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Highlights Portfolio Strategy Speculative fervor dominates trading in the S&P auto & components group, but soaring long-term profit projections, lofty valuations, overbought technicals, and a looming German/Japanese/Chinese BEV competitive attack on TSLA’s BEV home turf, all but guarantee some cooling off in the recent exuberance in this GICS2 industry group, and compel us to downgrade exposure to underweight. This move also pushes the S&P consumer discretionary sector to a below benchmark allocation, today. A firming operating backdrop, a stealthy turn in select macro data, extreme sell-side pessimism, bombed out technicals and compelling valuations all signal that it no longer pays to be bearish the S&P utilities sector. Upgrade to neutral.  Recent Changes Downgrade the S&P automobiles & components index to underweight, today. This move also pushes the S&P consumer discretionary sector to a below benchmark allocation, today. Upgrade the S&P utilities sector to neutral today, locking in gains of 14.8% since inception. Last Wednesday our rolling stop on the long “Back To Work”/short “COVID-19 Winners” pair trade got triggered and we booked gains of 21.5% since the September 8 inception. Table 1 Feature The SPX cheered Joe Biden’s inauguration and vaulted to fresh all-time highs last week. It is now at spitting distance from our 4,000 target, a mere 3.8% higher. While loose fiscal and easy monetary policies have staying power and will remain largely intact in 2021, their efficacy is dwindling. Crudely put, it would take additional extra-ordinary larger amounts of stimuli to move the needle, as all the good news and then some, is already reflected in fully valued stocks. Financial conditions are the easiest on record, as we highlighted recently, and investor complacency reigns supreme given the 0.34 print in the equity put/call ratio (Chart 1). Chart 1Complacency Reigns In the near-term, something’s got to give. Importantly, a rising number of indicators we track are flashing red. Not only is there a plethora of anecdotes that the newly minted stock traders using Robinhood are chasing story stocks armed with freshly-written stimulus checks, but margin debt is also exploding (Chart 2). Granted, the latter is a coincident indicator, nevertheless the stampede into stocks via tapping margin accounts is near previous cyclical zeniths: the annualized 13-week rate of change of margin debt uptake surpassed 100%/annum, a move last seen in 2007/2008 and 1999/2000 (Chart 2). Correcting margin debt for GDP and total stock market capitalization for the size of the US economy (Buffett Indicator) is revealing. Both measures are at an extreme using data going back to the 1970s, making the equity market susceptible to disappointment (Chart 3). Buyer exhaustion will come sooner rather than later, and such a dearth of buyers will cause at least an air pocket in stocks. Chart 2Maxed Out On Debt? Chart 3Off The Charts Moreover, there is an element of pre-GFC-type excesses, but now investors are speculating with equities instead of housing. Back then, NINJA loans, ARM loans and subprime loans in general were sustaining the house of cards as long as the price of the underlying asset kept on rising. As soon as prices crested and moved sideways to lower, debt deflation hit real estate speculators hard, especially ones that owned multiple homes. Currently, anecdotes of homeowners speculating on the stock market via Mortgage Equity Withdrawals (Greenspan-Kennedy MEW)1 are also mushrooming. In other words, many retail investors are tapping into their home equity and money saved from ultra-cheap re-financings and redeploying it into stocks. As of Q3/2020 MEW is running at the highest level since the GFC at $300bn or roughly 2% of disposable income; keep in mind that the latter has also gotten a COVID-19 fiscal boost to the order of $1.2tn, which makes the galloping MEW even more remarkable (Chart 4). Chart 4Even MEW Is Spiking While MEW is nowhere near its 2007/2008 peak, surely some of it is leaking into equities, beyond PCE, further fueling the recent stock market exuberance. Another indicator that has sprang to life of late is our Equity Capitulation Index. Back in March we used this indicator from a contrary perspective when we recommended investors go long equities on a cyclical basis (reason #16 to start buying equities). Subsequently we have remained cyclically exposed, but we cannot neglect the negative signal this indicator is now emitting: it has clawed back all the losses since March and is now at a level that has marked previous near-term tops, and at an eerily similar level as during the 2010 SPX peak (second panel, Chart 5). Further on the sentiment front, bulls are abundant, but bears have gone extinct: according to Investors Intelligence the bull/bear ratio is closing in on 4, an historically elevated ratio (Chart 6). Chart 5Contrary Alert: Bears Capitulated? Chart 6Extreme Sentiment Reading Netting it all out, speculative fervor has taken over the equity markets and at least a healthy near-term breather is warranted in order to consolidate recent impressive gains. We remain cautious on the short-term prospects of the broad equity market and continue to recommend investors go long a $390/$410 call spread on the SPY exchange traded fund financed by a short $340 put on the SPY for either March or June option expiries. This week, we downgrade a consumer goods index to underweight that is at the epicenter of the recent equity market bubble talk. This change also pushes the S&P consumer discretionary index to a below benchmark allocation. Further, we trigger our upgrade alert on a niche defensive sector monetizing sizable gains for the portfolio. Downgrade Autos & Components To Underweight We recommend investors shy away from the S&P automobiles & components GICS2 industry group, and today we downgrade it to an underweight stance. Before analyzing this group that has an 80%+ weight in TSLA in more detail, a couple of bubble-related observations are in order. The top panel of Chart 7 shows the google trends search term ‘stock market bubble’ as a time series, and it has hit all-time highs since the 2004 start in this data search query. Importantly, linking this to the SPX is instructive. Every time these search results pick up steam, so does S&P 500 momentum until it cracks. Assuming a sideways move from here onward on the S&P until the spring, it will boost year-over-year momentum to a peak over the 50%/annum mark (bottom panel, Chart 7). Using weekly data, the SPX has only managed such a feat three other times since WWlI, in 1983, in 1998 and in 2010 (as a reminder we drew SPX parallels to 1998 and 2010 earlier this month). True, this does not prove that the SPX is in a bubble per se, however it does highlight that it is overstretched and at risk of a snapback. While everyone was preoccupied with the effect TSLA’s SPX inclusion would have on the index’s 12-month forward P/E, the real change crept up in the long-term EPS growth expectations. This story stock caused the S&P 500’s five-year profit growth expectation to skyrocket from 12% to 21% overnight (top panel, Chart 8) and pushed down the S&P 500 forward P/E/G ratio to near par (not shown). Chart 7Bubble Talk Mushrooming Chart 8"It's too good for true, honey, it's too good for true" (Adventures of Huckleberry Finn, 1884), Mark Twain. Back in late-1999, YHOO’s SPX inclusion also caused a bump in this metric, but it paled in comparison to TSLA’s current dominance. In other words, nine percentage points of growth are attributed to a single stock or 43% of the SPX EPS growth is tied to the fortunes of TSLA. We highly doubt this will occur as analysts have been upgrading profit estimates and price targets for TSLA hand over fist over the past few months, with some using DCFs out to 2040 in order to back up their forecasts. Drilling deeper beneath the surface into the consumer discretionary sector is revealing. TSLA’s inclusion pushed the sector’s 5-year forward profit growth estimates to 83% (bottom panel, Chart 8). To put this in perspective it translates into consumer discretionary profits increasing 20 fold in the next 5 years; no, this is not a typo. Assuming that stock prices follow profits as it typically transpires, then prices will have to rise by a similar amount. Again, our sense is that this is highly unlikely. In comparison, AMZN’s graduation to the SPX in late-2005 barely budged this profit growth metric for the GICS1 sector as tech stocks were still licking their wounds from the dotcom bubble burst. One level lower into GICS2 territory and circling back to S&P auto & components, data series go fully parabolic, to a degree not seen even during the dotcom bubble era. The same aforementioned long-term growth rate zooms to over 300% for the S&P automobiles & components index compared with the broad market (Chart 9). Turning over to relative revenue expectations for the coming 12 months that data point surges close to 15% (middle panel, Chart 9). With regard to valuations, relative forward P/E, relative P/S and P/B are all in the stratosphere, warning that there is no valuation cushion to fall back on in case of an earnings mishap (Chart 10). Chart 9Dizzying… Chart 10...Heights Importantly, on the profit front, a wide gap has opened between relative share prices and relative forward EPS, which suggests that high-flying auto stocks will soon stop defying gravity (Chart 11). Technicals are also waving a red flag: the S&P autos & components relative annualized 13-week rate of change clocked in at over 250%/annum, steeply diverging from relative net EPS revisions (Chart 12). Chart 11Stocks Should Follow Profits Chart 12Cult Stock… Using the datastream index equivalent to the S&P automobiles & components (this data provider had included TSLA prior to the S&P’s inclusion in the S&P 500) reveals that this relative share price ratio is on a tear and warns investors that the S&P automobiles & components index is not as depressed as it first appears to the naked eye (Chart 13). Chart 13...Effect Looking at the single stock level, TSLA exemplifies the mania of the 2020s (bottom panel, Chart 14). This story stock has been moving in lockstep with M1 money supply. Such a breakneck pace of appreciation is clearly unsustainable (Chart 15). Chart 14TSLA Is A Mania Chart 15Spurious? Doubt It Finally, comparing TSLA to its global peers is also mind boggling. TSLA is worth a couple hundred billion US dollars more than all of the other global auto stocks put together (top panel, Chart 14)! Auto manufacturing is a cutthroat business with razor thin margins. Thus, we doubt that the German and Japanese (and lately even Chinese BEV makers) auto makers are not going to make inroads into TSLA’s BEV home turf. In Norway, the most advanced BEV market in the world, VW Group outsold TSLA last year by a factor of over 3-to-1. In sum, speculative fervor dominates trading in the S&P auto & components group, but soaring long-term profit projections, lofty valuations, overbought technicals, and a looming German/Japanese/Chinese BEV competitive attack on TSLA’s BEV home turf all but guarantee some cooling off in the recent exuberance in this GICS2 industry group. Bottom Line: Trim the S&P automobiles & components index to underweight today. This move also pushes the S&P consumer discretionary sector to a below benchmark allocation. The ticker symbols for the stocks in this index are: BLBG: S5AUCO – TSLA, GM, F, APTV, BWA. Act On The Utilities Upgrade Alert, Lock In Gains And Lift Exposure To Neutral We have been on the right side of the underweight utilities position for the better part of the past two years, but now that the easy money has been made we are compelled to book handsome gains of 14.8% for the portfolio since inception and move to the sidelines. The bearish story is well known on utilities and avoiding them is now a consensus trade. Chart 16 shows that when the economy is in expansion mode, it pays to minimize utilities exposure. The pendulum always swings the opposite direction and when the cycle matures, investors seek the safe haven stable cash flow status of this niche defensive sector. Extreme euphoria has taken over in the overall equity space and while the vaccine rollout news is a big positive, we doubt the ISM manufacturing survey reading can rise significantly from the current historically stretched level (ISM survey shown inverted, top panel, Chart 16). Similarly, junk yields are at all-time lows confirming that investor complacency is sky-high, and the USD very oversold with positioning stretched to the short dollars side. Any hiccups would cause all three of these macro indicators to reverse course abruptly, which would boost relative utilities share prices (Chart 16). Already, the CITI economic surprise index is sinking like a stone, equity market vol refuses to fall below 20, and the gap between the 10-year US Treasury (UST) yield and relative share prices remains historically wide, leaving ample room for utilities to catch up to the year-over-year drubbing in yields (yields shown inverted, top panel, Chart 17). In fact, were the broad equity market to correct as we expect in the near-term, there are high odds that the 10-year UST yield would fall, further boosting the allure of high yielding utilities. Chart 16Bearish Story Is Well Known Chart 17It No Longer Pays To Avoid Utilities On the operating front, nat gas prices have stopped hemorrhaging and as this least dirty fossil fuel gains broader investor acceptance in the new EV/ESG and responsible investing world, there is scope for utilities to reassert some of their lost pricing power. As a reminder, natural gas prices are the marginal price setter for utilities and the recent jump in momentum in the former is encouraging for utilities selling prices (second panel, Chart 18). Chart 18Positive Operating… Chart 19...Backdrop Moreover, industry inventories are whittled down and utilities construction has been receding, throughout last year (inventories shown inverted, top panel, Chart 19). In fact, it is contracting at roughly a 10%/annum pace (construction shown inverted, bottom panel, Chart 19). Taken together, it no longer pays to be overly bearish this niche defensive sector. Unsurprisingly, sell-side analysts have thrown in the towel and relative 12-month profit forecasts have plummeted, probing all-time lows near the negative 20% mark (third panel, Chart 18). Analyst pessimism is even more pronounced on the five-year outlook, with relative profit growth collapsing again near the negative 17% mark (bottom panel, Chart 18)! Granted this is a single stock’s effect as we showed in the previous section, with late-December TSLA inclusion to the index pushing the SPX long-term profit growth estimate to nearly 21%. We would lean against such pessimism. Finally, relative technicals and valuations also warn against staying negative on the prospects of the S&P utilities sector (Chart 20). Importantly, our Technical Indicator has fallen to one standard deviation below the historical mean, a level that has marked six countertrend up-moves in the past 25 years (bottom panel, Chart 20). Adding it all up, a firming operating backdrop, a stealthy turn in select macro data, extreme sell-side pessimism, bombed out technicals and compelling valuations all signal that it no longer pays to be bearish the S&P utilities sector. Bottom Line: Execute the upgrade alert and augment the S&P utilities sector to neutral today locking in gains of 14.8% since inception. The ticker symbols for the stocks in this index are: BLBG: S5UTIL – NEE, D, DUK, SO, AEP, EXC, XEL, ES, SRE, WEC, AWK, PEG, ED, DTE, AEE, EIX, ETR, PPL, CMS, FE, AES, LNT, ATO, EVRG, CNP, NI, NRG, PNW. Chart 20Unloved And Undervalued   Anastasios Avgeriou US Equity Strategist anastasios@bcaresearch.com     Footnotes 1     https://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf Current Recommendations Current Trades Strategic (10-Year) Trade Recommendations Size And Style Views January 12, 2021  Stay neutral small over large caps October 26, 2020 Favor small over large caps July 27, 2020 Overweight cyclicals over defensives (Downgrade Alert) June 11, 2018 Long the BCA Millennial basket  The ticker symbols are: (AAPL, AMZN, UBER, HD, LEN, MSFT, NFLX, SPOT, TSLA, V). January 22, 2018 Favor value over growth

In the September 8thStrategy Report we first created the “Back To Work” basket and recommended investors to gain exposure to the reopening trade by initiating a long “Back To Work”/short “COVID-19 Winners” pair trade. More recently, and in light of the handsome gains that this trade has produced, we instituted a 5% rolling stop in order to protect profits. Yesterday, our stop was triggered compelling us to crystallize 21.5% in gains since inception. Not only did this long/short trade serve its purpose by capturing the economic reopening and vaccine related rollout euphoria, but it also outperformed the market by 700bps as the SPX rose only by 14.5% since September 8th. Bottom Line: Lock in 21.5% gains in the long “Back-To Work”/short “COVID-19 Winners” pair trade since the early-September inception.  

While everyone was preoccupied with the effect TSLA’s SPX inclusion would have on the index’s 12-month forward P/E, the real change crept up in the long-term EPS growth expectations. This story stock caused the S&P 500’s five-year profit growth expectation to skyrocket from 12% to 21% overnight (top panel) and push down the S&P 500 forward P/E/G to near par (not shown). Back in late-1999, YHOO’s SPX inclusion also caused a bump in this metric, but it paled in comparison to TSLA’s current dominance. In other words, nine percentage points of growth are attributed to a single stock or 43% of the SPX EPS growth is tied to the fortunes of TSLA. We highly doubt this will occur as analysts have been upgrading profit estimates and price targets for TSLA hand over fist, with some using DCFs out to 2040 in order to back up their forecasts. Drilling deeper beneath the surface into the consumer discretionary sector is revealing. TSLA’s inclusion pushed the sector’s 5-year forward profit growth estimates to 83% (bottom panel). To put this in perspective it translates into consumer discretionary profits increasing 20 fold in the next 5 years; no, this is not a typo. Assuming that stock prices follow profits as it typically transpires, then prices will have to rise by a similar amount. Again, our sense is that this is highly unlikely. In comparison, AMZN’s graduation to the SPX in late-2005 barely budged this profit growth metric for the GICS1 sector as tech stocks were still licking their wounds from the dotcom bubble burst. Bottom Line: Frothiness is prevalent in certain parts of the equity market and some near-term caution is warranted. We reiterate our recent recommendation that investors deploy fresh capital via going long the $390/$410 SPY call spread and financing it via a $340 put either for March or June expiries. For additional analysis please look forward to this coming Monday’s Strategy Report.

The forthcoming third round of enormous US fiscal stimulus will likely mark a structural regime shift in global financial markets. Over the past 25 years, the chief concern of US and, hence, global financial markets, has been economic growth. Share prices typically fluctuated with growth expectations. As a result, the S&P 500 and US bond yields have been positively correlated, as shown in Chart 1 of week. Chart 1AUS Share Prices And Treasury Yields Will Soon Become Negatively Correlated Going forward, odds are that the correlation between US equity prices and US bond yields will turn negative and stay there for several years, as was the case prior to 1997. In brief, we are moving from a deflationary to an inflationary backdrop. Share prices will likely start negatively reacting to rising inflation and/or inflation expectations and vice versa. We will discuss these issues in depth in forthcoming reports. A rise in EM corporate bond yields is the key threat to EM share prices, as shown in the charts on page 3. EM corporate and sovereign US bond spreads are so tight that they are unlikely to compress further to offset the rise in US Treasury yields. As a result, EM dollar-denominated corporate and sovereign bond yields will also rise as US Treasurys sell off. Chart 2 of week shows that the distinct breakout in a high-beta American industrial stock price – Kennametal – points to higher US government bond yields. Chart 1BA Super-Strong US Industrial Cycle Points To Higher US Treasury Yields The timing of such a shakeout in risk assets is uncertain but it will likely be sharp and will happen in the first half of this year. The reason is that positioning and sentiment on global risk assets in general and EM risk assets in particular are very elevated as we illustrate in this January issue of Charts That Matter. Our major investment themes remain: US equities will continue underperforming global stocks. Rising bond yields and inflation will hurt the expensive US equity market more than overseas ones. Europe and Japan will outperform and EM will likely be a market performer. For now, maintain a neutral allocation to EM in a global equity portfolio. The US dollar is in a structural bear market but it is presently oversold and will bounce sharply sometime in H1 this year. Continue shorting select EM currencies versus an equal-weighted basket of the euro, CHF and JPY. EM currencies will suffer more than DM currencies during a potential US dollar snapback. A setback in EM fixed-income markets should be used as a buying opportunity. Inflation is much less of a problem in EM than in the US. A long-term bear market in the greenback favors EM fixed-income markets, both dollar-denominated and local currency ones. Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com Rising EM Corporate Bond Yields Is The Key Threat To EM Share Prices A continuous rise in corporate and sovereign US dollar bond yields (shown inverted) has historically been a negative signal for EM share prices. With no downside to global growth due to US fiscal policy, both US and EM bond yields are crucial variables to monitor. Chart 1Rising EM Corporate Bond Yields Will Be The Key Threat To EM Share Prices Chart 2Rising EM Corporate Bond Yields Will Be The Key Threat To EM Share Prices EM Stocks Will Outperform The S&P 500 Amid Rising Inflation Worries Rising inflation expectations will help EM stocks to outperform the S&P 500. The latter is more expensive and, thereby, more sensitive to rising interest rates. Chart 3EM Stocks Will Outperform The S&P 500 Amid Rising Inflation Worries Chart 4EM Stocks Will Outperform The S&P 500 Amid Rising Inflation Worries US Equities Are Overextended; EM Is Set To Outperform The S&P 500 In The Coming Years In real (inflation-adjusted) terms, US stocks in general and US tech stocks in particular are over-extended relative to their long-term trends. Relative to US equities, but not absolute term, EM stocks are cheap. Chart 5US Equities Are Overextended; EM Is Set To Outperform The S&P 500 In The Coming Years Chart 6US Equities Are Overextended; EM Is Set To Outperform The S&P 500 In The Coming Years   Chart 7US Equities Are Overextended; EM Is Set To Outperform The S&P 500 In The Coming Years Chart 8US Equities Are Overextended; EM Is Set To Outperform The S&P 500 In The Coming Years   Strategy For An Era Of Inflation Global growth stocks will underperform versus value ones. US equities have broken down relative to the global equity index. US bond yields have more upside. A rise in US corporate bond yields is the main danger to American stocks. Chart 9Strategy For An Era Of Inflation Chart 10Strategy For An Era Of Inflation   Chart 11Strategy For An Era Of Inflation Chart 12Strategy For An Era Of Inflation   Risk Measures That EM Investors Should Monitor US TIPS yields are very oversold. Any spike will likely trigger a rebound in the US dollar and a correction in EM local currency bonds. Besides, off-shore Chinese property company bond prices have rolled over. This means stress is accumulating in China’s property market and construction activity will slow in H2 this year. Finally, EM HY corporates might begin underperforming EM IG – a sign of poor risk backdrop. Chart 13Risk Measures That EM Investors Should Monitor Chart 14Risk Measures That EM Investors Should Monitor Chart 15Risk Measures That EM Investors Should Monitor   The Case For US Inflation US personal disposable income has surged due to fiscal transfers. This is ultimately Modern Monetary Theory (MMT) in action. US consumer spending on goods has been booming, lifting global trade and manufacturing. The vaccination and a reopening of the economy will increase the velocity (turnover) of money supply and lead to higher inflation in H2 2021. Chart 16The Case For US Inflation Chart 17The Case For US Inflation Chart 18The Case For US Inflation   Global Trade: The US and China Have Been Epicenters Of Spending China's and the US’ real trade balances (export volume divided by import volume) have been falling, meaning that both economies have been locomotives of global demand. China’s stimulus is tapering off but the US’ fiscal largess continues. Chart 19Global Trade: The US and China Have Been Epicenters Of Spending Chart 20Global Trade: The US and China Have Been Epicenters Of Spending   Chart 21Global Trade: The US and China Have Been Epicenters Of Spending US Consumers Could Face High Goods Prices Tradable goods prices are rising in US dollar terms. If export nations’ currencies continue appreciating, US imports prices in US dollar terms will rise much more. This will reinforce inflationary pressures in the US. Chart 22US Consumers Could Face High Goods Prices Chart 23US Consumers Could Face High Goods Prices Chart 24US Consumers Could Face High Goods Prices Chart 25US Consumers Could Face High Goods Prices   No Inflation In China In China, supply has been overwhelming demand and deflationary tendencies remain broad-based. Policymakers have become concerned with RMB appreciation, or at least the pace of its strengthening. Authorities have allowed more portfolio capital to leave China. The latter has produced the recent surge in HK-traded Chinese stocks (please refer to page 16). Chart 26No Inflation In China Chart 27No Inflation In China Chart 28No Inflation In China Chart 29No Inflation In China   The Chinese Economy: Strong In H1; Slowing In H2 China’s credit and fiscal stimulus peaked in Q4 2020. This and regulatory tightening for banks and ongoing non-banks as well as the property market restrictions will produce a meaningful slowdown in H2 this year. Chart 30The Chinese Economy: Strong In H1; Slowing In H2 Chart 31The Chinese Economy: Strong In H1; Slowing In H2 Chart 32The Chinese Economy: Strong In H1; Slowing In H2 Chart 33The Chinese Economy: Strong In H1; Slowing In H2   Commodities Inventories In China Are Elevated Slowdowns in China’s construction activity and infrastructure spending amid excessive inventories of commodities pose a downside risk in commodities prices this year. Chart 34Commodities Inventories In China Are ElevatedChart 36Commodities Inventories In China Are Elevated Chart 35Commodities Inventories In China Are Elevated   A Mania In Full Force Asia’s growth stocks have been rising exponentially. Such parabolic price moves can last for a while but these stocks will experience a major shakeout this year. The trigger will be rising global bond yields as discussed on pages 1 and 2. Chart 37A Mania In Full Force Chart 38A Mania In Full Force Chart 39A Mania In Full Force Chart 40A Mania In Full Force   Local Retail Investors Have Been Buying EM Stocks Aggressively These charts show that a retail mania is taking place not only in the US but has become a common phenomenon in many EM stock markets. Amid retail-driven rallies, fundamentals do not matter and momentum is the key variable to monitor. Chart 41Local Retail Investors Have Been Buying EM Stocks Aggressively Chart 42Local Retail Investors Have Been Buying EM Stocks Aggressively   Mainland Investors Buying HK-Listed Chinese Stocks To halt yuan appreciation, authorities have recently increased quotas for mainland investors to buy HK-listed equities. Consequently, capital has rushed out of the mainland and Chinese stocks listed in HK have surged. The duration and magnitude of any flow-driven rally is impossible to handicap with any certainty. Chart 43Mainland Investors Buying HK-Listed Chinese Stocks Chart 44Mainland Investors Buying HK-Listed Chinese StocksChart 45Mainland Investors Buying HK-Listed Chinese Stocks   Global Investors Are Super Bullish These charts illustrate that based on the Sentix1 survey European investors are record bullish on EM equities and European growth. Chart 46Global Investors Are Super Bullish Chart 47Global Investors Are Super Bullish Investor Sentiment And Positioning Are Very Elevated Investors are bullish on US stocks and copper (a proxy for global growth) and bearish on the US dollar. The ratio of US institutional and retail money market funds’ assets (cash on sidelines) relative to market value of stocks and all US dollar bonds has declined substantially. Chart 48Investor Sentiment And Positioning Are Very Elevated Chart 49Investor Sentiment And Positioning Are Very Elevated Chart 50Investor Sentiment And Positioning Are Very Elevated   Several Reflation Gauges Are Facing Resistance Global cyclical versus defensive stocks and several EM reflation plays are facing important technical resistances. Chart 51Several Reflation Gauges Are Facing Resistance Chart 52Several Reflation Gauges Are Facing Resistance   Major Equity Indexes Are Attempting A Breakout The EM, global ex-US, global ex-TMT and euro area equity indexes are at their previous highs and are attempting a breakout. Momentum is on their side but positioning and sentiment are against a sustainable breakout. Chart 53Major Equity Indexes Are Attempting A Breakout Chart 54Major Equity Indexes Are Attempting A Breakout Chart 55Major Equity Indexes Are Attempting A Breakout Chart 56Major Equity Indexes Are Attempting A Breakout   Outside Asian Growth Stocks, EM Equities Have Been Lagging Reflecting not-so-positive fundamentals, EM share prices, outside Asian growth stocks, have not yet entered a bull market. Chart 57Outside Asian Growth Stocks, EM Equities Have Been Lagging Chart 58Outside Asian Growth Stocks, EM Equities Have Been Lagging Chart 59Outside Asian Growth Stocks, EM Equities Have Been Lagging Chart 60Outside Asian Growth Stocks, EM Equities Have Been Lagging   The Outlook For EM Stocks The cyclical EM profit outlook is bullish. However, much of this is already priced in. China’s peak stimulus is a risk to EM later this year. We recommend equity investors to favor EM versus the S&P 500 but not against European or Japanese stocks. Chart 61The Outlook For EM Stocks Chart 62The Outlook For EM Stocks New COVID Cases Are Rising In Several Areas Outside North Asia Many developing countries are facing challenges to contain the pandemic as well as to obtain and conduct broad-based vaccination. Chart 63New COVID Cases Are Rising In Several Areas Outside North Asia Chart 64New COVID Cases Are Rising In Several Areas Outside North Asia   Footnotes 1  The Sentix surveys cover several thousand European institutional and individual investors. In the survey, investors are asked about their medium-term expectations. Source: SENTIX.  

Overweight The S&P movies & entertainment index has been on a tear recently likely due to receding fiscal uncertainty and the normalization process in the economy (third panel). This niche communication services sub-industry is dominated by the two key players DIS and NFLX, and while they are fierce competitors, our view remains that there is plenty demand for the pair of them to remain successful. We first showed the relative P/E/G ratio for this index in mid-December, and highlighted how the ratio was below the historical mean and offered compelling value. True, today it has spiked, but it is nowhere near previous extreme readings (bottom panel). Keep in mind that analysts still remain relatively neutral to slightly pessimistic on the industry’s growth prospects and earnings power (second panel). The fact that relative net earnings revisions are negative, underscores that investors should buy the breakout in relative share prices. Bottom Line: We remain overweight the S&P movies & entertainment index. The ticker symbols for the stocks in this index are: BLBG: S5MOVI – DIS, NFLX, LYV. ​​​​​​​