4% -3% 3% 95% 2.3 -4% -6% 17% 98%MSCI AC Asia ex JP VS MSCI EM (Emerging Markets) 1.1 0% 1% -1% 22% 1.0 0% -1% 2% 67%MSCI China VS MSCI EM (Emerging Markets) 1.0 -4% 1% 9% 50% 1.1 -5% -6% 7% 67%MSCI USA Value VS MSCI USA Growth 0.5 3% 7% -15% 2% 0.2 5% 9% -24% 2%

MSCI USA Large Cap VS MSCI USA Mid Cap 1.0 2% -2% 3% 92% 1.4 -2% -9% 11% 97%

MSCI USA VS MSCI World ex USA 1.3 -2% -3% 3% 97% 2.4 -3% -5% 16% 98%


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(b) Bond valuations based on our 10-yr rolling Z-score models

• US Treasuries remained expensive.

• Both IG and HY spreads moved to expensive from fair value, IG more so than HY.

Exhibit V3: Sovereign and Corporate Bond Yields

Source: Bloomberg/Factset/Principal Global Asset Allocation; YTW=Yield to Worst; OAS=Option Adjusted Spread; Excess Spread=OAS-UST 10yr; Z scores calculated using 10-yr rolling periods; IG Investment Grade, HY= High Yield; Negative=Expensive; As of 11/30/2020

(c) Currency valuations using purchasing-power parity-based models Regional: Latin America remained the cheapest region followed by EEMEA. Asia-x-J-x-China was neutral. Both EUR and US$ were on the expensive side (the former more than the latter after appreciating in the past few months). Cheap 3: Turkish Lira, HK$, & South African Rand. Expensive 3: Thai Baht, Indonesian Rupiah and Czech Krona.

Exhibit V4: Currency Values using Real-Effective Exchange Rates

Currencies (overvalued in red)

Time-Weighted CPI REER Change

Time-Weighted PPI REER Change

Equal Weighted (CPI&PPI) Rank

Turkey -38% -24% -31% 1

Hong Kong -4% -18% -11% 2

S Africa -14% -4% -9% 3

Mexico -12% -6% -9% 4

Malaysia -8% -9% -9% 5

UK -9% -7% -8% 6

Japan -11% -4% -7% 7

Brazil -30% 16% -7% 8

Singapore 1% -12% -6% 9

Taiwan -2% -9% -5% 10

Russia -9% -1% -5% 11

Norway -9% 0% -5% 12

Sweden -6% -2% -4% 13

Hungary -3% -4% -4% 14

Canada -4% -2% -3% 15

Poland -1% -2% -1% 16

Korea -1% 0% 0% 17

US -1% 1% 0% 18

Philippines 13% -11% 1% 19

India 10% -7% 2% 20

Chile -12% 18% 3% 21

Euro Area 2% 4% 3% 22

Australia 6% 7% 6% 23

Switzerland 6% 12% 9% 24

China 14% 5% 9% 25

Czech R 15% 10% 12% 26

Indonesia 4% 25% 15% 27

Thailand 12% 20% 16% 28 Source: Bloomberg/Factset/Principal Global Asset Allocation values; As of 11/30/2020

UST 10-Year

Yield % YTW % OAS % Excess Spread % YTW % OAS % Excess Spread %

Current 0.84 1.73 1.00 0.16 4.70 4.12 3.28

Max 3.47 4.27 2.55 1.88 9.51 8.80 8.13

Min 0.53 1.73 0.82 -2.15 4.70 3.16 0.10

Median 2.19 3.09 1.25 -0.92 6.27 4.56 2.25

Mean 2.15 3.11 1.30 -0.85 6.48 4.75 2.60

Std. Dev. 0.64 0.50 0.31 0.80 1.02 1.18 1.59

1m Change -0.03 -0.21 -0.19 -0.16 -1.08 -0.97 -0.94

3m Change 0.13 -0.13 -0.22 -0.35 -0.64 -0.65 -0.78

12m Change -0.94 -1.09 0.00 0.94 -0.89 0.42 1.36

Current Z-Score -2.04 -2.74 -0.97 1.26 -1.75 -0.53 0.43

BarCap US Investment Grade Credit BarCap US Corporate High Yield


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IX. Equities

HK SAR & China 30-Nov-

20 Month 4Q'20 YTD'20 1yr 3 yrs 5 yrs 10 yrs 15 yrs Hang Seng HKD 26,341 9% 12% -4% 3.3% 0.0% 7.4% 5.0% 7.5% H-Shares HKD 10,546 8% 12% -2% 6.4% 1.1% 5.6% 1.8% 8.5% SH-SZ CSI 300 CNY 4,960 6% 8% 24% 32.3% 9.8% 9.2% 6.9% 14.3% MSCI China USD 762 3% 8% 26% 36.5% 8.8% 14.1% 7.2% 11.8% Developed S&P500-US USD 3,622 11% 8% 14% 17.4% 13.2% 14.0% 14.2% 9.6% Nasdaq-US USD 12,199 12% 9% 37% 42.2% 22.4% 20.4% 18.6% 13.3% Russell 2000-US USD 1,820 18% 21% 10% 13.6% 7.1% 10.2% 11.1% 8.3% DAX-Germany EUR 13,291 15% 4% 0% 0.4% 0.7% 3.1% 7.1% 6.5% FTSE100-UK GBP 6,266 13% 7% -14% -11.9% -1.3% 3.8% 5.2% 4.9% CAC 40-France EUR 5,519 20% 15% -6% -4.4% 3.9% 5.4% 7.9% 4.8% ASX 200-Australia AUD 6,518 10% 12% 1% -1.1% 8.2% 10.5% 9.6% 8.3% Nikkei 225-Japan JPY 26,434 15% 14% 14% 15.7% 7.3% 8.1% 12.4% 5.8% Asia/Other EMs India-Sensex INR 44,150 11% 16% 8% 9.5% 11.3% 12.5% 10.0% 12.9% Korea-KOSPI KRW 2,591 14% 11% 19% 26.7% 3.7% 7.5% 4.8% 6.5% Taiwan-TWSI TWD 13,723 9% 10% 18% 23.6% 13.4% 14.9% 9.0% 9.4% Singapore-STI SGD 2,806 16% 14% -9% -8.3% -2.7% 3.5% 2.3% 4.6% Thai-SET Index THB 1,408 18% 14% -8% -8.4% -3.0% 4.0% 6.9% 9.0% Malaysia-KLCI MYR 1,563 7% 4% 1% 3.0% 0.1% 1.8% 3.8% 7.5% Indonesia-JCI IDR 5,612 9% 15% -9% -4.1% 0.5% 7.2% 7.0% 14.1% Brazil-BOVESPA BRL 108,893 16% 15% -6% 0.6% 14.8% 19.3% 4.9% 8.5% Mexico-BOLSA MXN 41,779 14% 12% -2% -0.5% -1.7% 1.3% 3.0% 8.1% Russia-RTSI$ USD 1,282 20% 11% -12% -4.9% 11.3% 15.3% 2.9% 5.6% MSCI: Net Total Return (US$) MSCI AC World USD 314 12% 10% 11% 15.0% 9.0% 10.8% 9.4% 7.0% MSCI AC World ex USA USD 263 13% 11% 5% 9.5% 3.8% 7.4% 5.2% 4.8% MSCI EM USD 581 9% 11% 10% 18.4% 4.9% 10.7% 3.6% 6.5% MSCI AsiaPac xJ USD 606 9% 12% 15% 21.5% 6.7% 11.5% 6.2% 8.0% MSCI US USD 10,108 12% 9% 16% 19.3% 13.4% 13.7% 13.7% 9.1% MSCI Europe USD 7,223 17% 10% 1% 4.6% 2.5% 5.3% 5.7% 4.4% MSCI Japan USD 7,492 12% 11% 10% 12.2% 4.9% 7.8% 6.8% 3.7%

Source: Bloomberg/Factset/Principal Global Asset Allocation; Annualized for > 1yr time periods; As of 11/30/2020 Equities had one of their best months ever, riding the end of US election uncertainty (details here), very promising vaccine news which overshadowed the worsening situation on new cases (details here), a further easing of global financial conditions (details here and here), continued macro-economic recovery albeit at a slightly slower pace (details here) and improving earnings visibility (details here). Implied volatility crashed (details here), encouraging risk taking which was evidenced by very strong flows into equities (details here). In December, we expect outflows from equities from rebalancing of multi-asset strategies though risk-parity strategies will balance some of that outflow, as detailed here. All 40 markets gained. The median local currency return was 12.7%, the second-best month ever in the last 25yrs! The

drawdown narrowed to -2% (-12% the month prior), with 18 markets in the green (just 7 the month prior). At the country level, Europe and Japan led with market caps in each country biased towards deep cyclicals as compared to US markets where new economy secular growth stocks dominate. Small Caps, energy, financials and industrials soared. The winners of the COVID-19 world lost out as markets priced a significant recovery in fortunes of the beaten down sectors (Brazil and Russia stood out in this regard). Short-covering also played a big role as many of such stocks were shorted by the hedge fund community to fund secular growth longs. Also benefiting were beneficiaries of re-opening of trade and tourism (countries like Singapore and Thailand). Despite the cyclical value rotation, Nasdaq finished marginally ahead of S&P 500, re-affirming the fundamental strength of large-cap technology. Outside of US however, core growth markets like offshore China keep pace, partly due to the rotation into financials and energy, and partly due to a completely unexpected development surrounding Ant Financials, the Alibaba promoted fintech giant whose fortunes took a sudden, rippling tumble (details here).

20 return tables showed US, secular growth and technology still leading by a wide margin. Three in the top four were Nasdaq, the tech-heavy Shenzhen & Korea. At the bottom were European markets (Greece, Russia, Hungary & UK). Styles

Value finished as the best style by a big margin in all markets barring Japan. In fact, in Europe it beat the worst style (Momentum) by 13%! So strong was its performance that it catapulted Value to the top place over 3 months too.


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However, its longer-term performance (12 months or longer) remained very weak with Momentum, Growth and Quality dominating. The struggles for Min Volatility as a style continued, not just in November but also over longer periods. Exhibit E1: Style Returns

Source: Bloomberg/Factset/Principal Global Asset Allocation. As of 11/30/2020.

Capitalization & Sectors o Large Caps underperformed Small caps in every region barring Japan, which narrowed their underperformance for

the year. o Sector performance showed a clear bias towards cyclicals across geographies, with Energy leading in all markets

barring Japan. Materials, Financials and Industrials too scored large relative wins. Surprisingly, IT too did well as defensive value (health care, telcos, utilities and staples) was shunned. While REITs lagged broad equities, COVID-19 losers like retail and office Reits outperformed industrial and specialized Reits, both of which had outperformed since the start of the year. , US Reits trailed S&P 500 by -25% (-11% vs 14%) and Global Reits trailed MSCI ACWI by -19% (-7% vs 12%).

Exhibit E2: Sector returns: for the last month and YTD

Source: Bloomberg/Factset/Principal Global Asset Allocation, As of 11/30/2020.

Bottom-up earnings estimates

• 2020-21 EPS growth expectations stayed on a positive track. 3m EPS change increased to 4%, the revision ratio improved further and stayed well above 0.50 (more upgrades than downgrades), and most markets saw higher EPS integers (Exhibits E3, E6 & E7). for 2020 improved to -17%yoy from -19% the month prior but 2021 expected growth dropped to 24%yoy from 26% (Exhibit E4). 80% of global sectors experienced positive EPS change on a 3-month basis (using MSCI ACWI sectors).

Returns ($) 30-Nov-20

Style Return-1m Momentum Value Growth Quality Min Vol Best-Worst Style Return-3m Momentum Value Growth Quality Min Vol Best-Worst

US 10% 13% 10% 11% 8% 5% US 2% 8% 2% 3% 3% 6%

EM 7% 13% 6% 6% 8% 7% EM 5% 11% 9% 8% 6% 5%

AsiaxJ 8% 13% 6% 6% 7% 7% AsiaxJ 8% 10% 8% 6% 6% 4%

Europe 9% 23% 11% 13% 11% 13% Europe 4% 10% 4% 6% 3% 6%

Japan 15% 9% 15% 14% 9% 6% Japan 18% 5% 17% 17% 6% 13%


US 24% 15% 28% 18% 9% 19% US 27% 0% 40% 23% 5% 40%

EM 40% 25% 37% 28% 17% 23% EM 38% 4% 33% 17% 7% 34%

AsiaxJ 45% 26% 38% 30% 18% 27% AsiaxJ 53% 8% 35% 26% 7% 46%

Europe 18% 23% 18% 18% 14% 9% Europe 18% -5% 13% 14% 5% 23%

Japan 28% 7% 26% 23% 7% 22% Japan 35% -7% 28% 29% -1% 42%


US 16% 4% 23% 17% 10% 19% US 17% 8% 19% 16% 11% 12%

EM 12% 0% 9% 5% 3% 11% EM 15% 7% 14% 9% 6% 9%

AsiaxJ 13% 1% 12% 8% 3% 12% AsiaxJ 17% 7% 16% 13% 7% 10%

Europe 8% -3% 8% 9% 5% 12% Europe 10% 2% 8% 9% 5% 7%

Japan 10% -3% 10% 11% 2% 15% Japan 11% 0% 12% 12% 6% 12%

Return during Nov-20 US Europe Japan EMs

Asia-x-

Japan China

AC

World

USD EUR JPY USD USD HKD USD

Broad Market 11% 14% 12% 9% 8% 3% 12%

IT 12% 15% 16% 13% 13% 10% 13%

Cons Disc 12% 16% 11% 2% 1% -1% 11%

Energy 26% 33% 7% 16% 8% 15% 25%

Materials 12% 13% 18% 16% 15% 15% 13%

Financials 17% 25% 9% 16% 14% 12% 19%

Industrials 16% 14% 14% 12% 11% 7% 15%

Relative

Value vs Growth 3% 11% -5% 7% 6% 12% 4%

Large vs Small Cap -6% -1% 6% -5% -4% -8% -3%

IT vs Market 0% 1% 4% 4% 5% 7% 0%

Cons Disc vs Market 0% 3% -1% -8% -7% -4% -1%

Energy vs Market 14% 19% -6% 7% 0% 12% 13%

Materials vs Market 1% -1% 6% 6% 7% 12% 1%

Financials vs Market 5% 11% -3% 6% 6% 10% 6%

Industrials vs Market 4% 1% 2% 2% 3% 4% 3%

YTD Nov-20 Returns US Europe Japan EMs

Asia-x-

Japan China

AC

World

USD EUR JPY USD USD HKD USD

Broad Market 15% -7% 3% 8% 15% 23% 9%

IT 37% 8% 16% 35% 35% 53% 35%

Cons Disc 42% 0% 3% 35% 38% 51% 30%

Energy -40% -38% -35% -23% -9% -29% -34%

Materials 15% 0% 9% 9% 16% 19% 10%

Financials -10% -18% -17% -16% -5% -7% -11%

Industrials 9% 0% 2% -5% -4% 3% 7%

Relative

Value vs Growth -39% -18% -29% -26% -30% -47% -31%

Large vs Small Cap 6% -6% 5% 1% 0% 5% 3%

IT vs Market 22% 15% 12% 27% 20% 30% 26%

Cons Disc vs Market 28% 8% 0% 27% 24% 28% 20%

Energy vs Market -55% -31% -39% -31% -24% -52% -44%

Materials vs Market 1% 8% 5% 1% 1% -4% 1%

Financials vs Market -25% -11% -20% -24% -20% -30% -20%

Industrials vs Market -6% 8% -2% -13% -19% -21% -3%


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• 3 showed strong beats versus expectations globally. S&P 500 earnings surprised by 19%, earnings by 28%, EuroStoxx earnings by 14% and Emerging/Asia earnings by 9%.

• 2021 EPS growth expectations are being driven by a bounce in deep cyclical sector earnings, the sectors that explained a bulk of the EPS decline for 2020 (Exhibit E5). Unsurprisingly, Energy was at the forefront of it.

Exhibit E3: Earnings Outlook: Turning Around

Source: Bloomberg/Factset/Principal Global Asset Allocation. NTM = Next Twelve-Month EPS. . All Indices are MSCI Indices

listed companies). As of 11/30/2020. Exhibit E4: Expected Earnings and Revenue Growth

November-20 Sales Growth Earnings Growth Margin Growth Dividend Yield Payout Ratios

CCY 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021

MSCI AC World USD -5% 7% -17% 24% -12% 16% 2% 2% 46% 40%

MSCI World Index USD -6% 6% -18% 23% -13% 16% 2% 2% 47% 41%

MSCI World ex USA USD -7% 5% -26% 29% -20% 23% 3% 3% 58% 50%

MSCI EM (Emerging Markets) USD -3% 11% -10% 31% -7% 18% 2% 2% 39% 36%

MSCI AC Asia Pacific ex JP USD 0% 10% -4% 23% -4% 11% 2% 2% 41% 38%

S&P 500 USD -3% 7% -15% 22% -12% 13% 2% 2% 42% 36%

MSCI Europe EUR -16% 7% -33% 31% -21% 22% 3% 3% 60% 53%

MSCI Japan JPY -9% 3% -29% 29% -23% 26% 2% 2% 49% 40%

MSCI Germany EUR -8% 6% -22% 27% -16% 20% 3% 3% 49% 44%

MSCI China CNY -4% 15% -9% 18% -4% 3% 2% 2% 27% 26%

MSCI United Kingdom GBP -25% 10% -39% 36% -18% 23% 3% 4% 67% 57%

MSCI India INR -12% 11% -10% 27% 2% 15% 1% 1% 36% 33%

MSCI Korea KRW -5% 9% 18% 41% 24% 29% 2% 2% 33% 25%

MSCI Taiwan TWD 1% 6% 17% 12% 16% 5% 3% 3% 57% 58%

MSCI Brazil BRL 5% 10% -46% 174% -48% 148% 2% 3% 72% 43%

MSCI USA Large Cap USD -4% 7% -12% 18% -8% 10% 2% 2% 41% 36%

MSCI USA Mid Cap USD -7% 8% -16% 26% -10% 17% 1% 1% 38% 30%

MSCI USA Small Cap USD -6% 7% -40% 76% -36% 64% 1% 1% 61% 34%

S&P 500 Value USD -6% 6% -25% 24% -21% 18% 3% 3% 53% 43%

S&P 500 Growth USD 3% 11% 0% 19% -3% 7% 1% 1% 31% 28%

MSCI AC Asia ex JP USD 0% 11% -2% 24% -2% 11% 2% 2% 38% 34%

MSCI Hong Kong HKD -15% 15% -29% 32% -16% 15% 3% 3% 60% 51%

MSCI Singapore SGD -21% 7% -39% 33% -23% 24% 3% 4% 66% 60%

MSCI Malaysia MYR -17% 14% -19% 38% -3% 21% 3% 4% 60% 55%

MSCI Thailand THB -16% 9% -42% 35% -31% 24% 2% 3% 57% 51%

MSCI Indonesia IDR -10% 12% -28% 32% -20% 18% 3% 3% 56% 45%

MSCI Philippines PHP -16% 15% -48% 43% -39% 25% 2% 2% 46% 28%

MSCI Mexico MXN -1% 5% -32% 69% -31% 61% 2% 3% 52% 48%

MSCI Russia USD -32% 15% -58% 63% -38% 42% 5% 7% 68% 54%

MSCI Chile CLP -22% 6% -38% 83% -21% 72% 3% 3% 82% 46%

MSCI Australia AUD -10% 3% -25% 18% -17% 14% 3% 3% 68% 68%

MSCI New Zealand NZD -5% 7% -17% 24% -12% 16% 2% 2% 46% 40%

Source: Bloomberg/Factset/Principal Global Asset Allocation; Estimates are sell- -up aggregated expectations; As of 11/30/2020

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EM USD Asia-Pac x J USD

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Exhibit E5: Sectoral Earnings Growth Heatmap for 2021: A Deep Cyclical Recovery Expected

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 11/30/2020 * EPS for US, Japan, UK, Korea and Brazil was very low/negative for 2020 and turns sharply positive for 2021 as under: US (-0.5 to 4.5), Japan (-3 to 11.5), UK (0.2 to 6.6), Korea (-66 to 26) and Brazil (-187 to 111). Exhibit E6: EPS Trend (Rebased to 12/31/19=100) Exhibit E7: Earnings Revision Ratio (0.5=neutral, >0.5=+ve)

Source: Bloomberg/Factset/Principal Global Asset Allocation; Earnings Revision ratio = Upgrades/(Upgrades+Downgrades); As of 11/30/2020,

2021 EPS Growth as of 11'20 Currency Overall Financials Cons Disc Real

Estate

Materials Industrials Energy IT Comm

Services

Staples Health

Care

Utilities

MSCI AC World USD 24% 19% 69% 8% 30% 44% 430% 16% 14% 9% 12% 7%

MSCI World Index USD 23% 21% 73% 5% 22% 45% 645% 15% 13% 8% 11% 5%

MSCI World ex USA USD 29% 20% 110% 5% 19% 63% 295% 17% 7% 11% 11% 9%

MSCI EAFE USD 29% 21% 112% 5% 16% 64% 368% 17% 7% 11% 11% 8%

MSCI EM (Emerging Markets) USD 31% 14% 55% 19% 61% 38% 241% 22% 20% 20% 25% 23%

MSCI AC Asia Pacific ex JP USD 23% 14% 65% 17% 21% 38% 50% 22% 16% 12% 25% 10%

MSCI USA USD 19% 22% 49% 5% 27% 31% * 15% 15% 6% 11% 3%

MSCI Europe USD 31% 22% 197% 1% 5% 67% 379% 15% 15% 8% 10% 11%

MSCI Japan JPY 29% 9% 47% -6% 151% 64% * 20% -1% 31% 21% -1%

MSCI Germany EUR 27% 32% 148% 5% -40% 93% 1% 5% 20% 3% 13%

MSCI United Kingdom GBP 36% 35% 46% 4% 9% 122% * 0% 22% 5% 13% 3%

MSCI Australia AUD 18% 31% 11% 13% 8% 61% 18% 20% 6% 11% 11% -11%

MSCI China CNY 18% 9% 40% 17% 16% 29% 21% 25% 14% 20% 24% 13%

MSCI India INR 27% 29% 123% 36% 54% 24% 9% 307% 17% 20% 13%

MSCI Korea KRW 41% 1% 117% 59% 60% * 37% 39% 2% 15% 32%

MSCI Taiwan TWD 12% 3% 22% 97% 47% 36% 341% 12% -5% 4% 1337%

MSCI Brazil BRL 174% 30% 73% 60% 100% 49% * 105% 17% 64% 17% 27%

MSCI Russia USD 63% 24% 43% 127% 34% 18% 3%

2020-21 EPS Rebased Nov-20 Oct-20 Aug-20 May-20 Nov-19

AC World USD 80 78 77 76 100

World USD 79 78 77 76 100

World x US USD 74 72 73 73 99

EM USD 80 77 76 78 98

Asia-Pac x J USD 85 83 82 82 99

S&P 500 USD 82 81 79 78 100

Europe EUR 69 68 67 71 101

Japan JPY 71 69 71 80 101

Germany EUR 73 70 68 73 100

China CNY 83 83 85 91 100

UK GBP 66 66 64 69 101

India INR 76 73 71 76 99

Korea KRW 85 84 82 83 99

Taiwan TWD 102 100 95 90 99

Brazil BRL 69 65 59 69 102

US Large USD 83 82 81 79 100

US Mid USD 82 79 76 73 101

US Small USD 67 65 60 56 100

US Value USD 75 74 73 72 99

US Growth USD 92 91 89 85 102

Asia x J USD 86 84 82 83 99

HK HKD 71 72 74 83 101

Singapore SGD 67 65 65 74 101

Malaysia MYR 84 82 78 79 100

Thailand THB 56 57 59 68 101

Indonesia IDR 69 68 69 76 98

Philippines PHP 55 56 59 69 104

Mexico MXN 72 72 70 76 101

Russia USD 49 47 52 58 98

Chile CLP 54 56 61 77 97

Australia AUD 78 79 75 78 101

New Zealand NZD 82 81 81 85 100

Nov-20 Oct-20 Aug-20 May-20 Feb-20

0.57 0.54 0.47 0.18 0.41

0.61 0.57 0.49 0.14 0.41

0.53 0.49 0.40 0.15 0.40

0.52 0.51 0.45 0.24 0.42

0.52 0.49 0.45 0.24 0.42

0.73 0.70 0.62 0.13 0.43

0.54 0.52 0.43 0.12 0.38

0.52 0.46 0.32 0.16 0.42

0.55 0.54 0.45 0.14 0.36

0.50 0.49 0.46 0.31 0.44

0.57 0.56 0.46 0.11 0.36

0.64 0.58 0.42 0.07 0.39

0.54 0.55 0.51 0.22 0.43

0.67 0.64 0.61 0.25 0.51

0.60 0.56 0.43 0.21 0.40

0.72 0.70 0.66 0.14 0.46

0.74 0.71 0.62 0.13 0.41

0.65 0.63 0.58 0.19 0.42

0.71 0.68 0.59 0.13 0.40

0.78 0.75 0.67 0.15 0.48

0.52 0.49 0.45 0.24 0.42

0.28 0.27 0.28 0.14 0.36

0.55 0.44 0.31 0.11 0.44

0.55 0.52 0.41 0.19 0.40

0.40 0.35 0.20 0.09 0.26

0.37 0.34 0.42 0.18 0.28

0.28 0.25 0.23 0.11 0.50

0.50 0.51 0.37 0.19 0.36

0.65 0.71 0.52 0.32 0.41

0.34 0.29 0.27 0.16 0.41

0.55 0.47 0.45 0.16 0.35

0.71 0.60 0.51 0.31 0.53

Indonesia

Philippines

Mexico

Russia

Chile

UK

3m ERR 2020-21

AC World

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World x US

EM

Asia-Pac x J

S&P 500

Europe

Japan

Germany

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X. Fixed Income

Key Policy Rates (%) 30-Nov-

20 Month 4Q'20 YTD'20 1yr 3 yrs 5 yrs 10 yrs 15 yrs US-Fed Funds USD 0.25 - - (1.50) (1.50) (1.00) - - (3.75) UK Bank Rate GBP 0.10 - - (0.65) (0.65) (0.40) (0.40) (0.40) (4.40) ECB Dep Rate EUR -0.50 - - - - (0.10) (0.30) (0.75) (1.50) China 7-day Rev Repo CNY 2.20 - - (0.30) (0.30) (0.25) (0.05) - - Sovereign Yields (%) USA-10y USD 0.84 (0.03) 0.15 (1.08) (0.94) (1.57) (1.37) (1.96) (3.65) UK-10y GBP 0.31 0.04 0.08 (0.52) (0.39) (1.03) (1.52) (2.92) (3.93) GER-10y EUR -0.57 0.06 (0.05) (0.39) (0.21) (0.94) (1.04) (3.24) (4.03) Japan-10y JPY 0.03 (0.01) 0.02 0.04 0.11 (0.01) (0.28) (1.16) (1.41) China-10y CNY 3.27 0.09 0.13 0.13 0.10 (0.64) 0.15 (0.74) - India-10y INR 5.91 0.03 (0.10) (0.64) (0.56) (1.15) (1.88) (2.15) (1.17) Credit Spreads (bps) 3m $ LIBOR-OIS USD 15 1 (1) (20) (21) 3 2 4 4 US IG Corp USD 104 (21) (32) 11 (1) 7 (51) (67) 9 US HY Corp USD 412 (97) (105) 76 42 68 (190) (196) 60 Europe IG Corp EUR 98 (23) (25) - (10) 4 (40) (117) 45 Europe HY Corp EUR 369 (111) (102) 65 27 85 (48) (289) (3) Asia US$ IG USD 156 (9) (18) 36 31 45 (17) (49) - Asia US$ HY USD 700 (92) (52) 208 188 355 143 165 - JPM EMBI Spread USD 350 (38) (48) 73 41 37 (69) 29 113 Bond Returns (%) Global Treasuries USD 248 2% 2% 8% 8.5% 4.4% 4.6% 2.3% 3.8% Global Corp IG USD 300 3% 3% 9% 9.4% 5.4% 5.6% 4.3% 4.8% Global Corp HY USD 1,477 5% 5% 4% 7.1% 4.2% 6.9% 6.5% 7.4%

Source: Bloomberg/Factset/Principal Global Asset Allocation; >1yr returns are annualized; Spreads/Returns are from Bloomberg Barclays Global Indices; As of 11/30/2020

Interest Rates and Yields a) Policy rates: The interest rate actions during the month are detailed here.

finished 4bps higher at 1.02%, with DM policy rate unchanged at -0.01% and EM at 2.69% (Turkey hiked 475bps to shore up a sinking currency). Given where rates are, most incremental easing will be in the form of balance sheet support and forward guidance, if required. In fact, steeper curves at the shorter end mean that rate hike possibilities are rising in markets like Brazil (270bps), Chile (52bps), China (21bps), India (37bps) and Korea (19bps). Among large EMs, only Mexico (-14bps) is pricing a rate cut.

Exhibit F1a: Zero Bound = Fading Rate Cut Momentum Exhibit F1b: Euro$ Futures

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 11/30/2020

b) Implied Fed Funds Forwards Rates show markets moved away from pricing rate cuts. US rates are still expected to

leave the zero bound only by end-2023. The projected terminal Fed funds rate of 1.5% is still -10long-term neutral estimate of 2.5%. The US treasury curve too shows the 10-yr forward 10-yr UST yield at just 2.05%.

c) Nominal Sovereign 10-yr Yields: Global Sovereign 10-yr yield indicator was flat at 1.97% despite November being one of the best risk-on months ever! 17/29 markets ended with higher yields, 12 lower. DM yield composite was unchanged @0.47% with Norway (15bps) rising the most. Italy (-13bps) continued to grind tighter on the anticipated ECB balance sheet expansion and progress in Brexit talks. EM yields -2bps to 4.17%, with

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Nov-20 Oct-20


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sizeable contributions from Turkey (-146bps as its Central bank finally hiked its overnight rate 475bps), Indonesia (-43bps) and Mexico (-35bps). Asian yields were 3.44% with Malaysia (12bps) and China (9bps) rising. In Europe, lower peripheral yields and higher Bund yields shrank the spread to a low of 79bps. The UST-Bund spread narrowed 9bps to 141bps. EM-US carry was stable at 333bps, close to its all-time high of 362bps.

d) Term structure: Our global 2-10 spread indicator was unchanged at 68bps, with DMs at 53bps and EMs at 90bps. US

2-10 spread narrowed to 69bps from a 3-yr high of 72bps. All 2-10 curves were positive barring Turkey (-184bps), and Taiwan (-25bps). Italy (102bps) offered the best term carry in DMs, Brazil/South Africa (306bps each) in EMs.

e) Real Sovereign 10-yr real yields: Based on Inflation swaps, they were -15bps as the rise in inflation expectations higher nominal yields. Real yields remained deeply negative in US (-120bps), Germany (-167bps),

UK (-322bps) and Australia (-106bps). Based on CPI releases, Global Real Yield indicator (smoothed using 3-month inflation) finished 11bps at 52bps (DMs at -22bps and EMs at 160bps). The EM real yield carry over USTs widened to a healthy 206bps. Real UST carry over Bunds vanished, having compressed -196bps in the past year.

Exhibit F2a: Nominal 10-yr Yields Exhibit F2b: Real 10-yr Yields (Nominals deflated using CPI)

Source: Bloomberg/Factset/Principal Global Asset Allocation; Yields are current GDP weighted; As of 11/30/2020

Credit spreads crashed across the board. Europe, high beta (Energy) outperformed. Asian IG lagged. While spreads moved into an expensive zone, Asian HY continued to offer the best carry both in relation to its own history and relative to other regions. Exhibit F3: Global Credit Spreads

Source: Bloomberg/Factset/Principal Global Asset Allocation; Spreads are after monthly rebalancing, based on ICE BofAML indices & represent Option Adjusted Spread vs Govt in BPs. IG= Investment Grade; HY=High Yield; EM=Emerging Markets. As of 11/30/2020. Bond Returns: Treasuries underperformed IG which underperformed HY as tighter credit spreads drove returns. Currency effects were positive as the US$ weakened across the board. The year 2020 has been a phenomenal year for fixed income investors. All segments i.e. treasuries, IG and HY have delivered strong returns, led initially by treasuries, and by credit in the past few months. $ weakness boosted returns from unhedged global strategies.

10-yr Nominal Yields Nov-20 1M Chg 3M Chg 12M Chg

Global 1.97 (0.01) 0.06 (0.42)

DM 0.46 (0.01) 0.01 (0.59)

EM 4.17 (0.02) 0.13 (0.17)

G7 0.46 (0.02) 0.02 (0.63)

DM ex US 0.07 0.01 (0.12) (0.24)

US 0.84 (0.03) 0.13 (0.94)

Japan 0.03 (0.01) (0.02) 0.11

Germany (0.57) 0.06 (0.17) (0.21)

EM-US 3.33 0.02 (0.00) 0.77

US - DM ex US 0.76 (0.05) 0.25 (0.70)

US - Japan 0.81 (0.02) 0.15 (1.04)

US - Germany 1.41 (0.09) 0.31 (0.73)

10-yr Real Yields

(deflated by CPI) Nov-20 1M Chg 3M Chg 12M Chg

Global 0.52 0.11 0.08 0.13

DM (0.22) 0.01 (0.10) (0.05)

EM 1.60 0.26 0.36 0.39

G7 (0.24) 0.02 (0.10) (0.11)

DM ex US 0.03 0.12 0.16 0.71

US (0.46) (0.10) (0.37) (0.80)

Japan 0.10 0.22 0.21 0.41

Germany (0.44) 0.09 0.43 1.16

EM-US 2.06 0.36 0.72 1.19

US - DM ex US (0.49) (0.22) (0.53) (1.52)

US - Japan (0.56) (0.32) (0.58) (1.21)

US - Germany (0.02) (0.19) (0.79) (1.96)

Option Adjusted

Spread (bps)

US IG

Corp

EUR IG

Corp

Asia IG

$ EM IG $

US HY

Corp

EUR HY

Corp

Asia HY

$ EM HY $

Asia - US

IG

Asia - US

HY

EM - US

IG

EM - US

HY

US - EU

IG

US - EU

HY US Global Asia EM EU

Nov-20 112 94 160 172 433 369 799 582 48 366 60 149 18 64 321 342 639 410 275

YTD Chg 11 - 36 22 73 61 239 88 25 166 11 15 11 12 62 69 203 66 61

1m Chg (22) (22) (9) (14) (99) (113) (88) (100) 13 11 8 (1) - 14 (77) (79) (79) (86) (91)

3m Chg (24) (20) (13) (19) (69) (77) 67 (59) 11 136 5 10 (4) 8 (45) (46) 80 (40) (57)

6m Chg (75) (72) (72) (86) (221) (188) (233) (256) 3 (12) (11) (35) (3) (33) (146) (150) (161) (170) (116)

12m Chg 1 (10) 29 12 31 21 229 61 28 198 11 30 11 10 30 41 200 49 31

24m Chg (33) (55) (2) (28) 4 (111) 99 29 31 95 5 25 22 115 37 24 101 57 (56)

36m Chg 9 5 46 35 72 96 421 207 37 349 26 135 4 (24) 63 90 375 172 91

High 305 337 298 370 877 974 1,376 1,154 67 499 135 454 67 206 575 633 1,095 784 650

Low 91 75 111 127 328 233 321 320 (24) (323) 34 (16) (71) (237) 215 228 151 193 144

Median 145 128 168 211 485 440 553 639 20 51 59 132 12 43 339 366 384 428 307

Current-Median (33) (34) (8) (39) (52) (71) 247 (57) 28 316 1 17 6 21 (18) (24) 256 (18) (32)

Current-Low 21 19 49 45 105 136 478 262 72 689 26 165 89 301 106 114 488 217 131

Standard Deviation 38 50 40 48 125 147 166 163 17 173 19 87 23 70 91 96 155 122 101

Relative Spreads High Yield - IG Spreads


22

Exhibit F4: Fixed Income Returns

Source: Bloomberg/Factset/Principal Global Asset Allocation; Returns are from ICE BofAML indices; IG=Investment Grade, HY=High Yield; As of 11/30/2020

Credit Ratings: On the sovereign side, the main rating actions were-

• Both downgraded South Africa a notch each to BB- and Ba2 respectively, retaining negative outlooks. S&P whose ratings for the country were already lower, affirmed it at BB-, Stable. Deteriorating fiscal situation and rising debt were main reasons for the downgrades. The moves followed one-notch downgrades by all three major rating agencies earlier in 2020.

• Greece to Ba3, Stable citing reforms improving its institutional strength, tax administration and the fight against corruption. While it projects its gross government debt to rise to 200% of GDP in 2020, it expects a gradual improvement thereafter. S&P already has Greece at BB- with a Stable outlook. Markets continued to reward Greece, with its 2-yr yield dropping into negative territory (-10bps). Its 10-yr yield dropped to an all-time low of 64bps, with its spread over 10-yr Bunds shrinking to a new low of 120bps!

On the corporate side, the ratio of global rating upgrade to total rating changes ticked up very slightly, with IG at 23% and HY at 15% and the pace of new downgrades slowing further. November saw 293 such actions versus 307 in October and a monthly average of 637 till end-August. Bankruptcy filings remained stable at levels well below those during the global financial crisis. Exhibit F5: Corporate Ratings: Weak but Bottoming Out

Source: Bloomberg/Factset/Principal Global Asset Allocation; Ratios represent rating and outlook upgrades as % of total changes S&P & Fitch; Global=US + W Europe + Asia-Pac, IG=Investment Grade, HY=High Yield; As of 11/30/2020

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

USTreasuries

US 10+Treasuries

US TIPS Global GovtBonds

EM ExternalSovereign

Returns in US$ Nov-20 3m

12m YTD-20

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

US

IG

GL

IG

Asi

a I

G

EM

IG

US

HY

Glo

ba

l H

Y

Asi

a H

Y

EM

HY

Ca

p S

ec

Returns in US$ Nov-20 3m

12m YTD-20

0%10%20%30%40%50%60%70%80%90%

100%

20

00

20

02

20

04

20

06

20

08

20

10

20

12

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14

20

16

20

18

YT

D'A

pr2

0

YT

D'J

un

20

YT

D'A

ug

20

YT

D'O

ct2

0

Upgrades/Total Rating Changes

Global IG+HY Global IG Global HY

-

100

200

300

400

500

600

700

800

900

20

00

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02

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Bloomberg US Corp Bankruptcy Index Bloomberg US Corp Bankruptcy Index


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XI. Currencies

CURRENCIES 30-Nov-

20 Month 4Q'20 YTD'20 1yr 3 yrs 5 yrs 10 yrs 15 yrs DXY Index 91.87 -2% -2% -5% -6.5% -0.4% -1.7% 1.2% 0.0% BB Asia $ Index 108.09 -2% -3% -3% -4.0% 0.1% -0.1% 0.6% -0.3% BB LatAm $ Index 43.81 -5% -4% 17% 12.5% 13.6% 8.5% 9.9% 6.3% USD/EURO 1.19 -2% -2% -6% -7.6% -0.1% -2.4% 0.9% -0.1% USD/GBP 1.33 -3% -3% 0% -3.0% 0.5% 2.5% 1.6% 1.8% USD/AUD 0.73 -4% -2% -4% -7.9% 1.0% -0.3% 2.7% 0.0% Yen/USD 104.31 0% -1% -4% -4.7% -2.5% -3.3% 2.2% -0.9% CNY/USD 6.58 -2% -3% -6% -6.5% -0.2% 0.6% -0.1% -1.4%

Source: Bloomberg/Factset/Principal Global Asset Allocation. +ve numbers indicates USD appreciation; Annualized > 1yr; As of 11/30/2020

Risk-on = US$ weakness. The greenback dropped against 29 of the 30 currencies we track it against, its sole win coming against the Argentinian peso (4%). Within DMs, its largest move was a drop of -7% (a 2-sigma move) against the Norwegian Krone (the best proxy in DMs for higher oil prices which jumped 27%). It also dropped -5% against the Kiwi. In Asia, the magnitude of moves was more muted as Asian currencies had already rallied in October in anticipation of a Joe Biden win. USD s drop of -4% against the Indonesian Rupiah was the most prominent. Its drop of -3% against KRW took its losing streak to six months (-11% cumulative). Similarly, it dropped a cumulative -8% against the Chinese Yuan in a 6-month losing streak. Latin American currencies made smart gains, led by the Real and Chilean Peso (7% each) with the Mexican Peso not far behind at 5%. Elsewhere, the most significant move was its -6% drop against the Turkish Lira as economic sense finally prevailed in the country. The much required policy rate hike took real policy rate back into positive territory, which could go a long way in stemming the dollarization of local currency deposits. , the US$ was weaker against DM and Asian currencies but significantly stronger against most LatAm and EEMEA currencies, the largest of which was against Argentinian Peso (36%), Real (33%) and Turkish Lira (32%). The Bloomberg EM-8 carry index gained 6%, but loss was still meaningful at -5%. Our real effective exchange rate-based valuation matrix can be accessed here. Latin America remained the cheapest region followed by EEMEA. Asia-x-J-x-China was neutral. EUR became expensive while USD moved towards fair value from expensive. Implied Currency Volatility: Both DM & EM volatilities dropped -14% each. DM volatility ended 22% below its long-term average while EM volatility at its long-term average. US$ Carry: $ carry vs EUR was 74bps using the 2-yr IRS differential (the high was 3.2% in Oct 2018). Using 10-yr yields, the differential has narrowed -140 bps since Oct 18 but widened 31bps in the last 3 months (details here). US$ positioning shows $ shorts were reduced but remained extended. Short-covering help much as the greenback stayed under pressure. The breadth of global recovery holds the key to future USD moves as shown in Exhibit CU2. If the PMI breadth starts dropping, it should give the greenback the legs it needs to break its losing streak. Exhibit CU1: Reduced US$ shorts Exhibit CU2: Breadth of global recovery key to $ fortunes

Source: Bloomberg/Factset/Principal Global Asset Allocation; USD speculative positions are against EUR, GBP, JPY, CAD, AUD and DXY. PMI Breadth score is PGAA s measure of breadth in Global Manufacturing PMIs. As of 11/30/2020

-300,000-200,000-100,000

0100,000200,000300,000400,000500,000600,000700,000

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

USD Speculative Short USD Speculative Long

Net USD Speculative Long

70

80

90

100

110

0%

20%

40%

60%

80%

100%

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

PMI Breadth Score (3m MA)

Inverted Broad $ Index (i.e. higher=weaker $), RHS


24

XII. Commodities

Commodities 30-Nov-

20 Month 4Q'20 YTD'20 1yr 3 yrs 5 yrs 10 yrs 15 yrs GS Commodity Index USD 385.6 13% 10% -12% -5.8% -3.1% 2.8% -3.9% -0.5% Nymex Crude USD/bl 45.3 27% 13% -26% -17.8% -7.6% 1.7% -6.0% -1.6% Brent Crude USD/bl 47.6 27% 16% -28% -23.8% -9.2% 1.3% -5.7% -1.0% Gold USD/toz 1,775.7 -6% -6% 17% 21.2% 11.7% 10.7% 2.5% 8.9% Silver USD/toz 22.5 -5% -4% 26% 32.8% 11.2% 9.9% -2.2% 6.9% Copper USD/T 7,578.8 13% 14% 23% 29.4% 3.9% 10.5% -1.0% 3.8% Aluminum USD/T 2,044.0 10% 17% 13% 15.9% 0.1% 7.1% -1.0% -0.3% Corn USc/bu 419.8 5% 11% 8% 13.1% 7.1% 2.8% -2.3% 5.5% Soybean USc/bu 1,168.5 11% 14% 24% 33.3% 5.8% 5.8% -0.6% 5.1% Wheat USc/bu 580.3 -3% 0% 4% 6.0% 12.3% 4.8% -1.1% 4.4%

Source: Bloomberg/Factset/Principal Global Asset Allocation; Annualized > 1yr; As of 11/30/2020

The GS commodity index jumped 13% to cut -12%. Energy (22%) led, followed by industrial metals (11%) as growth proxies were lapped up by markets. Energy: The GS energy index made handsome gains to not just recoup the drops of September and October, but close near its highest since the pandemic crushed oil prices hard, forcing a massive rescue operation by oil producers that involved deep output cuts to balance a market overflowing with oil. Oil prices seem fairly valued to us at current levels and the future path will be determined by the interaction between supply side discipline and demand recovery. OPEC is considering delaying the planned tapering of production cuts given potential hit to near-term demand from reimposed localized lockdowns due to rising virus cases. As they strive to strike unanimity, several hurdles including finding the right allocation among members and penalizing those did not implement the cuts fully will be the key. On the demand side, vaccine developments have surely improved the medium-term outlook even as the near term has become a little clouded. Precious metals ended lower though they remained winners for the year along with base metals. Both gold and silver succumbed to profit taking as inflation softened a tad and political risks ebbed with US elections failing to spring a negative surprise. That was an ideal recipe for investors to choose growth proxies (oil, copper) over ant-fragile ones like gold. Industrial metals: The sector has been unduly strong, reflective of continued shortage in production and recovering demand, buoyed by continued strength in Chinese growth indicators, which took Mr. Copper to a 7-yr high. Agricultural commodity prices were up yet again as crop yields remain challenged by weather conditions and supply bottlenecks. Russia announced that 22% of its crop was adversely impacted. Higher food prices are an important input into our models that predict higher inflation in 2021. Exhibit CO1: Gold lost some luster

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 11/30/2020; Right Exhibit shows inventories by week of the year

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

GOLD Held by ETFs (Mn Troy Oz) GOLD Held by ETFs (Mn Troy Oz)

-

10

20

30

40

50

60

70

80

19

99

20

00

20

01

20

02

20

03

20

04

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05

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06

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07

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11

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Gold/Brent Ratio Gold/Brent Ratio


25

Risk considerations Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Important information

This material covers general information only and and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that the investment manager or its affiliates has recommended a specific security for any client account. Subject to any contrary provisions of applicable law, the investment manager and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in the information or data provided.

- among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

Proprietary model output is based upon certain assumptions that may change, are not guaranteed and should not be relied upon as a significant basis for an investment decision. Forecasts for each asset class can be conditional on economic scenarios; in the event a scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making an investment decision. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice

Indices are unmanaged and do not consider fees, expenses and transaction costs are not available for direct investment. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation.

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26

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