Up to Neutral on reduced crash risk.

Plus Why ESG driven Energy sell off may be in the early stages (and give even larger rebound)

26 November, 2019

Peter HermanrudPhone : (+47) 24 13 36 22Mobile : (+47) 95 18 48 86E-mail : ph@sb1markets.no

SpareBank 1 MarketsPhone : (+47) 24 14 74 18Visit address : Olav Vs gate 5, 0161 OsloPost address : PostBox 1398 Vika, 0114 Oslo

Fredrik GundersenPhone : (+47) 24 14 36 28Mobile : (+47) 95 27 85 47E-mail : fg@sb1markets.no

Source: SB1 markets, Macrobond

Market crashes follow a pattern: First, the market becomes too expensive

From P/B 2.1, the market usually has peaked within 15 months, then crashed. Peak was Sep 18

Valuation

Then the global macro picture deteriorates

Macro

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4

OECD Leading Indicators come down

All four times L.I. reached 99.2 (now 99.0) the market has crashed. Note: Subject to revisions!

Macro

5

The bond markets sees the writing on the wall, and the yield curve inverts

100

110

120

130

140

150

160

170

180

80,0

85,0

90,0

95,0

100,0

105,0

110,0

115,0

120,0

Last24m

Last12m

Last6m

0 First6m

First12m

ISMConsumer expect.New Home salesJobbless claims (inverse)

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The market does not react to weakening macro. Then suddenly it does

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USA makrodata og OSEBX før/etter toppen i 90, 98, 00, 08

OSEBX

U.S. Macro

Finans /Psykologi

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3% global GDP growth has usually given 0 earnings growth, just like now

Unless GDP growth improves, we must learn to live with flat earnings

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And without earnings growth, markets look bound to stagnate

Earnings growth and market growth strongly correlated.

9

Analysts try to tell us earnings will rally in Q4. Don’t listen to them

However, the estimated flat earnings in the U.S. look achievable

Source: Bloomberg, Factset, SB1 Markets, Macrobond.

World/USA

• Survive Q3 reporting season

• ‘Crash season’ over (Nov)

• Stabilization of world economy

• Time for interest rate cuts to work

• No escalation of trade war

• No hard Brexit

10

Macro has stabilized, and no major shocks to the market.

Still, we upgrade to Neutral on lower (but not low) crash risk

• 2019 scaringly similar to previous pre-crisis years» Even if U.S. job market has not caved in yet

• If the market crashes, it will crash this fall» All crashes happen in the fall» OSEBX Estimates set to come down sharply – 2020E 32-46% too high» Close to the edge on economic growth

• Rebound most likely (but risk/reward still not good)

» Crashes seldom occur, but are often feared» World economy is stabilizing or starting to recover(?)» Stocks only moderately expensive

Up to neutral in Nov/Dec unless further deterioration

Probably OK and rebound likely, but too high risk. Moderate underweight

Source: OSE, SB1markets, Macrobond. 11

November is the last month with a high crash propensity..

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1

2

3

4

5

6

7

8

Jan Feb Mar Apr Mai Jun Jul Aug Sep Okt Nov Des

Number of times OSEBX has fallen 8% or more since 1983

Market

…and we are getting closer to the positive half year

Negative return June- Dec since 1983! More moderate this decade, but still sizeable difference

Market

12Source: OSE, SB1 Markets, Macrobond.

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PMIs indicate the world economy is stabilizing

Macro

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Citi Surprise Index: No improvement, but stabilization (?)

Macro

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Weak current investor sentiment feels better than he opposite

Although there is no historical correlation between sentiment and future return

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The last bastion, the U.S. job market, is holding up well

Jobless claims has always increased before large, macro driven market declines

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But we are still close to the edge, with low GDP growth and stretched valuations. What may tip us over the edge?

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Weak profits should give lower investments

S&P 500 earnings are strong, but smaller companies are struggling. In sum, investment capacity is poor. Also, corporate gearing is high

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Companies are delaying decision on policy uncertainty. Will they dare act now?

Higher uncertainty usually leads to investment delays

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The recession idea has been planted in consumers’ heads. Will it affect them?In the 2008 crisis they were alerted Jan 2008, acted 6 months later. Too late to sell on the second wave

Supply

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Global valuations are quite stretched both on long term earnings…Note: Different sources for MSCI AC world EPS give different P/Es in 2 charts

Source: MSCI Barra, STOXX, Standard & Poor’s Dow Jones, SB1 Markets, Macrobond.

Valuation

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… and on near term earnings…

The U.S. more expensive, but better record and affected by FAANG stocks (7% effect)

Valuation

Source: Bloomberg, SB1 Markets, Macrobond. 23

…and the evidence from Japan speaks against permanent repricing on low rates

• The world economy is at the end of a long up cycle and there is little spare capacity

• Global economic growth is weak

• Global and Norwegian valuation multiples are fairly high

• The OSEBX P/B is still high

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And of course

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A large proportion of asset managers has pledged to exit fossil fuels

1000 institutions with $8.8 tn in assets have pledged to cease new fossil investment, divest existing investments within 3-5 years and invest more in ‘climate solutions’. Abt 13% of MSCI World, will probably reach 20%. Only 3-4% has sold

» New York City: Decided to divest the $200bn pension fund from fossil fuels (Jan 18)

» University of California: Announced divestment of its $83bn endowment and pension funds from the fossil fuel industry (Sep 19)

» San Francisco Pension System ($25.5bn) will divest of five fossil fuel companies, probably followed by the rest if they don’t reduce oil and gas reserves and stop denying climate change

» Ireland: Euro 8bn national investment fund required to sell all investments in coal, oil, gas and peat «as soon as is practicable»

» University of Oslo: Foundation with MNOK 950 in assets announced to stop all investments in fossil fuel (Oct. 19)

» Impossible to find Norwegian Index Funds that track full indexes: All exclude some shares

» Fossil free funds have assets of more than USD 100bn

» Several banks will cease to finance coal or fossil (World Bank, HSBC, BNP Paribas, Axa). Nov 15: European investment Bank, from 2021

Source: DivestInvest, The Guardian, British Columbia University, CNBC, Dagsavisen

Source += The Economist 26

Low pricing of Energy required to make eligible investors 50% overweight on average

If 20% of funds become fossil free and 43% are indexed portfolios, remaining active managers must have a massive overweight position in energy of 9% vs. 6% in the index. That means valuation of fossil shares must be extremely attractive. But will all these investors really sell out?

No fossil Indexed

All others

SUM

Share ofassets

20% 43% 37% 100%

Fossil weight 0% 6% 9% 6%

Sum 0% 2.6% 3.4% 6%

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Note: we have taken HEX out of Virtue index since only 30% of value is Hydrogen. 30% return in the period

A consistent picture: All virtue shares have been strong, all Vice shares weak

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For most other shares, little effect of ESG ratings till now

Key reason: Only the extremely good or bad shares have consistent ratings

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ESG subsektorer med lave inngangsbarrierer vil oppleve lav avkastning på investeringer. For selskaper med høye barrierer vil det være høy vekst på fortsatt marginer

ESG

Win Win vs. Win Lose investments

Phase 1 Phase 2 Phase 3

Time

Share price

Virtue shares

Vice shares

More money chasing same stocks

Selling pressure

Takeovers, more dividends, less capex

Stock offerings to fund capex

Overcapacity

Undercapacity

Today

Kilde: SB1 Markets

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