Developed Countries

Yesterday we were stopped out on our long S&P managed health care/short S&P semis market neutral pair trade initiated on May 13, 2019 for a gain of 10%. Our thesis remains intact that a lot of negative news has been priced into HMOs on the back of the threat of the “Medicare For All” bill passage, while a lot of euphoria has been baked in the cake for semis despite their current down cycle. However, portfolio risk management is forcing our hand and given our ongoing de-risking, we are obeying our trailing stop loss for a gain of 10% in a very short time span. Bottom Line: Book gains of 10% in the long S&P managed health care/short S&P semis pair trade since inception and move to the sidelines for now.  

Highlights Fed: The large divergence between Treasury yields and risk assets means that the Fed will almost certainly cut rates during the next few months. The only question is whether a large sell-off in risk assets will be required to force the Fed’s capitulation. Maintain a cautious near-term (0-3 month) allocation to corporate credit. Duration: The economic data and shape of the yield curve do not suggest that the economy is heading into recession. Rather, they suggest that the economy is experiencing an external shock – akin to 1998 or 2015/16 – that can be offset by a relatively minor pivot in Fed policy. Investors should keep portfolio duration low. Corporate Balance Sheets: Growth rates for both corporate profits and debt should settle into the mid-single digits during the next few quarters. This will keep gross leverage and the default rate roughly stable. A sustained period of negative profit growth and tighter C&I lending standards would challenge this outlook. Feature Chart 1Markets Taking The Rate Cut For Granted Markets aren’t begging for a rate cut. Rather, they are behaving as though one has already occurred. This sort of set-up could lead to wider credit spreads and lower equity prices in the near-term. To elaborate, notice that the S&P 500 is only 3% off its late-2018 peak, but is down an alarming 8% relative to the Bloomberg Barclays Treasury Master Index. Meanwhile, the 10-year Treasury yield had fallen all the way to 2.06% as we went to press last Friday (Chart 1, bottom panel). The overall message from financial markets is that investors expect the Fed to cut rates very soon, but also think that a small number of cuts will be enough to forestall recession and keep risk assets supported. As we see it, the divergence between risk assets and Treasuries makes a rate cut during the next few months a near certainty. If the Fed does not appear sufficiently dovish at next week’s FOMC meeting, then risk assets will sell off. The resulting tightening of financial conditions will then force the Fed’s hand, leading to a rate cut in July or September. The alternative is that the Fed tries to get ahead of market sentiment by delivering a rate cut next week, even if such a move is not easily justified by the economic data. A New Trade In last week’s report, we recommended adding a fed funds futures calendar spread trade to take advantage of these near-term policy moves (Chart 2).1 Specifically, we advised investors to go long the August 2019 fed funds futures contract and short the February 2020 contract. Chart 2Exit Long Aug 2019 / Stay Short Feb 2020 We recommended buying the August 2019 fed funds futures contract to hedge the risk that the Fed tries to get ahead of market sentiment by cutting rates in June or July. As of last week, this contract would have earned a positive return in a scenario where the Fed delivered one 25 basis point rate cut in either June or July, and a negative return in a scenario where rates are unchanged. But as of last Friday, the contract’s risk/reward profile had shifted dramatically. The contract is now priced for a loss in both the “one rate cut” and “no rate cut” scenarios. We therefore exit our long position in the August 2019 fed funds futures contract for a gain of 8 bps.  .  The second leg of our proposed trade was to short the February 2020 fed funds futures contract. This remains an excellent bet. As of last Friday, a short position in the February 2020 contract will earn a positive return as long as three or fewer rate cuts occur between now and next February (Chart 2, bottom panel). In last week’s report, we recommended adding a fed funds futures calendar spread trade to take advantage of these near-term policy moves. Table 1 displays the expected returns from our proposed spread trade (long Aug 2019/short Feb 2020) as of last Friday, the most recent pricing available at the time of publication. Because of the rapid gains in the August 2019 contract price, an outright short position in the February 2020  contract now dominates the expected returns from the calendar spread trade in all likely scenarios. We therefore advise investors to exit the long position in the August 2019 contract, but to remain short the February 2020 contract. Table 1Expected Returns From Long Aug 2019 / Short Feb 2020 Fed Funds Futures Calendar Spread Trade Bottom Line: The large divergence between Treasury yields and risk assets means that the Fed will almost certainly cut rates during the next few months. The only question is whether a large sell-off in risk assets will be required to force the Fed’s capitulation. We advise near-term caution on credit spreads. While a near-term rate cut is likely, we also doubt that the Fed will deliver more than the 76 bps of rate cuts priced into the curve for the next 12 months. We therefore recommend that investors keep portfolio duration low and maintain a short position in the February 2020 fed funds futures contract.  More 1998 Than 2001 In the last section we reiterated our view that the Fed will deliver fewer than the 76 bps of rate cuts that are priced into the yield curve for the next 12 months. Our main justification is that such a large number of rate cuts will only occur if the economy enters recession. At present, the pre-conditions for an economic recession are simply not in place. Rather, the economy is experiencing an external shock – akin to 2015/16 and 1998 – that will require only a modest shift in Fed policy. In other words, if we use the mid-1990s cycle as a roadmap, today looks much more like 1998 than 2001. The divergence between manufacturing and services PMIs is exactly what occurred in 1998 and 2015/16. In a recent Special Report, we observed that every single post-WWII recession was preceded by either high inflation or rapid private debt growth (Chart 3).2 At present, inflation is muted and private debt growth is low. The economy is unlikely to experience a recession if there hasn’t been a prior build-up of excess demand. Chart 3Private Debt Growth, High Inflation & Recessions Second, economic indicators are much more consistent with the 2015/16 and 1998 episodes than with “pre-recession” conditions. The ISM Manufacturing PMI has fallen sharply, though it remains above 50, but the ISM Non-Manufacturing PMI looks much healthier. This divergence between manufacturing and services is exactly what occurred in 1998 and 2015/16 (Chart 4). It is consistent with a shock to global demand and trade that has relatively little impact on the U.S. consumer and the domestic economy’s large service sector. Chart 4Divergence Between Services And Manufacturing Granted, the PMIs compiled by Markit do not mirror the divergence between the ISM Manufacturing and Non-Manufacturing surveys. In fact, the Markit Services PMI has dropped sharply alongside its manufacturing counterpart (Chart 5). However, the Markit surveys also showed no divergence between manufacturing and services in 2015/16 and have no available data for 1998. We are therefore inclined to downplay the weakness in the Markit Services PMI for the time being. Chart 5MARKIT PMIs Third, employment growth usually starts to slow at least one year before the economy heads into recession. But it showed relatively little weakness in 1998 and 2015/16 (Chart 4, bottom panel). If May’s downbeat payrolls number turns out to be the start of a trend, then we will have to reconsider our view. But for now, even after last week’s report, employment growth remains solid. Finally, not only do the economic data suggest an episode similar to 1998 and 2015/16, but the slope of the yield curve does as well. While many have focused on the inversion of the 3-month/10-year Treasury slope, the 2-year/10-year slope remains above zero, and has indeed steepened in recent weeks. A more comprehensive look at the entire yield curve, adjusting for changes in the overall level of yields, shows that it looks very similar to the yield curve seen just ahead of the first 1998 rate cut. In contrast, the yield curve seen just before the first 2001 rate cut was more heavily inverted at the front-end, and long-dated yields priced-in much less of a rebound (Charts 6A & 6B). Bottom Line: The economic data and shape of the yield curve do not suggest that the economy is heading into recession. Rather, they suggest that the economy is experiencing an external shock – akin to 1998 or 2015/16 – that can be offset by a relatively minor pivot in Fed policy. Investors should keep portfolio duration low on the view that the Fed will cut rates by less than 76 bps during the next 12 months. Corporate Health Update Chart 7Weak Profit Growth In Q1 The full slate of first quarter corporate balance sheet data have now been released, and as expected, corporate profit growth cooled significantly compared to the rapid gains seen in 2018. As a result, our Corporate Health Monitor – an equal-weighted composite of six important financial ratios – ceased its recent improvement and jumped firmly back into “deteriorating health” territory (Chart 7). Our preferred measure of pre-tax profits contracted at an annualized rate of 17% in Q1, dragging the year-over-year growth rate down to 7%, from 15% in 2018 Q4 (Chart 7, bottom panel). The crucial relationship for corporate bond investors is between pre-tax profit growth and debt growth. If profit growth exceeds debt growth, then gross leverage will decline over time taking the default rate with it. Conversely, defaults tend to rise whenever profit growth fails to keep pace with debt growth.3 Corporate debt has been growing at an annualized pace of about 6-8%. This means that profit growth would have to slow to below those levels for us to become concerned about an increase in defaults. This could occur for the next quarter or two, as the weak global growth environment weighs on revenues (Chart 8). But our Profit Margin Proxy – corporate selling prices less unit labor costs – is in a strong uptrend, suggesting that the weakness may not be that dire. The crucial relationship for corporate bond investors is between pre-tax profit growth and debt growth.  There is also some reason to think that corporate debt growth might slow during the next few quarters. According to the Fed’s Senior Loan Officer Survey, C&I loan demand has weakened significantly in recent months, while lending standards remain approximately unchanged. Historically, it is extremely rare for loan demand to weaken without a simultaneous tightening in bank lending standards (Chart 9). However, if the current unusual situation were to persist, it would be quite positive from the perspective of corporate balance sheet health. It would suggest that firms are adding less debt to balance sheets, even though banks continue to make credit readily available. Chart 8Profit Margins Still Strong Chart 9Is Corporate Sector On A Debt Diet? Bottom Line: Growth rates for both corporate profits and debt should settle into the mid-single digits during the next few quarters. This will keep gross leverage and the default rate roughly stable. A sustained period of negative profit growth and tighter C&I lending standards would challenge this outlook.   Ryan Swift, U.S. Bond Strategist rswift@bcaresearch.com Footnotes 1 Please see U.S. Bond Strategy Portfolio Allocation Summary, “When Expectations Are Self-Fulfilling”, dated June 4, 2019, available at usbs.bcaresearch.com 2 Please see U.S. Bond Strategy/Global Fixed Income Strategy  Special Report, “The Risk From Corporate Debt: Theory And Evidence”, dated April 23, 2019, available at usbs.bcaresearch.com 3 Please see U.S. Bond Strategy Special Report, “Assessing Corporate Default Risk”, dated March 19, 2019, available at usbs.bcaresearch.com Fixed Income Sector Performance Recommended Portfolio Specification

Highlights Portfolio Strategy The risk/reward tradeoff remains squarely to the downside and we are turning cyclically (3-12 month horizon) cautious on the prospects of the broad equity market. The Presidential cycle, UBER’s IPO, the SPX hitting all-time highs following the initial December 2018 yield curve inversion, and two additional yield curve inversions signal that this time is no different and a recession is likely upon us in the coming 18 months. The re-escalation of the U.S./China trade tussle along with the risk of an antitrust investigation into Apple, waning capital outlays, softening exports and deteriorating operating conditions warn that it does not pay to be overweight the S&P tech hardware storage & peripherals (THS&P) index. Our tech EPS model is flashing red on the back of sinking capex and an appreciating U.S. dollar, deteriorating operating metrics signal that tech margins are under attack and exports are also in a freefall, suggesting that the time is ripe to put the tech sector on downgrade alert. Recent Changes Downgrade the S&P THS&P index to neutral, today. Put the S&P tech sector on downgrade alert. Table 1 Feature The SPX appeared to crack early in the week, but dovish Fed President statements saved the day and stocks recovered smartly to end the week on a high note. Our tactically (0-3 month) cautious equity market stance has served us well and has run its course. We are currently leaning toward a cyclically (3-12 month) cautious stance as a slew of our cyclical indicators have rolled over decisively. At the current juncture the big call to make is on the longevity of the business cycle. Crudely put, can the Fed engineer a soft landing or is the looming easing cycle a precursor of recession (Chart 1)? We side with the latter. Chart 1What’s The Opposite Of Bond Vigilantes? This is U.S. Equity Strategy service’s view. BCA’s house view remains constructive on a cyclical 3-12 month time horizon. As a reminder, the ongoing expansion is officially the longest on record and BCA’s house view also calls for recession in late-2020/early-2021. Stan Druckenmiller once famously said “…you have to visualize the situation 18 months from now, and whatever that is, that's where the price will be, not where it is today." Thus, if BCA’s recession view is accurate then we need to start preparing the portfolio for a recessionary outcome. This week we conduct a simple thought experiment on where and why the SPX will be headed as the economy flirts with recession. But first, we rely on the message from our indicators to guide us in determining if the cycle is nearing an end. Last December parts of the yield curve slope inverted (Chart 2) and our simple insight was that the market almost always peaks following the yield curve inversion and we remained bullish on the prospects of the broad equity market and called for fresh all-time highs based on the results of our research.1 On May 1, 2019 we got confirmation as the SPX vaulted to new all-time highs, so that box is now checked. Chart 2The Yield Curve... Beyond the traditional yield curve inversion that forecasts that the Fed’s next move will be a cut and eventually the cycle ends, other yield curve type indicators have inverted and also foreshadow the end of the business cycle. Charts 3A & 3B show that the unemployment gap and another labor market yield curve type indicator have both inverted signaling that the business cycle is long in the tooth. Chart 3A...Is Always Right...Chart 3B...In Predicting Fed Cuts This time is no different and the business cycle will end. Why? Because the Fed has likely raised interest rates (as we first posited on November 19, 2018 and again on December 3, 2018) by enough to trigger a default cycle in the most indebted segment of the U.S. economy where the excesses are most prominent in the current expansion: the non-financial business sector (Chart 4A). Chart 4AMind The Corporate Debt Excesses Chart 4BDefault Cycle Looming Already, junk bond market spreads are widening and the yield curve is predicting that a default cycle is around the corner (yield curve shown on inverted scale, bottom panel, Chart 4B).  Another interesting indicator is the Presidential cycle. Chart 5 updates our work from last year showing years 2 & 3 of 17 Presidential cycles dating back to 1950. In the summer of year 3 the SPX typically peaks. Finally, the anecdote of the biggest unicorn, UBER, ipoing on May 10, 2019 also likely marks the ending of the cycle. Therefore if recession looms in the coming 18 months what is the typical magnitude of the SPX EPS drawdown and what multiple do investors pay for trough earnings? Chart 5Presidential Cycle Says Sell While the two most recent recessionary earnings contractions have been severe, we are conservative in estimating a garden variety recession causing a 20% EPS fall. S&P 500 2018 EPS ended near $162/share. This year $167/share is likely and we are now revising down our forecast for next year to $175/share from $181/share previously. A conservative 20% drawdown sets us back to $140/share in 2021. Dating back to the late 1970s when our IBES dataset on the forward P/E multiple commences, the trough forward P/E multiple during recessions averages out to 10x (Chart 6). Remaining on a conservative path we will use 13.5x, or the recent December 2018 trough multiple as our worst case multiple and a sideways move to 16.5x as the most optimistic case. This implies an SPX ending value of between 1890 and 2310 will be reached some time in 2020, with the former resetting the equity market back near the 2016 BREXIT lows. Chart 6Trough Recession Multiple Averages 10x As a result, we are not willing to play a 100-200 point advance for a potential 1000 point drawdown, the risk/reward tradeoff is to the downside. Can and has the Fed previously engineered soft landings that have caused big relief rallies in the equity market? Six times since the 1960s: once in each of the mid-1960s, early-1970s, mid-1970s, mid-1980s and mid-1990s and once in 1998 (top panel, Chart 7). Chart 7Six Mid-cycle Easing Attempts Three easing cycles were not forecast by a yield curve inversion, but the mid-1960s, the mid-1990s and in 1998 the yield curve cautioned investors that an easing cycle was looming (bottom panel, Chart 7). Specifically in 1998 the Fed only acted after the equity market fell by 20%. Another interesting observation is that ex-post five of these six iterations were truly mid cycle, one was very late cycle, but none took place in year 11 of an expansion as is currently the case. We are in uncharted territory. Chart 8 shows the mean profile of the S&P 500 six months prior to and one year post the initial Fed cut. Our assumption is that a cut in July may materialize, thus the vertical line in Chart 8 denotes t=0, which is in sync with the bond market that is pricing a greater than 75% chance of this occurrence. The subsequent market rallies were significant. Our insight from this research is that we already had the explosive rally as Chart 8 depicts, owing to the Fed’s completed pivot, with the stock market rallying from the 2018 Christmas Eve lows to the May 1, 2019 all-time highs by 26%. But, the jury is still out. The biggest risk to our call is indeed a continued rally in the S&P 500 on easy money. A way to mitigate this risk of missing out on a rally is by going long SPX LEAPS Calls once a greater than 10% correction takes root. Chart 8Is The Rally Already Behind Us? Keep in mind, that for the Fed to act and cut rates, stocks will likely have to breach the 2650 level, a point where a reflexive fall will further shake investor’s confidence in profit growth. In other words, the bond market is screaming that Fed cuts are looming, but it also means that stocks have ample room to fall before the Fed cuts rates, i.e. a riot point will force the Fed’s hand. Another big risk to this call is a swift positive resolution on the U.S./China trade dispute, and/or an unprecedented easing from the Chinese authorities which will put us offside as a euphoric rise will definitely ensue. Again SPX LEAPS Calls are an excellent way to position for such an outcome. Netting it all out, the risk/reward tradeoff remains squarely to the downside and we are turning cyclically (3-12 month horizon) cautious on the prospects of the broad equity market. The Presidential cycle, UBER’s IPO, the SPX hitting all-time highs following the initial December 2018 yield curve inversion, and two additional yield curve inversions signal that this time is no different and a recession is likely upon us in the coming 18 months. Thus, this week we are further de-risking the portfolio by downgrading a tech subindex to neutral, setting a tighter stop on a different long term tech subsector holding that has been the cornerstone of the equity bull market, and putting the overall tech sector on downgrade watch. Downgrade Tech Hardware Storage & Peripherals To Neutral In the context of further de-risking the portfolio we are downgrading the S&P tech hardware storage & peripherals index to a benchmark allocation and booking a small loss of 1.0% in relative terms since inception. Four reasons underpin our downgrade of this index that comprises almost 1/5 of the S&P tech market cap. First, index heavyweight Apple has 20% foreign sales exposure to the Greater China region. While we doubt the Chinese will directly retaliate to the U.S. restriction on Huawei by directly targeting Apple, it is still a risk. Moreover, recent news of the FTC and the DOJ targeting GOOGL and FB pose a risk to Apple, especially given its App Store dominance. Any negative news on either front would take a bite out of the sector’s profits. Second, capex has taken a bit hit. Chart 9 shows industry investment is almost nil and capex intentions from regional Fed surveys and from CEO confidence surveys signal more pain down the line. Third, the S&P THS&P index’s internationally sourced revenues are near the 60% mark, and computer exports are also flirting with the zero line. Worryingly, deflating EM Asian currencies are sapping consumer purchasing power and are weighing on industry exports (third panel, Chart 10). Chart 9Capex Blues Chart 10Exports... Similarly, global trade volumes have sunk into contractionary territory and to a level last seen during the Great Recession (not shown). With regard to export expectations the recently updated IFO World Economic Survey still points toward sustained global export ails (second panel, Chart 10). More specifically, tech laden Korean and Taiwanese exports are outright contracting at an accelerating pace and so are Chinese exports. Tack on the negative signal from the respective EM Asian stock market indices and the implication is that more profit pain looms for the S&P THS&P index (Chart 11). Finally, on the domestic front, new orders-to-inventories (NOI) have not only ground to a halt from the overall manufacturing sector, but also computer and electronic product NOI are not contracting on a short-term rate of change basis (bottom panel, Chart 10). Tracking domestic consumer outlays on computer and peripheral equipment reveals that they too have steeply decelerated from the cyclical peak reached in early 2018, painting a softening picture for industry sales growth prospects (Chart 12). Chart 11...Under Pressure Chart 12Soft Sales Backdrop  The re-escalation of the U.S./China trade tussle along with the risk of an antitrust investigation into Apple, waning capital outlays, softening exports and deteriorating operating conditions warn that it does not pay to be overweight the S&P THS&P index. Nevertheless, before getting too bearish there is a silver lining. This index has a net debt/EBITDA of 0.5x versus the non-financial broad market of 2x. On the valuation front this tech subindex trades at 28% discount to the non-financial broad market on an EV/EBITDA basis suggesting that most of bad news is already reflected in bombed out valuations (Chart 13). The re-escalation of the U.S./China trade tussle along with the risk of an antitrust investigation into Apple, waning capital outlays, softening exports and deteriorating operating conditions warn that it does not pay to be overweight the S&P THS&P index. Bottom Line: Downgrade the S&P THS&P index to neutral for a modest relative loss of 1.0% since inception. The ticker symbols for the stocks in this index are: BLBG: S5CMPE – AAPL, HPQ, HPE, NTAP, STX, WDC, XRX. Chart 13But B/S Remains Pristine Put Tech On Downgrade Alert We are compelled to put the S&P tech sector on our downgrade watch list as President Trump’s hawkish trade talk and actions since May 5 warn that tech revenues (60% export exposure) and profits will likely remain under intense downward pressure. The way we will execute this tech sector downgrade to underweight will be via the S&P software index, the sector’s largest market cap weight. A downgrade to neutral in the S&P software index would push our S&P tech sector weight to a below benchmark allocation. Thus, we are initiating a stop near the 10% relative return mark on the S&P software high-conviction overweight call since the December 3, 2018 inception and also lift the stop to 27% from 17% relative return on the cyclical overweight we have on the S&P software index since the November 27, 2017 inception. Any near term stock market pullback will likely trigger these stops and push the tech sector to an underweight position. Stay tuned. With regard to the overall tech sector, our EPS model is on the verge of contraction on the back of sinking capex and a firming U.S. dollar (middle panel, Chart 14). In more detail, tech capex has recaptured market share swinging from below 6% to above 13% in the past decade and now has likely hit a wall similar to the late 1990s peak (second panel, Chart 15). On a rate of change basis tech capital outlays have all peaked and national data corroborate the message from stock market reported data (bottom panel, Chart 15). Chart 14Grim EPS Model Signal Chart 15Exhausted Capex? The San Francisco Fed’s Tech Pulse Index (comprising coincident indicators of activity in the U.S. information technology sector) is also closing in on the expansion/contraction line warning that tech stocks are in for a rough ride (bottom panel, Chart 14). Delving deeper into operating metrics, we encounter some profit margin trouble for tech stocks. Not only do industry selling prices continue to deflate, but also our tech sector wage bill gauge is picking up steam. Taken together, all-time high profit margins – double the broad market – appear unsustainable and something has to give (Chart 16). On the export relief valve front, the sector faces twin headwinds. First the trade war re-escalation suggests that an interruption/disruption of tech supply chains is a rising risk, and the firming greenback will continue to weigh on P&Ls as negative translation effects will hit Q2, Q3 and likely Q4 profits (Chart 17). Chart 16Margin Trouble Chart 17Rising Dollar Will Weigh On Revenues & Profits Netting it all out, our tech EPS model is flashing red on the back of sinking capex and an appreciating U.S. dollar, deteriorating operating metrics signal that tech margins are under attack and exports are also in a freefall, suggesting that the time is ripe to put the tech sector on downgrade alert. Nevertheless, there are two sizable offsets contrasting all the grim news. Tech stocks are effectively debt free with the net debt/EBITDA sitting on the zero line and valuations a far cry from the tech bubble era. Finally, the drop in interest rates via the 10-year yield and looming Fed cuts will underpin these growth stocks that thrive in a disinflationary backdrop (Chart 18). Netting it all out, our tech EPS model is flashing red on the back of sinking capex and an appreciating U.S. dollar, deteriorating operating metrics signal that tech margins are under attack and exports are also in a freefall, suggesting that the time is ripe to put the tech sector on downgrade alert. Bottom Line: We are compelled to put the tech sector on our downgrade watch list. We will execute the S&P tech sector downgrade to underweight when the S&P software index’s stops are triggered. This would push the S&P software index to neutral from currently overweight. Stay tuned. Chart 18But There Is An Offset: Melting Yields Help Growth Stocks   Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com   Footnotes 1      Please see BCA U.S. Equity Strategy Weekly Report, “Signal Vs. Noise” dated December 17, 2018, available at uses.bcaresearch.com.   Current Recommendations Current Trades Size And Style Views Favor value over growth Favor large over small caps

Overweight As a follow up to yesterday’s Insight Report where we highlighted our sanguine view on the S&P health care equipment index, a structural EM macroeconomic trend further reiterates our constructive view on the U.S. health care equipment providers. Aging population, one of the major factors that has been driving the explosion of health care spending in DM for the past 20 years, is now rapidly impacting EM. According to the UN, the share of the population aged 65 and older in EM countries will rise from roughly 7% this year to 16% by 2060, while population growth slows to below the replacement rate (see chart). Meanwhile, IMF data shows that EM health care spending is approximately 5% of GDP, whereas it stands in excess of 14% in DM. U.S. health care equipment providers are the first in line to benefit from the upcoming increase in health care spending in EM. Indeed, U.S. companies are often the only source of equipment for hospitals/clinics globally given their status of technological leaders. Bottom Line: Long-term EM demographic trends as well as the short-term “fear selling” discussed in Monday’s Special Report create an exploitable trading opportunity in the S&P health care equipment index. The ticker symbols for the stocks in the S&P health care equipment index are: BLBG: S5HCEP – ABT, MDT, DHR, BDX, SYK, ISRG, BSX, BAX, EW, ZBH, IDXX, RMD, TFX, HOLX, ABMD, VAR.