INVESTMENT STRATEGY - Lyxor

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INVESTMENT STRATEGY - Lyxor
2ND QUARTER 2021

                                                                                              INVESTMENT
                                                                                               STRATEGY

Contact email CrossAssetResearch@Lyxor.com. Slides updated as of April 26, 2021
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INVESTMENT STRATEGY - Lyxor
Risk-on positioning

   Ongoing reflation / EPS-driven markets
       US economic boom w/o sustained inflation
        upturn but likely to raise inflation fears
       Europe behind but on the road to normality
        with growth rebound and muted inflation

   Tentative exit from deflationary regime,
    i.e., from >0 Equity to Yield correlation
   O/W Equities (US EMU JP)
    Value/Growth through Sectors
   U/W Govies
    HY Down to Neutral
   Bullish tilt on cyclical commodities
                                                                                Macrobond, Lyxor AM

                                                     MARKET RESEARCH >> INVESTMENT STRATEGY            2
INVESTMENT STRATEGY - Lyxor
EPS-driven markets

                     MARKET RESEARCH >> INVESTMENT STRATEGY   3
Covid-19
Backdrop

           MARKET RESEARCH >> INVESTMENT STRATEGY   4
Uneven Covid-19 backdrop
   Resulting from immunity from previous waves + Vaccination + Mobility restrictions
   Pandemic may turn endemic as variants multiply but most vaccines seem able to prevent
    severe symptoms from variants, allowing a return to normality, rather than herd immunity

   Macrobond, Lyxor AM

                                                           MARKET RESEARCH >> INVESTMENT STRATEGY   5
… with the latest wave hard to contain in some countries

                                                                 Macrobond, Lyxor AM

                                      MARKET RESEARCH >> INVESTMENT STRATEGY            6
Covid-19 vaccination: Eurozone behind
US easing mobility restrictions; EMU still constrained

                                                                  Macrobond, Lyxor AM

                                       MARKET RESEARCH >> INVESTMENT STRATEGY            7
Vaccination works (IL Pfizer / UK AstraZeneca)
UK & SA variants present in IL & UK

                                                                    Macrobond, Lyxor AM

                                         MARKET RESEARCH >> INVESTMENT STRATEGY            8
Upward revision to US growth likely to continue
Risks in EMU related to vaccination supply & rollout

                                                                 Macrobond, Lyxor AM

                                      MARKET RESEARCH >> INVESTMENT STRATEGY            9
Timing the return to pre-Covid GDP level

                                                                 Macrobond, Lyxor AM

                                      MARKET RESEARCH >> INVESTMENT STRATEGY            10
US

     MARKET RESEARCH >> INVESTMENT STRATEGY   11
U.S. looming economic boom
Massive fiscal stimulus $5tn Covid-19 rescue + coming $4tn recovery plan

                                                                       Macrobond, Lyxor AM

                                            MARKET RESEARCH >> INVESTMENT STRATEGY            12
Inflation: from commodities to wage worries
Wage growth capped by labor market slack

                                                                Macrobond, Lyxor AM

                                     MARKET RESEARCH >> INVESTMENT STRATEGY            13
Stay O/W US Breakeven before …

Little visibility on 2/3Y inflation outlook
 What post-Covid normalcy (output gap,

  nGDP, labor costs …) ?
 Oversupply will need to be reassessed

  once the ongoing default wave is over
Structural tail risks rising
 Peace dividend (end of Cold War) over

 Budgetary discipline vanished with

  2009 & Covid-19 crises
 Monetary unorthodoxy aimed at

  fostering an inflation revival
 Free trade & GVC threatened

 Sentiment now against disinflation

Technology downward impact to last
                                                                         Macrobond, Lyxor AM

                                              MARKET RESEARCH >> INVESTMENT STRATEGY            14
… the Taper threat

                                                                                Taper impact
                                                                  YTD Changes    May-June
                                                                     in bps         2013
                     US 10YY                                           65            85
                     US 10Y Break-Even Inflation                       35            -35
                     US 10YY Term Premium (Fed, Kim-Wright)            48            60
                     US 10Y Average Implicit Real ST Rate (K&W)        -19           60

                     US 3YY                                             17           36
                     US 3Y Break-Even Inflation                         70           -40
                     US 3YY Term Premium (Fed, Kim-Wright)              18           27
                     US 3Y Average Implicit Real ST Rate (K&W)          -71          50

                                                                       Macrobond, Lyxor AM

                                  MARKET RESEARCH >> INVESTMENT STRATEGY                      15
Fed committed to AIT framework … but revised up its forecasts

   Fed to act on actual data not
    forecasts, not preemptively
   Tapering well before liftoff
    Tapering announced late 2021?
   No liftoff before:
    labor cond.  max. employment
    Inflation @2% and not transitory
    Inflation on track to exceed 2%
   Liftoff in 2023?
   Current QE
    $80bn UST + $40bn MBS
Fed keeps control of the short end
of the curve ; Up pressures on long
maturities to continue                                            Macrobond, Lyxor AM

                                       MARKET RESEARCH >> INVESTMENT STRATEGY            16
U/W long dated UST: Fed YCC focus on short maturities
12M target @2.25%

                                                               Macrobond, Lyxor AM

                                    MARKET RESEARCH >> INVESTMENT STRATEGY            17
Downgrading US High-yield to Neutral
Spread compression well advanced; base risk increasing

                                                                      Macrobond, Lyxor AM

                                           MARKET RESEARCH >> INVESTMENT STRATEGY            18
S&P 500 Sales: rebound ahead

   2020 sales down -3% in 2020
   Model assumptions
       Nom GDP estimates from CBO
       DXY stable N12M
       WTI @ $65
   Rebound +8% in 2021 and
    +6.7% in 2022

                                                                Macrobond, Lyxor AM

                                     MARKET RESEARCH >> INVESTMENT STRATEGY            19
Strong EPS prospects

   Bottom-up and Top-down
    convergence on EPS estimates
    2021 > 25%
   Up risks to 2021 EPS amid
    upside in economic activity
   2022 EPS outlook clouded by
    Biden’s tax agenda

                                                              Macrobond, Lyxor AM

                                   MARKET RESEARCH >> INVESTMENT STRATEGY            20
Recovery Part I – Infrastructure / Corporate tax outlook

American Jobs Plan (outlined on 31 March):
≈$2tn infrastructure (road, bridges, green
energy, etc. …Funded by ▲ corporate taxes

Made in America Tax Plan:
  ▲corporate tax rate from 21% to 28% or

   more likely 25%. (28%  top OECD)
  Quasi-worldwide regime (reduced rate)

  ▲ Tax on foreign income (minimum tax

   “Global Intangible Low Taxed Income “
   closer to new domestic tax rate
   => minimum tax ≈20%.
  Likely acceleration in OECD multilateral

   negotiations on a Global Minimum Tax to
   halt the race to the bottom in corporate tax
   rates. (GILTI at 20% would become US
   minimum tax)
                                                                             Macrobond, Lyxor AM

                                                  MARKET RESEARCH >> INVESTMENT STRATEGY            21
US Corporate tax outlook
Impact on S&P500 EPS

Made in America Tax Plan: negotiations over the
summer; bill passed in late Q3 or Q4.
                                                       Effective
Tax reform to take effect in 2022, likely phased-in.   Tax Rate
                                                                   Effective
                                                                   Tax rate            S&P 500
                                                       Weighed
                                                                    Median
                                                       average                  100%

                                                         18.6        19.4              Sectors
Depending on the reform’s specifics:                     31.1        23.2      2.4%    Energy
                                                         23.0        21.2      2.5%    Materials
   Corporate America effective tax rate ▲+5 pp          20.1        22.1      8.1%    Industrials

   Tax reform could trim 2022 S&P 500 EPS by 3%         19.2        19.0      12.7%   Consumer Discretionary

    to 10% overall, but uneven across companies.
   Higher domestic rate to hurt stocks with high        26.3        22.0      6.3%    Consumer Staples

    domestic exposure (Fin., Indust., Consumer)          21.8        19.0      11.8%   Health Care

   ▲ minimum tax on foreign earnings to affect IT       20.2        19.5      10.8%   Financials

    and Healthcare.
                                                         3.9          1.1      2.3%    Real Estate
                                                         16.0        14.8      25.6%   Information Technology

                                                         14.4        20.4      15.2%   Communication Services
   Macrobond, Lyxor AM
                                                         18.3        19.9      2.4%    Utilities

                                                       MARKET RESEARCH >> INVESTMENT STRATEGY                   22
Recovery Part II – Social / Household tax outlook

American Families Plan ≈$1-2tn social spending
for low, middle-income, and elderly:
▼ healthcare cost ▲ direct cash assistance
(primarily via tax credits)
Funded through ▲ taxes on wealthy households

Biden’s possible plan (not yet announced)
   ▲ federal capital gain tax to 39.6% for wealthy

    households (income>$1M). Combined with
    current 3.8% tax on net investment income =>
    43% tax on LT capital gains
   ▲ top marginal income tax from 37% to 39.6%

Congress will likely pass a scaled down version.
Tax hike likely to take effect Jan 2022
Mid-point between current tax on LT capital gains &
Biden’s plan ≈ 28%

                                                                                 Macrobond, Lyxor AM

                                                      MARKET RESEARCH >> INVESTMENT STRATEGY            23
O/W US Equity

   Conducive vaccine rollout
   Massive fiscal stimulus & lasting
    monetary accommodation
   EPS growth > +25% with up risks
   Valuations supported by Fed’s
    unorthodox policies

   Macrobond, Lyxor AM

                                        MARKET RESEARCH >> INVESTMENT STRATEGY   24
Neutral EURUSD

   ECB / Fed status quo
   Macro gap likely to fade
   IR gap should favor USD but
    Eurozone reflation to attract flows
   USD safe-haven feature
   EURUSD gap to PPP @13%
   Speculative positions fading

                                                                     Macrobond, Lyxor AM

                                          MARKET RESEARCH >> INVESTMENT STRATEGY            25
EUROPE

         MARKET RESEARCH >> INVESTMENT STRATEGY   26
EMU joining the reflation party
Services & Consumer Confidence awakening

                                                                      Macrobond, Lyxor AM

                                           MARKET RESEARCH >> INVESTMENT STRATEGY            27
Europe recovery delayed but nearing

       Consensus: recovery to start in Q2
       Sustained mobility restrictions
        suggest downside risks
       Yet, potentially huge pent-up
        demand could be unleashed late
        Q2 & Q3 (if/when restrictions are
        eased)

   Macrobond, Lyxor AM

                                             MARKET RESEARCH >> INVESTMENT STRATEGY   28
EMU current lack of fiscal support; stimulus backloaded

                                                                 Macrobond, Lyxor AM

                                      MARKET RESEARCH >> INVESTMENT STRATEGY            29
EMU Inflation: upside likely transitory (distorted wages trends)
Neutral EMU breakeven

                                                                     Macrobond, Lyxor AM

                                          MARKET RESEARCH >> INVESTMENT STRATEGY            30
ECB highly accommodative

   Rates unchanged in 2021/22
   QE= PEPP €1850 bn until Mar 2022
    + APP €20bn per month
   PEPP frontloaded (€bn/month):
     71 in Q3 2020 ; 63 in Q4 2020 ;

      73.5 in Q1 2021
     Current envelope => $75.5bn/M

   Net-Net supply to switch back to
    negative territory
   3 TLTROs over next 3 quarters
    March TLTRO attracted € 330bn,
    above recent ones
   4 PELTROs on a quarterly basis
    during 2021; tenor 1Y; rate 0.25%
    (liquidity backstop for banks)
   Macrobond, Lyxor AM

                                        MARKET RESEARCH >> INVESTMENT STRATEGY   31
U/W 10Y Bunds
Target 3M@ -0.2%; 12M @0%

   Contagion from UST
   Bund curve steepening
    likely to continue
   Recovery in inflation
    expectations well-
    advanced
   Germany Govies net-net
    issuance largely negative

                                                           Macrobond, Lyxor AM

                                MARKET RESEARCH >> INVESTMENT STRATEGY            32
Neutral Peripheral Debt: Yield rise capped by ECB’s QE; ST down
risks on macro-outlook; yet, reopening nearing and likely to favor reflation

                                                                          Macrobond, Lyxor AM

                                               MARKET RESEARCH >> INVESTMENT STRATEGY            33
IG Credit (N) slightly favored over Bunds & Gilts
HY Credit (N): default complacency; high beta continued to outperform

                                                                      Macrobond, Lyxor AM

                                           MARKET RESEARCH >> INVESTMENT STRATEGY            34
O/W EMU Equities to leverage global growth
52% EBITDA from overseas (SXXE, FY20) o/w US ≈50%; DY ▲ @3.2%

                                                                 Macrobond, Lyxor AM

                                      MARKET RESEARCH >> INVESTMENT STRATEGY            35
EMU sectors: prefer Cyclicals to Defensive
Cyclicals: IT, Cons. Disc, Materials, Industrials, Financials, Real Estate
Defensives: Cons. Staples, Utilities, Energy, HealthCare, Com. Services

   ▲Financials (14%) tactical Buy
    Higher beta to Bund yields
    Weak credit growth but
    dividend ban eased; valuation
   O/W Cons. Discretionary (17%)
    O/W Materials (7.5%)
    Rich valuation but significant
    beta to Bund yield
   U/W Cons. Staples (8%)
    U/W Real Estate (2%)

                                                                                              Macrobond, Lyxor AM

                                                                   MARKET RESEARCH >> INVESTMENT STRATEGY            36
UK Macro outlook
    Brexit impact (EC Forecasts – Feb 2021) & BoE Inflation projections

   24 Dec 2020 EU & UK Trade &
    Cooperation Agreement, incl.
    FTA (0 tariff 0 quotas on goods
    compliant to rules of origin)
   TCA => lower drag on growth,
    concentrated in Q1 2021
   Increase in non-tariff barriers
    (‘NTBs’) equivalent to new tariff
    of 10.9% for EU imports
    of 8.5% on UK imports
   Output loss EU -0.5% by end 22
   Output loss UK -2.25%

                                                                            Macrobond, Lyxor AM

                                                 MARKET RESEARCH >> INVESTMENT STRATEGY            37
Neutral UK Gilts with a bearish MT bias
    Rapid vaccine rollout suggests a gradual reopening in Q2

   BoE to stay put over N2Y even in
    case of strong & early recovery
   Consensus Q2 at +4.8% after Q1
    @ -3.5%
   Fiscal support extended until
    30/09; capex to be boosted by 2Y
    super-deduction for capital
    allowances*: increase in
    corporate tax rate to start in FY
    2023-24 (from 19% to 25%)

* Companies can claim 130% capital allowances
on qualifying plant and machinery invest. for
expenditure incurred from 1 Apr 21 to 31 Mar 23

                                                                             Macrobond, Lyxor AM

                                                  MARKET RESEARCH >> INVESTMENT STRATEGY            38
Tactical Buy UK Equities: vaccination / reopening; fiscal support extended
until Sept; ▲corporate tax rate (19% to 25%) in FY 23/24; EPS up; dividend yield.
Neutral GBPUSD

                                                                             Macrobond, Lyxor AM

                                                  MARKET RESEARCH >> INVESTMENT STRATEGY            39
JAPAN

        MARKET RESEARCH >> INVESTMENT STRATEGY   40
Japan: structural pressures but external & domestic upside

   Large output gap; potential growth=0
   Pandemics recent upturn but
    vaccination started mid-February
   Further recovery in exports (80% to
    China, US, Asia). Strength in cyclical
    services machinery, auto, tech
   Topix 40% foreign exposure incl.
    15/20% in US & China
   Domestic upside if/when confidence
    returns and drives consumption
   Tokyo July Olympics (July 23)
    without foreign spectators
   MT positive Suganomics impacts
    with tech & M&A driven Capex

                                                                         Macrbond, Lyxor AM

                                             MARKET RESEARCH >> INVESTMENT STRATEGY            41
Japan: exposed to US reflation & isolated from US rates
Neutral JPY

   US rate isolation + Reflation benefit:
       Low Japan rates beta to US rates (BoJ
        committed to YCC)
       Would benefit from higher USD
   BoJ only a tad more hawkish
       Raised daily LT rate trading range 5bp to
        25bp, removed explicit annual ETF QE
        target (focusing on TPX vs NKY)
       Marginal improvement in CPI towards 0
   JPY: Neutral
       Little monetary differentials with other DM
       Weaker JP investors’ rationale to rush into
        to foreign assets
       Favorable (U/W) foreign positioning
                                                                                  Macrbond, Lyxor AM

                                                      MARKET RESEARCH >> INVESTMENT STRATEGY            42
Staying O/W Japan Equity

   Strong exposure to US reflation
   Monetary & Fiscal support
   Lower US-China trade war risks, and
    solid strategic US-JP alliance
   Suganomics market friendly policies:
    (corporate deregulation, restructuring,
    shareholder reforms) loosely priced-in
   EPS upside: high operating leverage
   JP equity under-owned & diversifier
   Valuation stretched (post 08 crisis)
Key themes for Q2:
 US reflation (rather than Asia recovery)

 Value & Cyclicals

 World trade focused industrials (to build

  up capacities); Chip supply chain
  replacement (semi & equipment)

                                                                          Macrbond, Lyxor AM

                                              MARKET RESEARCH >> INVESTMENT STRATEGY            43
EMERGING
MARKETS

           MARKET RESEARCH >> INVESTMENT STRATEGY   44
EM Economies: recovery to prevail after Q1 mild soft patch

   Uneven pandemic trends; overall
    vaccination slower than DM
    EM activity resilient; CEE more
    vulnerable than Asia
   >0 growth drivers : ample dollar
    liquidity, global trade acceleration
   Moderating China: lower stimulus
    and manufacturing full recovery
   Erosion in structural EM/DM
    growth differential (reshoring,
    protectionism, slow dom. Cons.)
   Higher political risk than DM
    [Elections: CHL Apr11, MX Jun6, IR
    Jun18, TWN Aug28, RU Sep19, CZ Oct8,
    IQ Oct10, AR Oct24, CHL Nov21]                                    Macrobond, Lyxor AM

                                           MARKET RESEARCH >> INVESTMENT STRATEGY            45
EM Economies: Pivotal US Reflation
Fundamental EM risks have receded

   US to attract flows at the expense of EM (FX)
   Likely to support assets most connected to its
    supply chain (CH, IN, SK,TWN, Mexico)
   Upside from green / infrastr. / housing capex
   CEE upside growth will rather be paced by EU
   EM lower vulnerabilities to capital outflows.
    Better overall situation, and the “Fragile 5” are
    more dispersed and idiosyncratic
   Investors to focus on improving growth
    prospects rather than capital flow risk
   EM likely to better navigate higher US rates &
    USD volatility (unless related to Fed policy shift)
   EM risk premium should be average
                                                                                     Macrobond, Lyxor AM

                                                          MARKET RESEARCH >> INVESTMENT STRATEGY        46
EM: Inflation & Pandemics remain
key risks / differentiators

   Inflation remains a key risk to monitor
    though:
   Inflation surprises are intensifying,
    mainly due to commodity prices, but
    unevenly
   EM countries where Core CPI is rising
    look more at risk
   Will likely prompt a selection of central
    banks to tighten (TK +200bps, BZ, RU,
    delayed MX cut?)

                                                                           Macrobond, Lyxor AM

                                                MARKET RESEARCH >> INVESTMENT STRATEGY            47
EM Equities: Tactical Buy
post correction

   Technical, Positioning & Valuations cleaned.
    5-10% upside potential
   Brighter EM backdrop, receding macro risks
    lift a hurdle for equities
   EM rate hikes (+120bps priced for N12M)
   US reflation net positive for EM
   EM assets should navigate higher US rates

Key movers and differentiators:
   Pandemics trends
   Sensitivity to higher inflation, to commodity
    prices, to US reflation
   Rotation towards laggard likely to continue,
    with volatility until US rates stabilize
   Macrobond, Lyxor AM

                                                    MARKET RESEARCH >> INVESTMENT STRATEGY   48
EM Equities – Tactical Buy China & Neutral- Brazil

Tactical Buy China
   Recovery moderating and skewed towards
    manufacturing, with eroding stimulus
   US trade war: less tariffs, more multilateral
    pressure & non-tariff barriers
   Steep correction cleaned up excess
    valuation; ST catch up (+5%?) likely

Neutral- Brazil amid Covid-19 spread
   Widespread pandemic
   A longer soft patch is probable, while
    stimulus package got delayed
   Inflation passes through to core CPI,
    prompting central bank to tighten.
   Bolsonaro’s eroding political support could
    limit reforms
   Upside from low abs & relative valuation
                                                                               Macrobond, Lyxor AM

                                                    MARKET RESEARCH >> INVESTMENT STRATEGY            49
EM Equities – O/W India & Neutral- Russia

O/W India: macro upside past Covid
   Pandemics worsening anew
   Reforms validated, boosting sentiment, but
    implementation will be key
   Elevated inflation to cap stimulus leeway
   US reflation and supply chain
    diversification favors India
   Downside risk from high valuation

Neutral- Russia: capped recovery
   Rising Core CPI => tighter monetary policy
   Oil activity to gain traction, but elsewhere
    still sluggish demand and little budget
    stimulus (+0.5/+1% of GDP boost?)
   Western sanctions risk remain live
   Upside risk from oil prices and Valuation
                                                                              Macrobond, Lyxor AM

                                                   MARKET RESEARCH >> INVESTMENT STRATEGY            50
EM HC Debt – Neutral overall amid US rate risk
Favor active managers to play dispersion

Reasonably isolated from US rates, but
less than equities:
   EM HC Debt in line with DM (YTD)
   Non-panic factoring of UST/$ trends
   High corr.to UST/$ suggest higher volatility
   LATAM & EMEA ~ 2/3 EM debt

Modest & uneven spread tightening
   Valuation close to fair; possible compression
    (~20bps in BZ, RU, INDO, PH)
   Issuance seasonally strong, flows paused
   No pending major default (ex Arg)
   Still provides credit diversification
   Higher yielder look more sheltered, provided
    risk aversion stays stable                                                 Macrobond, Lyxor AM

                                                    MARKET RESEARCH >> INVESTMENT STRATEGY            51
COMMODITIES

              MARKET RESEARCH >> INVESTMENT STRATEGY   52
Commodities: uneven
sensitivity to US rates

   Drag from higher rates volatility likely
    transitory (unless Fed shifts policy)
   Cyclical commodities typically tend to
    navigate higher rates
   More challenging for Gold

                                               MARKET RESEARCH >> INVESTMENT STRATEGY   53
O/W Copper amid strong macro tailwinds
Expecting a spike at $10000/t

Conducive macro backdrop
 Better growth, US reflation, rebound in

  construction (esp. in the US) and auto
 Inflation hedging; Market liquidity

Copper in shortage in 2021
 China demand to be relayed by RoW

 Structural trends in electronics, EV,

  decarbonization remain intact
 Supply (Chili, Peru, China; US …) to

  resume slowly; new projects for 2022
 Global inventories already tight

Prices could breach new highs
 Signs of shortage stress: backwardation,

  dispersion across regional markets
 Stretched long positions would last
                                                                        Macrobond, Lyxor AM

                                             MARKET RESEARCH >> INVESTMENT STRATEGY            54
Tact. Buy Oil: tight supply favors
higher prices
12M Target $75

   Geopolitics becoming oil adverse (thaw
    in Iran-US relations)
   Large pent-up demand at time of high
    seasonal demand (transport, A/C etc.)
   Macro tailwind: Reflation, Infrastructure
    spending, Inflation hedging
   Technical factors to amplify ST spikes
    (backwardation, liquidity)
   Possible spike at $75 amid US reflation
   Cooler prices in H2 as OPEC+ ramp up
    output (spare capacities > 6.5mbd)

                                                                           Macrobond, Lyxor AM

                                                MARKET RESEARCH >> INVESTMENT STRATEGY            55
Neutral+ Gold: mixed fundamentals, tactically driven
12M Target $1800 per ounce

Mixed macro backdrop
 (+) Alternative to cash (neg. yield debt

  ~20%) supportive but less so
 (+) Physical mkt improvement (jewelry,

  electronics), partially offset by ▲ output
 (-) Lower tail risk from vaccine & ongoing

  recovery (though uneven)
 (=/+?) Stimulus sustainably inflationary?

 (=/-) rangy USD, ST positive tilt

Flow rotation could shift gold features
 ETF flows less active than in 2020

 Physical and CBs (which trashed gold in

  H2 20) could both be more decisive
 Correlation to real yield & USD could

  intensify as rate volatility surges
                                                                          Macrobond, Lyxor AM
Healthier technicals

                                               MARKET RESEARCH >> INVESTMENT STRATEGY            56
Agenda

     Apr 27: BoJ meeting with outlook
     Apr 28: FOMC
     Apr 30: European National Recovery & Resilience plans to be
      submitted
     May 6: BoE meeting with inflation report
     May 6: Scotland general elections
     Jun 10: ECB with projections
     Jun 16: FOMC with projections
     Sept 26: German federal election
     Before Oct 22: Japan parliamentary election

                                             MARKET RESEARCH >> INVESTMENT STRATEGY   57
Our 3M Views

               MARKET RESEARCH >> INVESTMENT STRATEGY   58
APPENDIX

           MARKET RESEARCH >> INVESTMENT STRATEGY   59
US ST headline inflation indicators ticking up

                                Macrobond
                                Lyxor AM

                                             MARKET RESEARCH >> INVESTMENT STRATEGY   60
US Budget reconciliation                        Budget process
                                                   1. President submit a budget request to
                                                    Congress
   Reconciliation => only a simple majority
    needed in Senate (and not the                  2. Congress passes its own budget
    standard 60 votes) and no need of               resolution (that must be voted by both
    getting rid of the Senate filibuster            House & Senate)
    (obstruction to prevent a measure from         The Resolution does not include specific
    being brought to a vote in the Senate           policy changes) but can contain
    by endlessly speaking on a subject)             Reconciliation instructions
   Democrats can use 2 Budget                         allow for a budget-related bill to pass with
                                                        simple majorities in House & Senate
    Resolutions (FY21 and FY22) since no
    budget resolution was passed for FY21              Committees can be ordered to reduce or
                                                        increase deficit, spending or revenues
   2/3 Reconciliation bills likely: on Covid          Resolution can split into 3 reconciliation
    stimulus if a bipartisan deal fails ; on            bills (spending + revenues +debt limit)
    Biden’s core economic agenda ; and                 Reconciliation drawbacks: restrictions to
    possibly on debt limit expansion                    likely prohibit minimum wage increase and
                                                        other Biden’s pro-union labor agenda

                                                              MARKET RESEARCH >> INVESTMENT STRATEGY   61
SPX record concentration
AAPL, MSFT, GOOGL, AMZN, FB, BRK/B, JNJ, JPM, XOM

                                                                Macrobond, Lyxor AM

                                     MARKET RESEARCH >> INVESTMENT STRATEGY            62
Signs of froth, limited overall threat for now

   Short squeeze on GME when shorts >
    100% float, a rare occurrence
   Little transitory impact on financial
    stability
   No change in monetary & fiscal support
   Likely regulation to address the
    gamification of retail investing
   Multiple signs of frothiness
       non profitable companies trading at
        extreme price to sales (Tesla, Airbnb …)
       Equity supply from young unprofitable
        companies to surge to >20% of their
        current market cap

                                                                              Macrobond, Lyxor AM

                                                   MARKET RESEARCH >> INVESTMENT STRATEGY            63
Sector Performance & Valuation

                                                            Macrobond, Lyxor AM

                                 MARKET RESEARCH >> INVESTMENT STRATEGY            64
Value vs. Growth through sector recommendations
Media = Facebook+Google+Netflix+Twitter ; Retailing = Amazon

                                                                                S&P 500
                                                                        Pure Growth Pure Value
                                        Industry Groups
                                       Energy                                  0.0%       11.4%
                                       Materials                               0.3%        1.8%
                                       Capital Goods                           0.2%        5.7%
                                       Commercial & Professional Serv          0.5%        0.0%
                                       Transportation                          0.2%        0.0%
                                       Automobiles & Components                4.2%        2.4%
                                       Consumer Durables & Apparel             0.0%        1.2%
                                       Consumer Services                       0.4%        0.0%
                                       Retailing                              11.9%        0.9%
                                       Food & Staples Retailing                0.0%        4.3%
                                       Food, Beverage & Tobacco                0.3%        1.9%
                                       Household & Personal Products           0.0%        0.0%
                                       Health Care Equipment & Servic          1.5%        6.8%
                                       Pharmaceuticals, Biotechnology          2.9%        0.4%
                                       Banks                                   0.2%       25.7%
                                       Diversified Financials                  1.1%       17.3%
                                       Insurance                               0.0%        7.1%
                                       Real Estate                             0.0%        0.7%
                                       Software & Services                    23.2%        0.1%
                                       Technology Hardware & Equipmen         15.1%        1.6%
                                       Semiconductors & Semiconductor          7.2%        0.0%
                                       Telecommunication Services              0.0%        4.0%
                                       Media & Entertainment                  30.8%        4.1%
                                       Utilities                               0.0%        2.7%
   Macrobond, Lyxor AM

                                             MARKET RESEARCH >> INVESTMENT STRATEGY           65
O/W S&P500 Banks amid cyclicality & steeper yield curve

                                                                Macrobond, Lyxor AM

                                     MARKET RESEARCH >> INVESTMENT STRATEGY            66
O/W S&P500 Healthcare Equipment & Services

   Support from Covid-19
    crisis & Biden’s policy
    agenda
   Earnings upside beyond
    the current +9% expected
    in 2021
   Valuation not cheap

                                                              Macrobond, Lyxor AM

                                   MARKET RESEARCH >> INVESTMENT STRATEGY            67
O/W S&P500 Utilities

   To be supported by green
    capex
   Dividend yield @3.25%
   Attractive valuation
   Little downside risks
       A contrarian play in early cycles
       Vulnerable to rising rates &
        inflation

                                                                       Macrobond, Lyxor AM

                                            MARKET RESEARCH >> INVESTMENT STRATEGY            68
US Small versus Large: downgraded to Neutral late February after
an eye-catching relative rally

                                                                  Macrobond, Lyxor AM

                                       MARKET RESEARCH >> INVESTMENT STRATEGY            69
EM Equities: China concentration & froth

                                                                 Macrobond, Lyxor AM

                                      MARKET RESEARCH >> INVESTMENT STRATEGY            70
Bitcoin: not yet the “digital gold”

   Volatility: recent 20% correction,
    possibly originated in Asia
   Distrust: “(Bitcoin) is a highly speculative
    asset, which has conducted some funny
    business and some interesting and totally
    reprehensible money laundering activity”
    ECB President Lagarde, 13 Jan 2021
   Risk that regulatory regime could turn
    more unfriendly (Turkey banned cryptos
    for payment)
   Stable and limited issuance that cannot
    be devalued by Central Banks
   Greater acceptance as a store of value
    (Robert Kaplan, President of Dallas Fed)
    and an investment option (Lo BI, PBoC
    deputy governor)                                                          Macrobond, Lyxor AM

                                                   MARKET RESEARCH >> INVESTMENT STRATEGY            71
Bitcoin: not yet the “digital gold”
Highly volatile and still >0 correlated to risk assets

                                                                    Macrobond, Lyxor AM

                                         MARKET RESEARCH >> INVESTMENT STRATEGY            72
CONTACT DETAILS

               Jeanne                                Jean-Baptiste                        Philippe
            Asseraf-Bitton                              Berthon                           Ferreira
     Head of Market Research                        Senior Strategist                Senior Strategist
     jeanne.asseraf-bitton@lyxor.com                jb.berthon@lyxor.com          philippe.ferreira@lyxor.com

                                           Eloise
                                       Girard-Desbois
                                           Intern
                               eloise.girard-desbois@lyxor.com

                                                                           MARKET RESEARCH >> INVESTMENT STRATEGY   73
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                                                                                                    MARKET RESEARCH >> INVESTMENT STRATEGY                           74
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                                                                                                 MARKET RESEARCH >> INVESTMENT STRATEGY                          75
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