Developed Countries

Weekly Performance Update For the week ending Thu Nov 11, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio Total Weekly Return BCA US Portfolio S&P500 TRI 0.49% -0.62% Top Contributors   TX:US TNET:US MPLX:US NFG:US DELL:US Weekly Return 21 bps 15 bps 14 bps 13 bps 9 bps Top Detractors   AMN:US MC:US FB:US HE:US GOOG.L:US Weekly Return -12 bps -10 bps -8 bps -7 bps -5 bps Top Prospects   GOOG.L:US MC:US MPLX:US DELL:US TX:US BCA Score 97.33% 97.04% 96.01% 94.91% 94.78% BCA Canada Portfolio Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 1.10% 1.13% Top Contributors   RUS:CA CRON:CA ATZ:CA CS:CA DSG:CA Weekly Return 21 bps 17 bps 17 bps 14 bps 12 bps Top Detractors   PXT:CA DIR.UN:CA SMU.UN:CA WPK:CA AND:CA Weekly Return -13 bps -11 bps -11 bps -6 bps -4 bps Top Prospects   TPZ:CA LNF:CA CS:CA PXT:CA TOY:CA BCA Score 99.58% 98.41% 98.01% 96.62% 95.00% BCA UK Portfolio Total Weekly Return BCA UK Portfolio FTSE 100 TRI 0.86% 1.54% Top Contributors   AAF:GB TUNE:GB RIO:GB TEP:GB ROSN:GB Weekly Return 60 bps 49 bps 11 bps 11 bps 10 bps Top Detractors   INDV:GB CKN:GB NFC:GB DRX:GB DEC:GB Weekly Return -32 bps -21 bps -17 bps -10 bps -9 bps Top Prospects   VVO:GB FDM:GB WHR:GB INDV:GB SVST:GB BCA Score 98.33% 97.69% 97.50% 97.50% 97.06% BCA Eurozone Portfolio Total Weekly Return BCA EMU Portfolio MSCI EMU TRI 0.65% 0.30% Top Contributors   FSKRS:FI MVV1:DE SOL:IT JMT:PT TL5:ES Weekly Return 27 bps 19 bps 14 bps 14 bps 12 bps Top Detractors   DLG:IT KESKOB:FI ARTO:FR FDJ:FR VETO:FR Weekly Return -38 bps -11 bps -10 bps -8 bps -7 bps Top Prospects   094124453:BE MVV1:DE VRLA:FR DVT:FR ROTH:FR BCA Score 99.08% 98.83% 97.97% 96.49% 96.44% BCA Japan Portfolio Total Weekly Return BCA Japan Portfolio TOPIX TRI -2.60% -2.01% Top Contributors   4628:JP 9422:JP 4553:JP 8066:JP 9945:JP Weekly Return 5 bps 5 bps 5 bps 2 bps 1 bps Top Detractors   4694:JP 7958:JP 9543:JP 1835:JP 8850:JP Weekly Return -30 bps -24 bps -23 bps -19 bps -15 bps Top Prospects   9639:JP 9436:JP 6960:JP 3738:JP 4553:JP BCA Score 99.96% 99.78% 98.54% 98.11% 98.10% BCA Hong Kong Portfolio Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI -1.76% 0.13% Top Contributors   486:HK 3600:HK 856:HK 369:HK 1883:HK Weekly Return 16 bps 9 bps 9 bps 8 bps 7 bps Top Detractors   6118:HK 746:HK 1816:HK 506:HK 855:HK Weekly Return -59 bps -33 bps -29 bps -18 bps -14 bps Top Prospects   1277:HK 746:HK 1576:HK 1088:HK 486:HK BCA Score 100.00% 99.61% 99.57% 98.55% 98.02% BCA Australia Portfolio Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 0.79% -0.37% Top Contributors   BLX:AU MHJ:AU GRR:AU CVW:AU ZIM:AU Weekly Return 62 bps 43 bps 26 bps 20 bps 14 bps Top Detractors   PL8:AU RDY:AU SHL:AU MMS:AU RIC:AU Weekly Return -29 bps -25 bps -16 bps -12 bps -11 bps Top Prospects   MHJ:AU PL8:AU RIC:AU ZIM:AU GRR:AU BCA Score 99.50% 99.20% 98.03% 97.91% 97.51%

Chart 1 In June of this year, we published a Special Report on EV Revolution, recommending clients to add exposure to the structural electric vehicles (EV) theme to their portfolios. We continue to be bullish about the space and are reiterating our call. While the EV Revolution theme transcends GICS definitions, the S&P Autos & Components index remains the industry group with the highest EV exposure. It is dominated by Tesla and legacy automakers, Ford, and GM. Since our June Special Report, the sector outperformed the market by 34% (Chart 1). In the report, we posited that The Autos & Components industry group is in the middle of a momentous transition to electric and autonomous-vehicle manufacturing thanks to technological advances in battery storage, AI, and radars. Further, we noted that the entire EV ecosystem will benefit from government support for decarbonization, the preferences of millennials for green tech, and cutting-edge technological innovation. The recent passage of the Infrastructure bill with its green provisions are a certain positive for EVs. Chart 2 Tesla dominates the Auto industry group and accounts for roughly 75% of its market cap, thus dwarfing all other constituents. It had an amazing run since we made the call, doubling since June 21, 2021, when the report was published. While we are not stock-pickers, we believe that Tesla is a poster child of the theme: it sold 241,300 in the third quarter alone, which is over 100,000 than the same quarter last year - compare that to 367,500 vehicles in all of 2019. Tesla’s profitability is growing steadily (Chart 2), and so far, it was able to fend off challenges from competitors. Legacy Automakers, while crimped by the chip shortages and supply chain disruptions, are also likely beneficiaries of the theme: costs are high, but rewards are worth it: Higher earnings and greater economic visibility regarding EV transition should lead to eventual rerating of the industry group. These carmakers are also turning into Growth stocks as an expected surge in earnings is far in the future. In Table 1, we summarize the most popular EV ETFs. A more detailed description of each investment vehicle is in the appendix of the original report. Bottom Line: We believe that the EV/AV theme will continue to outperform the US equity market over the 3-12 months horizon.

Highlights There is a high risk of a global demand shortfall in 2022. This is because consumer demand for services will remain well below its pre-pandemic trend… …while the recent booming demand for goods is crashing back to earth. Stay overweight 30-year T-bonds. In the equity market, underweight the ‘reflation’ sectors: specifically, underweight banks and basic resources. Stay overweight animal care. Overweight the interactive entertainment sector (look out for a Special Report on this sector coming out very soon). Fractal analysis: Overweight gas distribution. Feature Chart of the WeekSpending On Services In The US Is Still Far Below The Pre-Pandemic Trend. Will It Catch Up In 2022? With inflation surging, you would be forgiven for thinking that global demand is red-hot. Sadly, global demand is not red-hot. Two years after the pandemic began, the lynchpin of demand – consumer spending on services – remains far below its pre-pandemic trend. For example, US consumer spending on services is around $420 billion, or 5 percent, below where it should be (Chart I-1). A similar story holds true in the UK and France (Chart I-2 and Chart I-3). Chart I-2Spending On Services Is Still Far Below The Pre-Pandemic Trend In The UK... Chart I-3...And France Still, overall US consumer spending is on trend. Just. But only thanks to an unprecedented largesse of fiscal and monetary stimulus. Begging the question, what will happen when the stimulus ends? If overall stimulated spending is just on trend while spending on services is in deficit, it means that spending on goods is in a mirror-image $420 billion surplus. Which, given the smaller share of spending on goods, equates to 8 percent above where it should be. One misconception is that the surplus in goods spending is concentrated in durables. While this was true six months ago, two-thirds of the current surplus is in nondurables, dominated by clothing and shoes, food and drink at home, and games, toys and hobbies (Chart I-4). Chart I-4US Overspend On Durables Is Now $140 Bn, While Overspend On Nondurables Is $280 Bn Looking ahead, if the demand for goods crashes back to earth, as seems to be happening now, then the demand for services will have to catch up to its pre-pandemic trend. Otherwise there will be a deficit in aggregate demand. So, the crucial question for 2022 is, will services spending catch up to its pre-pandemic trend? Services Spending Will Remain Well Below Its Pre-Pandemic Trend Many people believe that the deficit in US services spending is due to the underspend in bars, restaurants, and hotels. In fact, this is another misconception. The underspending on ‘food services and accommodations’ is now a negligible $30 billion out of the $420 billion deficit. In which case, where is the deficit? Surprisingly, the biggest component is a $160 billion underspend on health care (Chart I-5). In particular, the spending on ‘outpatient physician services’ levelled off a year ago well below its pre-pandemic level (Chart I-6). A plausible explanation is that many doctor’s appointments have shifted to online, requiring much lower spending. The result is that health care consumption has slowed its convergence to the pre-pandemic trend, implying that a deficit could be persistent. Chart I-5US Underspend On Health Care ##br##Is $160 Bn Chart I-6US Spending On Physician Services Is Far Below The Pre-Pandemic Trend A second major component of the deficit is a $110 billion underspend on recreation services, as consumers have shunned the large or dense crowds in amusement parks, sports centres, spectator sports, and theatres. Some of this shunning of crowds will be long-lasting (Chart I-7). Chart I-7US Underspend On Recreation Services Is $110 Bn A third major component of the deficit is a $60 billion underspend on public transportation, as people have likewise shunned the personal proximity required in mass transit systems and aeroplanes. Some of this shunning of transport that requires personal proximity will also be long-lasting (Chart I-8). Chart I-8US Underspend On Public Transportation Is $60 Bn Worryingly, the recent spending on both recreation services and public transportation has stopped converging with the pre-pandemic trend. Admittedly, this might be a blip due to the delta wave of the pandemic, and spending could re-accelerate once this wave subsides. On the other hand, it would be prudent to assume that the delta wave was not the last wave of the pandemic and that further waves could arrive in 2022. Pulling all of this together, large parts of services spending will remain persistently below their pre-pandemic trend. Eventually, new and innovative types of services will plug this deficit, but this will take time. Therefore, we conservatively estimate that, at the end of 2022, US consumer spending on services will still be below its pre-pandemic trend by at least $200 billion, or 2.5 percent. Other major economies, like the UK and France, will suffer similar deficits. Goods Spending Will Crash Back To Earth Let’s now switch to the other side of the ledger, and assess to what extent the underspend in services can be countered by an overspend in goods. Spending on durables is already crashing back to earth. A surplus of $500 billion in March has collapsed to $140 billion now, and we fully expect it to fall back to zero. The reason is that durables, by their very definition, provide long-duration utility. Meaning that there are only so many cars, smartphones, and gadgets that any person can own. But what about the current $280 billion surplus on nondurables – can that be sustained? The biggest component of the nondurables surplus is a $85 billion, or 20 percent, overspend on clothes and shoes. Some of this overspend is justified by a wardrobe transition to the post-pandemic way of working and living. But clothes and shoes, though classified as nondurable, are in fact quite durable. Meaning that once the wardrobe transition is complete, we do not expect people to spend 20 percent more on clothes and shoes than they did before the pandemic (Chart I-9). Chart I-9US Overspend On Clothes And Shoes Is $85 Bn A second major component of the nondurables surplus is a $75 billion, or 7 percent, overspend on food and beverages at home. To a large extent, this has been a displacement of the underspending on eating and drinking out. But given that this underspend on eating and drinking out has almost normalised, we expect the overspend on eating and drinking at home to fade (Chart I-10). Chart I-10US Overspend On Food And Drink At Home Is $75 Bn A third major component of the nondurables surplus is a $45 billion, or 16 percent, overspend on recreational items: games, toys, hobbies, and pets and pet products (Chart I-11 and Chart I-12). To a large extent, this has been a displacement of the underspend on recreation services involving crowds, which will last. Hence, we expect the nondurable surplus on recreational items also to last, to the benefit of the animal care sector and the interactive (electronic) entertainment sector. Chart I-11US Overspend On Games, Toys, And Hobbies Is $45 Bn Chart I-12Spending On Pets Is ##br##Booming Pulling all of this together, we expect the $140 billion surplus on durables to disappear fully, and the $280 billion surplus on nondurables to fade to well below $200 billion. Therefore, given that the deficit on services is likely to be above $200 billion, there is a high risk of a consumer demand deficit in 2022. Four Investment Conclusions The ultra-long end of the bond market is figuring out that without sustained above-trend demand, you cannot get sustained inflation. And to repeat, if demand is barely on trend after an unprecedented largesse of fiscal and monetary stimulus, then what will happen when the stimulus ends? All of which leads to four investment conclusions: Stay overweight 30-year T-bonds. In the equity market, underweight the ‘reflation’ sectors: specifically, underweight banks and basic resources. Stay overweight animal care. Overweight the interactive entertainment sector (look out for a Special Report on this sector coming out very soon). Gas Distribution Is Oversold Finally, one of the paradoxes of skyrocketing natural gas prices is that it has badly hurt the gas distributors which, for the most part, have not been able to pass on the higher prices in full to end users. The resulting margin squeeze has caused a sharp recent underperformance, which is now fragile on its 65-day/130-day composite fractal structure (Chart I-13). Chart I-13Gas Distribution Is Oversold Given this fractal fragility combined with the recent correction in natural gas prices, a recommended trade would be to overweight global gas distribution versus banks, setting a profit target and symmetrical stop-loss at 5 percent.   Dhaval Joshi Chief Strategist dhaval@bcaresearch.com Fractal Trading System Fractal Trades 6-Month Recommendations Structural Recommendations Closed Fractal Trades   Indicators To Watch - Bond Yields Chart II-1Indicators To Watch - Bond Yields ##br##- Euro Area Chart II-2Indicators To Watch - Bond Yields ##br##- Europe Ex Euro Area Chart I-3Indicators To Watch - Bond Yields ##br##- Asia Chart I-4Indicators To Watch - Bond Yields ##br##- Other Developed   Indicators To Watch - Interest Rate Expectations Chart I-5Indicators To Watch - Interest Rate Expectations Chart I-6Indicators To Watch - Interest Rate Expectations Chart I-7Indicators To Watch - Interest Rate Expectations Chart I-8Indicators To Watch - Interest Rate Expectations  

Highlights The bipartisan Infrastructure Investment and Jobs Act will increase US government non-defense spending to around 3% of GDP, a level comparable to the 1980s-90s and larger than the 2010s.   Democrats are increasingly likely to pass their ~$1.75 trillion social spending bill, with odds at 65%. The budget reconciliation process necessary to pass this bill is also necessary to raise the national debt limit by December 3, so Congress is unlikely to fail.    The Democratic spending bills will reduce fiscal drag very marginally in 2022-24 and will occasionally increase fiscal thrust thereafter. Republicans are unlikely to repeal much of the spending in coming years. Limited Big Government is a new strategic theme. The federal government is permanently taking a larger role in the economy – but this role will still be limited by voters, who do not favor socialism. Biden’s approval rating will stabilize at a low level. Immigration, crime, and especially inflation will determine the Democrats’ fate in the 2022 midterms. Gridlock is likely. The stock market has already priced the infrastructure bill and it will continue to rally on the rumor that reconciliation will pass. But growth has outperformed value, contrary to expectations. Feature Democrats in the House of Representatives finally passed the $1.2 trillion Infrastructure Investment and Jobs Act, which consists of $550 billion in brand new spending and $650 billion in a continuation of existing levels of spending to cover the next ten years. The legislation passed with 228 votes in the House, ten more than needed, due to 13 Republican votes, making it “bipartisan” (Chart 1). The contents of the bill are shown in Table 1. Republicans supported the bill because of its focus on traditional infrastructure – roads, bridges, ports – but they also agreed to more modern elements such as $65 billion on broadband Internet and $36 billion on electric vehicles and environmental remediation. Implementation of the bill will be felt in 2023-24, in time for the presidential election, as committees will need to be set up to identify and approve projects. Table 1Itemized Infrastructure Plan While $550 billion is not a lot in a world of multi-trillion dollar stimulus bills, nevertheless it makes for a 34% increase in federal non-defense investment to levels consistent with the 1980s-90s (Chart 2). The new government spending will amount to 3% of GDP per year over the next ten years, a non-trivial amount of stimulus even though the big picture of the budget deficit remains about the same (Chart 3). The passage of the infrastructure bill will increase, not decrease, the odds of Biden and the Democrats passing their $1.75 trillion social spending bill via the partisan budget reconciliation process. Subjectively we put the odds at 65% in the wake of infrastructure, although recent events suggest that the odds could be put even higher. While left-wing Democrats failed to link the infrastructure and social spending bills, as we argued, nevertheless the passage of infrastructure was a requirement for the key swing voter in the Senate, Joe Manchin of West Virginia. Manchin is negotiating on the reconciliation bill, suggesting he will vote for it, and he will ultimately capitulate because he will not want to be blamed for a default on the US national debt. The US will hit the national debt ceiling on December 3 and the only reliable means for the Democrats to raise the ceiling is reconciliation. The other critical moderate Democratic senator, Kyrsten Sinema of Arizona, seems to have capitulated, after securing a removal of corporate and high-income individual tax hikes from the bill. Far-left senators might make a last stand, holding up reconciliation and winning some last-minute concession. Six House Democrats refused to vote for the infrastructure bill (including New York House member Alexandria Ocasio-Cortez). However, progressives lost leverage after the Democrats’ losses in the off-year elections. Moreover the debt ceiling will force the hand of the progressives as well as the moderates. Any such hurdles will ultimately be steamrolled by the president and Democratic Party leaders. Combined with infrastructure, the net deficit impact of the infrastructure and reconciliation bills will range from $461 billion to $1 trillion (Table 2). Our scenarios vary based on how much credence we give to Democratic revenue raisers, since many of these are gimmicks and accounting tricks to make the bill look more fiscally responsible than it really is. At the most the US is looking at an increase in the budget deficit of less than 0.5% of GDP per year in the coming years. Table 2Biden Administration Tax-And-Spend Scenarios Investors should think of Biden’s legislative efforts as very marginally reducing fiscal drag rather than increasing fiscal thrust, at least in the short run. The budget deficit is normalizing after hitting unprecedented peacetime extremes at the height of the global pandemic and social lockdowns. The shrinking deficit subtracts from aggregate demand in 2022-2024. But the new spending bills will remove a small part of that drag during these years, as highlighted in Chart 4. More importantly the US Congress is signaling that fiscal policy is back in action and that fiscal retrenchment is a long way off. Over the long run, new spending will add marginally to fiscal thrust and aggregate demand, suggesting that the US government’s contribution to the economy will grow a bit in the latter part of the 2020s, namely if Democratic legislation survives the 2024 election. For the most part it probably will, as it is very difficult to repeal entitlements or slash government spending even with Republican majorities, as witnessed with the Affordable Care Act (Obamacare) in 2017. Chart 5Polarization Of Economic Sentiment Declining The polarization of economic sentiment – i.e. divergence in partisan views of the economy – has fallen since the pandemic and will likely continue to fall as the business cycle continues (Chart 5). Both presidential candidates offered infrastructure packages – they only differed on how to fund it. With the government taking a larger role in the economy – and yet the Republicans likely to rebound in future elections – the result is one of our new strategic themes: limited big government. The heyday of “limited government,” from President Ronald Reagan through George W. Bush, has ended. But the new popular and elite consensus in favor of “Big Government” can be overrated – the US political system is defined by checks and balances that will limit the pace and magnitude of the big government trend, and at times even seem to reverse it. Hence investors should think of US fiscal policy and government role in the economy as limited big government. Political Implications Of Bipartisan Infrastructure President Biden’s approval rating has collapsed since this summer when he suffered from perceptions of incompetence on both the delta variant of COVID-19 and the withdrawal from Afghanistan. Democratic infighting, which delayed the passage of his legislation, also hurt him (Chart 6). However, these are all passing narratives, with the exception of the incompetence narrative, which could become a lasting threat to Biden if not addressed. Biden’s signing of the infrastructure bill will stabilize his approval rating. Biden will probably end up somewhere between Presidents Obama and Trump. Voters will most likely upgrade their assessment of his handling of the economy over the coming year, at least marginally. But on foreign policy he will remain extremely vulnerable since he faces numerous immediate crises in coming years. American presidential disapproval has trended upwards since the 1950s of President Eisenhower. Disapproval peaks during recessions and wars. As the economy improves, Biden’s disapproval will fall, but foreign crises and wars are likely in today’s fraught geopolitical environment (Chart 7). A few opinion polls suggest that Republicans have taken the lead over the Democrats in generic opinion polling regarding support for the parties in Congress. These polls are outliers and may or may not become the norm over the next year. Democrats have fallen from their peaks but Republicans still suffer from significant internal divisions (Chart 8). Voters continue to identify mostly as political independents, with a notable downtrend in the share of voters who see themselves as Republicans or Democrats in recent years (Chart 9). Independent voters have marked leanings, right or left. While the leftward lean of independents has peaked, they are not leaning to the right. The infrastructure bill and even reconciliation bill will support Democratic identification. But the sharp rise in immigration, crime, and potentially persistent inflation will support Republicans. These last will become the critical political issues going forward. The democratic socialist or progressive agenda has already been checked by voters and Democrats can only double down on that agenda at their own peril. The infrastructure bill’s passage may give a boost to perceptions of Democratic odds of maintaining the Senate in the 2022 midterm elections – that question is still up in the air, even as the House is very likely to return to Republican control (Chart 10). Chart 9Independent Voters Still Rule An under-the-radar beneficiary of the bipartisan infrastructure bill is Congress itself. Since 2014, public approval of Congress has gradually recovered from historic lows. The level is still low, at 27%, but the upward trend is notable for suggesting that a fiscally active Congress gains popular approval (Chart 11). New social spending will also increase Congress’s image, first for “doing something,” and second for expanding the social safety net, which more than half of voters will approve.  Partisan gridlock after 2022 could reverse the trend, as Republicans may find or invent a reason to impeach President Biden in retribution for President Trump’s impeachments. But our best guess is that Congress will remain above its low point as long as fiscal support – limited big government – remains intact. Aggressive tax hikes or spending cuts, or a national debt default, could reverse the recovery of this institution. Investment Takeaways The infrastructure bill’s passage may have supported the recent rally in stocks but it is not the main driver. Infrastructure stocks had largely discounted the bill’s passage by spring and our BCA Infrastructure Basket has underperformed the broad market since then. In absolute terms, infrastructure stocks have reached new highs and show a rising trajectory (Chart 12). The infrastructure bill has not delivered as expected when it comes to sectors or investment styles. Cyclicals have outperformed defensives, as expected. But value stocks have hit new lows relative to growth stocks, contrary to our expectation this year (Chart 13). Chart 12Infrastructure Was Already Priced Chart 13Wall Street Looks Well Beyond Infrastructure External factors – namely China’s policy tightening and bumps in the global recovery – weighed on cyclicals and value plays, especially relative to Big Tech (Chart 14). Growth stocks have surged yet again on low bond yields, positive earnings surprises, and secular trends like innovation and digitization. The American economy looks robust as the year draws to a close. The service sector is recovering smartly from the delta variant. Non-manufacturing business activity is surging and new orders are exploding upward relative to inventories (Chart 15). Service sector employment has suffered from shortages. Chart 14External Factors Weigh On Infrastructure Plays Chart 15Service Sector Recovery Underway Inflation risks are trickling into consumer and voter consciousness as Christmas approaches and prices rise at the pump (Chart 16). The Democrats’ two big bills will mitigate the damage they face in next year’s midterm elections – the Senate is still in competition. But a persistent inflation problem will overwhelm their legislative accomplishments. Voters will connect the dots between large deficit spending and inflationary surprises (not to mention any Democratic changes that reinforce the extremely dovish stance of the Fed). The normal political cycle will count heavily against the Democrats in 2022 regardless of inflation. But voters simultaneously face historic spikes in immigration and crime – and the former, at least, will get worse and not better over the next 12 months. Predicting inflation is a mug’s game but wage growth suggests it will remain a substantial risk in 2022 – and the structural shift in favor of big government, even if it is limited big government due to the political cycle, is inflationary on the margin. Chart 16Voters Awakening To Inflation   Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com   Appendix