Equities

We nearly fully captured the economic reopening theme through our long “Back-To-Work”/short “COIVD-19 Winners” baskets pair trade. As a brief summary, we first initiated this trade in the September 8th, 2020 Strategy Report, and subsequently closed it earlier this year for a gain of 21.5% via a rolling stop trigger, until we reopened it once again on February 3. Fast-forward to today, and this pair trade has vaulted another 25.5% since the second inception. Now that the US equity market is euphoric on the back of stimulus news and more importantly given that the bond market is no longer responsive having already priced in four Fed hikes by the end of 2023, we opt to re-introduce a 5% rolling stop as a risk management tool in order to protect handsome profits. Bottom Line: Institute a 5% rolling stop in the long “Back-To-Work”/short “COIVD-19 Winners” baskets pair trade today. ​​​​​​​

Feature The selloff in Chinese stocks since mid-February reflects a rollover in earnings growth and multiples. Lofty valuations in Chinese equities driven by last year’s massive stimulus means that stock prices are vulnerable to any pullback in policy supports (Chart 1A and 1B). Chart 1AGrowth In Chinese Investable Earnings And Multiple Expansions Has Rolled Over Chart 1BEarnings Outlook Still Looks Promising In The Onshore Market, But May Soon Peak After diverging in the past seven to eight months, Chinese stocks have started to gravitate towards deteriorating monetary conditions index. The market may be beginning to price in a peak in economic as well as corporate profit growth (Chart 2). Defensive stocks in China’s onshore and offshore equity markets have also outperformed cyclicals since February, which confirms that investors expect earnings growth will slow in the coming months (Chart 3). A tighter monetary policy stance, coupled with increased regulations targeting the real estate, banking, and tech sectors have further dampened investors’ appetite for Chinese stocks. Chart 2A-Share Prices Start To Gravitate Towards Tightening Monetary Conditions Chart 3Defensives Have Prevailed Over Cyclicals In Both Onshore And Offshore Markets The official PMIs bounced back smartly in March following three consecutive months of decline. However, the strong PMI readings do not change our view that the speed of China’s economic recovery is near its zenith. PMIs in the first two months of the year are typically lower due to the Lunar New Year (LNY), and the improvement in March’s PMI did not exceed seasonal rebounds experienced in previous years. Weakening fixed-asset investments also indicate that economic activity is moderating. We remain cautious on the 6 to 12-month outlook for Chinese stocks, in both absolute and relative terms. Qingyun Xu, CFA Associate Editor qingyunx@bcaresearch.com Jing Sima China Strategist jings@bcaresearch.com     China’s NBS manufacturing and non-manufacturing PMIs in March beat market expectations with sharp rebounds after moderating in the previous three months. The improvement in the PMIs will likely provide authorities with confidence to stay the course on policy normalization. The methodology calculating PMI indexes reflects the net reported improvement in business activities relative to the previous month and there was a notable decline in PMIs in February, due to the LNY holiday and travel restrictions related to the spread of COVID-19.  Additionally, the average reading of China’s official composite PMI in Q1 this year was 2.2 percentage points lower than in Q4 last year and weaker than the Q1 PMI figures in most of the pre-pandemic years. Moreover, Chinese Caixin manufacturing PMI, which focuses on smaller and private corporates, declined further in March as it continued its downward trend started in December 2020. Chart 4Q1 PMIs Slowed By More Than Seasonal Factors Chart 5Caixin PMI Shows Further Deterioration Among Private-Sector Manufacturers Growth in credit expansions in February was better than expected, supported by a substantial increase in corporates’ demand for medium- and long-term loans. Travel restrictions during this year’s LNY led to a shorter holiday, a faster resumption in manufacturing activity after the break and stronger credit demand in February. China’s Monetary Policy Committee meeting last week reiterated the authorities’ hawkish policy tone and removed dovish language prevalent in last month’s National People’s Congress, such as “maintaining the consistency, stability, and sustainability in monetary policy” and “not making a sudden turn in policymaking.” Given the strong headline economic and credit data in January and February, the authorities will be unlikely to slow normalizing monetary policy. Therefore, the risk of a policy-tightening overshoot remains high. The PBoC has continued to drain net liquidity in the interbank system since early this year, evidenced by falling excess reserves at the central bank. Excess reserves normally lead the credit impulse by about six months, signaling that the latter will continue to decelerate in the months ahead. In turn, the credit impulse normally leads the business cycle by six to nine months, meaning that China’s cyclical economic recovery will likely peak in the first half of 2021. Chart 6Corporates Demand For Longer-Term Bank Loans Resumed Their Upward Trend Early This Year Chart 7Falling Excess Reserves Leads To A Deceleration In Credit And Economic Growth Robust industrial activities and improving profitability helped to boost profit growth in January and February. The bounce in producer prices also drove up returns in industrial output, particularly in upstream industries loaded with commodity producers. Nevertheless, weak final demand is limiting the ability of Chinese producers to pass on higher prices to domestic consumers, highlighted in the divergence between Chinese PPI and CPI. In addition, China’s domestic demand for commodities and industrial metals may reach its cyclical peak in mid-2021, following ongoing credit tightening and reduced economic activity. Commodity inventories have surged to historical highs due to soaring imports (which far exceeded consumption) during 2H20. Inventory destocking pressures will weigh on commodity prices with China’s domestic demand reaching its cyclical peak. Disinflation/deflation pressures may re-emerge in 2H21, which will pose downside risks to China’s industrial profits. Chart 8Industrials Posted A Strong Rebound In The First Two Months of 2021 Chart 9Surging Commodity Prices Helped To Boost Upstream Industry Profits Chart 10Domestic Final Demand Remains Sluggish Chart 11Decelerating Chinese Credit Growth Poses Downside Risks To Global Commodity Prices Chart 12Chinas Raw Material Inventory Restocking Cycle May Be Near A Cyclical Peak Chart 13Real Estate And Infrastructure Investment Losing Steam In 2021 Investments in infrastructure and real estate drove China’s economic recovery in the second half of 2020. However, growth momentum in both sectors has slowed because of retreating government spending in infrastructure and tightening regulations in the property sector. Both home sales and housing prices, especially in tier-one cities, rose significantly in January-February this year, deepening authorities’ concerns over bubble risks in the property market. The share of mortgages, deposits and advanced payments as a source of funds for property developers reached an all-time high in February. Following the LNY, the authorities introduced a slew of new restrictions on the housing market to curb excessive demand. These were in addition to placing limits on bank lending to both property developers and household mortgages. All of these measures will weigh on housing supply and demand, and the impact is already evident in falling land purchases and housing starts. At the same time, property developers are rushing to complete existing projects. The tighter regulations on real estate financing will likely weaken growth in real estate investment and construction activities in the second half of this year. Chart 14Housing Prices In Top-Tier Cities Have Been On A Tear … Chart 15… But Bank Lending To Developers And Mortgage Loans Continue Downward Trend Chart 16Property Developers Are Rushing To Sell And Complete Existing Projects Chart 17Forward-Looking Indicators Suggest A Slowdown In Housing And Construction Activities   Table 1China Macro Data Summary Table 2China Financial Market Performance Summary Footnotes Cyclical Investment Stance Equity Sector Recommendations

Last week we highlighted BCA’s Risk Appetite Index (RAI) that has catapulted to uncharted territory. While such euphoria has not historically spelled cyclical or structural SPX trouble, it does warrant some near-term caution. Tack on the blockbuster non-farm payrolls and ISM manufacturing releases from last week and this week’s ISM services all-time high print and investors have further stampeded into stocks. Moreover, we recently showed that seasonality would boost the SPX in April before the dreaded month of May. Lastly, the equity put/call ratio collapsed to 0.38 on Monday, the VIX broke 18 and the SPX surpassed our end-2021 target of 4,000 (please look forward to receiving our SPX DDM update scheduled for the April 19 Strategy Report publication). Amidst such exuberance, and given that the 10-year US Treasury yield appears exhausted unable to breakout to fresh recovery highs, we are compelled to book handsome profits in our synthetic SPX long via closing the long $400/$420 call spread short $340 put on the SPY for June expiry for a gain of $8.86/contract or 2850% since the February 11 inception (middle panel). As a reminder, our previous synthetic long netted us $5.41/contract of 676% return as we managed to lock in gains before it fell to $0 at expiry (bottom panel). For clients that want to roll over the synthetic long position and continue to chase this manic market, we would recommend a long $415/$435 call spread with a short $365 put on the SPY for the August expiry at a net outflow of $0.2/contract. Bottom Line: Crystalize gains of $8.86/contract or 2850% and move to the sidelines on the SPX synthetic long position for now, but stay tuned. The SPX is now above our 4,000 yearend target and some near-term caution is warranted.   ​​​​​​​

Special Report

Highlights The Eurozone economy and assets remain beholden to the global manufacturing cycle. This sensitivity reflects the large share of output generated by capex and exports. Yet, the second half of 2021 and first half of 2022 could see euro area growth follow the beat of its own drum. This is a consequence of the unique role of consumption in the COVID-19 recession. European growth will therefore outperform expectations, even if economic momentum slows outside of Europe. Consequently, the euro and Eurozone equities will outperform for the coming 12 to 18 months. Feature For the past 20 years, investors have used a simple rule of thumb to understand European growth and markets. Europe is a derivative of global growth because of its large manufacturing sector and torpid domestic economy. A reductionist approach would even argue that China’s economy is what matters most for Europe. Is this model still valid to analyze Europe? In general, this approach still holds up well. However, the nature of the 2020 COVID-19 recession suggests that the European economy could still accelerate in the second half of the year, despite a small slowdown in the Chinese economy and global manufacturing sector. The Origin Of The Pro-Cyclicality Narrative Investors in European markets have long understood that Eurozone equities outperform when the global manufacturing cycle accelerates. This pro-cyclicality of European stocks is a consequence of their heavy weighting toward cyclical and value stocks, such as industrials, consumer discretionary and financials. Chart 1German/US Spreads: Global Manufacturing Cycle Historically, European yields have also moved in a very pro-cyclical fashion. Over the past 30 years, periods when German 10-year yields rose relative to that of US Treasury Notes have coincided with an improvement in the global manufacturing sector as approximated by the ISM Manufacturing survey (Chart 1). Investors also understand that the euro is a pro-cyclical currency. Some of this behavior reflects the counter-cyclicality of the US dollar. However, if German yields rise more than US ones when global growth improves and European equities outperform under similar conditions, the euro naturally attracts inflows when the global manufacturing sector strengthens. Chart 2China Is A Key Determinant Of European Activity Ultimately, the responsiveness of the euro and European assets to global growth is rooted in the nature of the European economy. Trade and manufacturing account for nearly 40% and 14% of GDP, respectively, compared to 26% and 11% for the US. This economic specialization has made Europe extremely sensitive to the gyrations of the Chinese economy, the largest contributor to fluctuation in the global demand for capital goods. As Chart 2 highlights, European IP and PMI outperform the US when China’s marginal propensity to consume (as approximated by the growth in M1 relative to M2) picks up. Is The Pro-Cyclical Narrative Still Valid? Despite the euro area debt crisis and the slow health and fiscal policy response of European authorities to COVID-19, evidence suggests that the Eurozone’s pro-cyclicality is only increasing. Chart 3Europe Is Becoming More Sensitive To The Rest Of The World Europe Is Becoming More Sensitive To The Rest Of The World A simple statistical analysis confirms this hypothesis. A look at the beta of European GDP growth against the Global PMI reveals that the sensitivity of Eurozone growth and German growth to the Global PMI has steadily increased over the past 20 years (Chart 3, top panel). Moreover, the beta of euro area growth to the global PMI is now higher than that of the US, despite a considerably lower potential GDP growth, which means that a greater proportion of the Eurozone’s GDP growth is affected by globally-driven fluctuations. The bottom panel of Chart 3 shows a more volatile but similar relationship with Chinese economic activity. Correlation analysis confirms that Europe remains very sensitive to global factors. Currently, the rolling correlation of a regression of Eurozone GDP growth versus that of China stands near 0.7, which is comparable to levels that prevailed between 2005 and 2012. The correlation between German and Chinese GDP growth is now higher than at any point during the past two decades. Chart 4The Declining Role Of Consumption The increasing influence of global economic variables on the European economy reflects the evolution of the composition of the Eurozone’s GDP. Over the past 11 years, the share of consumption within GDP has decreased from 57% to 52%. For comparison’s sake, consumption accounts for 71% of US GDP. The two sectors that have taken the primacy away from consumption are capex and net exports, whose combined share has grown from 22% to 26% of GDP (Chart 4). This shift in the composition of GDP echoes the structural forces facing the Eurozone. An ageing population, a banking system focused on rebuilding its balance sheet, and the tackling of the competitiveness problems of peripheral economies have hurt wage growth, consumption and imports. Meanwhile, exports have remained on a stable trend, thanks to both the comparative vigor of the euro area’s trading partners and a cheap euro. Therefore, net exports expanded. Capex benefited from the strength in European exports. A Granger causality test reveals that consumption has little impact on fixed-capital formation in the euro area. However, the same method shows that fluctuations in export growth cause changes in investment. This makes sense. The variance in exports is an important contributor to the variability of Eurozone profits (Chart 5). Thus, rising exports incentivize the European corporate sector to expand its capital stock to fulfill foreign demand. The expanding share of output created by exports and capex along with the role of exports as a driver of capex explains why Europe economic activity is bound to remain so sensitive to the fluctuations in global trade and manufacturing activity. Moreover, the capex/exports interplay even affects consumption. As Chart 6 shows, the growth of euro area personal expenditures often bottoms after the annual rate of change of the new orders of capital goods has troughed, which reflects the role of exports as a driver of European income. Chart 5Profits And Exports Chart 6Consumption Doesn't Move In A Vacuum Bottom Line: European economic activity remains a high beta play on global and Chinese growth. The decrease in consumption to the benefit of exports and capex explains why this reality will not change anytime soon. 2021, An Idiosyncratic Year? In 2021, consumption will be the key input to the European economic performance, despite the long-term relationship between European GDP and foreign economic activity. This will allow European growth to narrow some of its gap with the US and the rest of the world in the second half of this year and the first half of 2022, even if the global manufacturing sector comes off its boil soon. The 2020 recession was unique. In a normal recession, capex, real estate investment, spending on durable goods and the manufacturing sector are the main contributors to the decline in GDP. This time, consumption and the service sector generated most of the contraction in output. These two sectors also caused the second dip in GDP following the tightening of lockdown measures across Europe last winter. Once the more recent wave of lockdowns is behind us, consumption will most likely slingshot to higher levels. More than the US, where the economy has been partially open for months now, Europe remains replete with significant pent-up demand. Obviously, fulfilling this demand will require further progress in the European vaccination campaign, something we recently discussed. Chart 7The Money Supply Forecasts A Rapid Recovery The surge in M1 also points to a sharp rebound in consumption once governments lift the current lockdowns (Chart 7). M1 is a much more reliable predictor of economic activity in Europe than in the US, because disintermediation is not as prevalent in the Eurozone, where banks account for 72% and 88% of corporate and household credit, respectively, compared to 32% and 29% in the US. We cannot dismiss the explosion in the money supply as only a function of the ECB’s actions. European banks are in much better shape today than they were 10 years ago. Non-performing loans have been steadily decreasing. A rise in delinquencies is likely in the coming quarters due to the pandemic; however, the EUR3 trillion in credit guarantees by governments will limit the damages to the private sector’s and banking system’s balance sheets. Moreover, the Tier-1 capital ratio of the banking system ranges between 14% for Spain and 17% for Germany, well above the 10.5% threshold set by Basel-III (Chart 8). In this context, the pick-up in money supply mirrored credit flows. Thus, even if some of that credit reflects precautionary demand, the likelihood is high that a significant proportion of the built-up cash balances will find its way into the economy. Another positive sign for consumption comes from European confidence surveys. Despite tighter lockdown measures, consumer confidence has sharply rebounded, which historically heralds stronger consumption. Moreover, according to the ECB’s loan survey, stronger consumer confidence is causing an improvement in credit demand, which foreshadows a decline in savings intentions, especially now that wage growth is stabilizing (Chart 9). Nonetheless, there is still a risk that the advance in wages peters off. The recent wage agreement reached by Germany’s IG Metall union in North Rhine Westphalia was a paltry 1.3% annual pay raise, and once the Kurzarbeit programs end, the true level of labor market slack will become evident. However, for consumption to grow, all that we need to see now is stable wage growth, even if at a low rate.  Chart 8European Banks Are Feeling Better Chart 9Confidence Points To Stronger Consumption Beyond consumption, Europe’s fiscal policy will be positive compared to the US next year. The NGEU plan will add roughly 1% to GDP in both 2021 and 2022. As a result, the Eurozone’s net fiscal drag should be no greater than 1% of GDP next year. This compares to a fiscal thrust of -7% in the US in 2022, even after factoring in the new “American Jobs Act” proposed by the Biden Administration last week, according to our US Political Strategy team. Bottom Line: The revival in European consumption in the second half of 2021 and the first half of 2022 will allow the gap between European and global growth to narrow. This dynamic will be reinforced next year, when the fiscal drag will be lower in Europe than in the US. These forces will create a rare occasion when European growth will improve despite a deceleration (albeit a modest one) in global manufacturing activity. Investment Conclusions The continued sensitivity of the euro area economy to the global industrial and trade cycle indicates that over the long-term, European assets will remain beholden to the gyrations of global growth. In other words, the euro and European stocks will outperform in periods of accelerating global manufacturing activity, as they have done over the past 30 years. The next 12 to 18 month may nonetheless defy this bigger picture, allowing European assets to generate alpha for global investors. Chart 10The Euro Will Like Idiosyncratic European Growth First, the gap between US and euro area growth will narrow over the coming 12 to 18 months, thus the euro will remain well bid, even if the maximum acceleration in global industrial activity lies behind. As investors re-assess their view of European economic activity and the current period of maximum relative pessimism passes, inflows into the euro area will accelerate and the euro will appreciate (Chart 10). Hence, we continue to see the recent phase of weakness in EUR/USD as transitory. Second, European equities have scope to outperform US ones over that window. Some of that anticipated outperformance reflects our positive stance on the euro. However, a consumption-driven economic bounce will be positive for European financials as well. Such a recovery will let investors ratchet down their estimates of credit losses in the financial system. Moreover, banks are well capitalized, thus the ECB will permit the resumption of dividend payments. Under these circumstances, European banks have scope to outperform US ones temporarily, especially since Eurozone banks trade at a 56% discount to their transatlantic rivals on a price-to-book basis. An outperformance of financials will be key for Europe’s performance. Chart 11German/US Spreads Near Equilibrium? Finally, we could enter a period of stability in US/German yield spreads over the coming months. The ECB remains steadfast at limiting the upside in European risk-free rates, as Christine Lagarde reiterated last week. However, BCA’s US bond strategist, Ryan Swift, believes US yields will enter a temporary plateau, as the Federal Reserve will not adjust rates until well after the US economy has reached full employment. Hence, the Fed is unlikely to let the OIS curve bring forward the date of the first hike currently priced in for August 2022 on a durable basis, which also limits the upside to US yields. Thus, looking at core CPI and policy rate differences, US yields have reached a temporary equilibrium relative to Germany (Chart 11).   Mathieu Savary, Chief European Investment Strategist Mathieu@bcaresearch.com

Highlights Fiscal stimulus props up output when it’s injected into an economy, but is a consumption hangover just around the corner?: Fiscal drag is a very real phenomenon but we don’t think US investors have to worry about a consumption drag any time soon, given that consumption has yet to see a bounce. Is the housing market’s boom vulnerable to reversing?: Powered by an outward shift in the demand curve for single-family homes in the suburbs and beyond and helped along by a chronic supply deficit, it appears that the housing boom has at least another year or two to run. Is the Archegos implosion a sign of broader weaknesses?: Based on what we know now, we do not believe that one levered investor’s reported demise is a symptom of systemic problems in financial markets or the banking system. Feature BCA’s monthly editorial view meeting, held last week, underlined the unusual level of uncertainty confronting investors. Against a backdrop of enormous domestic fiscal stimulus and global monetary accommodation, an entire generation of market participants is ruminating about inflation for the very first time. The course of the pandemic remains a significant unknown; while the US has seemingly lined up all the vaccine doses it will need and has begun to hit its vaccination stride, infections are rising and Europe and Canada are still mired in shutdowns. It has been easy to tally up the excess pandemic savings as they’ve accumulated into what we expect will be a $2 trillion mass, but we can only guess how much of the hoard will be spent and when. It is unclear what elements of the infrastructure spending vision laid out by President Biden last week will make it through a Congress deeply riven by partisan conflict and fissures within the Democratic caucus and the fate of its associated tax hike proposals is therefore uncertain. Against this backdrop of unknowns, we highlight the questions that have come up the most in our recent discussions with clients. We continue to have a constructive view on risk assets and the economy but the situation is fluid and we will take our cue from the evidence as it emerges. A Stimulus Hangover? Q: I get that fiscal stimulus will produce a big GDP pop this year, but what happens after it’s gone? Is the US heading for a consumption/income hangover in 2022? It’s true that the US cannot keep pumping out transfer payments to households at its 2020 and 2021 rate. It’s also true, however, that fewer and fewer households are in need of them. Employee compensation surpassed its February 2020 pre-pandemic peak in both January and February (Chart 1) and it should continue to rise as more and more people go back to work. Conversely, unemployment assistance should naturally dwindle as vaccinations allow the private sector to take the baton from the federal government. Chart 1Aggregate Compensation Is Making New Highs Chart 2The Big Surge Has Yet To Come The end of the economic impact payments ($1,400 to adults earning $75,000 or less in the current round, following $1,200 and $600 rounds last spring and this January) will represent something of a fiscal cliff for vulnerable households. They have a high marginal propensity to consume and presumably have been depending on the transfers, as evidenced by the revised 7.6% month-over-month spike in January retail sales upon the distribution of the $600 round and its subsequent 3% decline in February (Chart 2). As people return to work, however, the number of vulnerable households should shrink. We nonetheless do not fear a near-term consumption hangover for the simple reason that there was no consumption sugar rush in 2020. Consumption growth has badly lagged increases in household net worth as the multitude of households who didn’t really need the economic impact payments used them to pad their savings, pay down debt or buy stocks. Once the $1,400 checks are fully disbursed, we estimate that excess household savings will top $2 trillion. Much of those excess pandemic savings have accumulated because households were unable to spend on things like restaurant meals, travel, movies, concerts and sporting events. We are confident that they will spend again once they recover their full menu of options, but much of the forgone services spending will simply be lost. Some of the unintended pandemic savings will remain savings and the consumption tailwind driven by pent-up demand will eventually dissipate. When that happens, consumption may indeed hit a bit of a wall and economic growth will likely decelerate. The key for our twelve-month market outlook is that the unfettered release of pent-up demand cannot begin until households recover their full range of consumption options. They won’t do so until the economy fully reopens, which means the inevitable slowdown clock has not yet begun to tick. One can’t be hungover without first getting drunk and the longer it takes for the consumption surge to arrive, the longer the slowdown will be delayed. In our most likely scenario, the hangover won’t arrive until 2023, beyond the time horizon of most institutional investors. How Vulnerable Is The Housing Market? Q: The US housing market has experienced a remarkable recovery. Is the real estate boom sustainable or is it vulnerable to a sudden reversal? We believe the real estate boom can be sustained over the next year and beyond. It is supported by strong demand, affordable financing and tight supplies. Against a backdrop of extended supply shortfalls, there is scope for prices to continue to rise even as new construction activity accelerates (Chart 3). Residential investment accounts for a modest amount of economic activity but housing is nonetheless likely to remain in a sweet spot in which rising prices boost household wealth at the margin and increasing activity boosts employment and income. Chart 3Falling Supply, Rising Prices Chart 4A Seller's Market The pandemic has acted to stoke demand for suburban single-family homes and it appears as if at least some of the migration from urban centers to suburban and exurban/rural communities will outlast the pandemic. Several businesses have already moved to lower their real estate expenses by shrinking their office footprints in high-cost central business districts (CBD). Working from home will be an option for many professionals going forward and a lot of them may choose to trade high-cost-per-square-foot city apartments for much cheaper space in the suburbs and beyond now that they are no longer tethered to their CBD offices five days a week. In addition to the work-from-home catalyst, the flow from cities may be persistent if urban living becomes less attractive in a post-pandemic world that features fewer bars and restaurants and lingering wariness about close interactions with crowds. The supply of houses is historically low when adjusted for the total number of US households (Chart 4) and the tight conditions are only partly related to the pandemic. The first pandemic feature is an unwillingness to have (potentially infected) prospective buyers trooping through one’s house to examine it. The second is an aversion among older people to sell their homes and move to the senior-living facilities that incubated infections in the pandemic’s initial waves. Both of these factors are temporary and should ease quickly once widespread immunization stifles COVID’s spread. The longer-run supply factor is restrictive zoning laws that make it difficult to construct new homes. This is an intractable issue in many if not most of the more desirable locations across the country and it will not be solved quickly or easily (Chart 5). Demand was poised to exceed supply in many of the nation’s housing markets even before work from home unshackled skilled professionals from their offices. That dynamic should help keep prices firm while supporting residential investment and construction employment. Chart 5New Home Construction Has Lagged Since The GFC Chart 6Homes Are Still Affordable Finally, houses remain quite affordable (Chart 6, top panel). Despite a backup of 40-50 basis points from the 2.8% bottom, the rates on 30-year fixed-rate mortgages are still extremely low relative to history (Chart 6, third panel). Buying is an appealing alternative to renting despite the rise in home prices over the last year (Chart 6, bottom panel). The rate of price appreciation is likely to slow once the pandemic supply impediments fade, but US home construction has not kept pace with long-run household formation growth and we expect the housing market will remain robust for at least the next year or two. Have Termites Gotten Into The Beams? Q: Retail investors nearly brought down a hedge fund with a large short position in GameStop (GME). Now a family office that looked a lot like a hedge fund has blown up after its prime brokers allowed it to amplify long equity exposures with ridiculous amounts of leverage. We all know there’s never just one cockroach. Do you think there’s a deeper rot in this market after 12 years of gains disconnected from the fundamentals? The details of the reported fire sales of margin collateral that may have wiped out the multi-billion-dollar Archegos portfolio have not been made public. No one but the parties involved have definitive knowledge of what occurred but it’s always worth thinking about what could go wrong, especially twelve years into a bull market. We can state with full confidence, however, that the S&P 500’s extended run has not been disconnected from the fundamentals. Chart 7Earnings Growth Has Outpaced Multiple Expansion Treating the pandemic sell-off as a vicious correction instead of a full-fledged bear market that ushered in a brand-new bull market, the current bull market began in March 2009 and has lasted for twelve years and one month (Chart 7, top panel). When it began, four-quarter forward consensus earnings estimates for the S&P 500 were $65. As of March 26th, forward four-quarter earnings were $180. Over the duration of the bull market, S&P 500 earnings estimates have nearly tripled, growing at an 8.75% annualized rate (Chart 7, middle panel). The index’s forward multiple has nearly doubled, from 11.25 to 21.5, rising at a 5.5% annualized rate (Chart 7, bottom panel). Earnings growth has accounted for the majority (about 61%) of the index’s 14.75% annualized gain. Through last January, ahead of the pandemic, when the forward multiple was 18.3, earnings growth accounted for two-thirds of the gain. The pandemic leg has been a re-rating phenomenon, but it slanders the overall advance to say that it has been disconnected from fundamentals. Earnings growth has been solid for an extended period of time and is poised to accelerate to 9.2% by the end of the year if today’s consensus expectations for calendar 2022 hold up. As for the issues raised by the news reports of Archegos’ demise, it is well understood that long bull markets breed excesses. It may be disheartening that a sizable pool of institutional capital found a way to use bespoke derivative instruments to game the system and evade regulatory attention but it’s certainly not surprising. When money, elections, university admissions, Olympic laurels, the World Series or the Tour de France are at stake, many people will do nearly anything to get an edge. Post-GFC measures like Basel III and the Volcker rule have made the regulated banking system more stable, but markets will never be completely shock-proof as long as humans are involved with them. We enjoy reading exposés as much as anyone else but we try to keep in mind that not every item the media sink their teeth into is evidence of systemic rot. There is a lot that is still not known about the Archegos saga beyond the apparent outlines of a highly leveraged investor who got into trouble when its underlying positions went the wrong way. It is striking to see broker-dealers challenging the three major ETF sponsors for ownership primacy in individual equities, as they do in DISCA, GSX, IQ, TME and VIAC – all stocks in which Archegos reportedly amassed large synthetic exposures. Credit Suisse and Nomura, which were singed the worst by Archegos exposures, have sizable holdings in several other companies, as do other broker-dealers. The presence of those other holdings might lead one to conclude that Archegos was not the only investor to discover that total-return swaps/contracts for difference offered a way to ramp up exposures. One might also conclude that the broker-dealers, finding households and non-financial businesses had little appetite for loans, were only too happy to provide leverage to investors via their prime brokerage arms. The two conclusions do not mean that a collapse is imminent, however. We continue to recommend that investors maintain risk-friendly portfolio positioning, albeit with added vigilance and a bias to shorten holding periods given the uncertain and potentially volatile backdrop. Doug Peta, CFA Chief US Investment Strategist dougp@bcaresearch.com  

Weekly Performance Update For the week ending Thu Apr 01, 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 2.30% 2.84% Top Contributors   UTHR:US TX:US QFIN:US WES:US VICI:US Weekly Return 43 bps 26 bps 18 bps 18 bps 17 bps Top Detractors   VIPS:US ESGR:US ARD:US UGI:US ACHC:US Weekly Return -17 bps -8 bps -4 bps -4 bps -3 bps Top Prospects   ESGR:US TX:US QFIN:US VIPS:US SCCO:US BCA Score 99.76% 99.39% 97.20% 96.28% 95.00% BCA Canada Portfolio Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 2.75% 1.95% Top Contributors   IFP:CA PXT:CA CFP:CA VII:CA TOU:CA Weekly Return 47 bps 35 bps 33 bps 33 bps 25 bps Top Detractors   QBR.A:CA RCI.B:CA T:CA LNF:CA WEED:CA Weekly Return -11 bps -11 bps -10 bps -8 bps -7 bps Top Prospects   LNF:CA IFP:CA LNR:CA CFP:CA LIF:CA BCA Score 98.91% 97.52% 97.24% 97.01% 96.13% BCA UK Portfolio Total Weekly Return BCA UK Portfolio FTSE 100 TRI 1.94% 0.96% Top Contributors   OXIG:GB NLMK:GB SVST:GB TM17:GB IPO:GB Weekly Return 36 bps 25 bps 22 bps 20 bps 17 bps Top Detractors   DRX:GB XPP:GB ROSN:GB CNE:GB TYMN:GB Weekly Return -15 bps -8 bps -6 bps -6 bps -4 bps Top Prospects   NLMK:GB GLTR:GB SVST:GB FXPO:GB BPCR:GB BCA Score 98.61% 97.92% 97.85% 96.33% 95.79% BCA Eurozone Portfolio Total Weekly Return BCA EMU Portfolio MSCI EMU TRI 2.54% 2.74% Top Contributors   SOL:IT PAH3:DE TEN:IT VGP:BE MOL:IT Weekly Return 29 bps 20 bps 16 bps 15 bps 15 bps Top Detractors   SES:IT PHH2:DE HDG:NL MMT:FR GCO:ES Weekly Return -6 bps -5 bps -5 bps -4 bps -0 bps Top Prospects   PHH2:DE SOLV:BE BEKB:BE SOL:IT SES:IT BCA Score 99.57% 99.23% 97.72% 97.51% 95.53% BCA Japan Portfolio Total Weekly Return BCA Japan Portfolio TOPIX TRI -0.72% 0.97% Top Contributors   2362:JP 4980:JP 8595:JP 8966:JP 3132:JP Weekly Return 27 bps 14 bps 11 bps 10 bps 7 bps Top Detractors   9506:JP 9503:JP 2692:JP 5943:JP 7942:JP Weekly Return -16 bps -16 bps -15 bps -12 bps -11 bps Top Prospects   9436:JP 5451:JP 4008:JP 7279:JP 7942:JP BCA Score 99.17% 98.88% 98.73% 98.65% 98.57% BCA Hong Kong Portfolio Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI 3.97% 3.72% Top Contributors   148:HK 1888:HK 1088:HK 990:HK 856:HK Weekly Return 48 bps 45 bps 34 bps 34 bps 27 bps Top Detractors   41:HK 3306:HK 3369:HK 737:HK 991:HK Weekly Return -13 bps -4 bps -4 bps -3 bps 0 bps Top Prospects   990:HK 1378:HK 86:HK 737:HK 3306:HK BCA Score 99.89% 99.32% 98.84% 98.79% 98.51% BCA Australia Portfolio Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 1.30% 0.63% Top Contributors   ZIM:AU PDN:AU GRR:AU AQZ:AU BSE:AU Weekly Return 72 bps 25 bps 24 bps 15 bps 10 bps Top Detractors   AGL:AU BLX:AU WPP:AU ADH:AU SOL:AU Weekly Return -19 bps -14 bps -13 bps -11 bps -6 bps Top Prospects   GRR:AU BSE:AU ZIM:AU BLX:AU WPP:AU BCA Score 99.50% 99.47% 99.43% 98.58% 96.21%