Multi-Asset perspectives · Multi-Asset perspectives Principal Global Asset Allocation (PGAA)...

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Multi-Asset perspectives

Principal Global Asset Allocation (PGAA) Monthly Market Perspectives: April 2020 Links to Sections

I. Highlights Link II. Macro-economic Summary Link III. Monetary Policy, flows & other developments Link IV. PGAA’s Macro-economic & Technical models Link V. PGAA’s Cross-Asset Valuation models Link VI. Equity markets Link VII. Fixed income markets Link VIII. Currency markets Link IX. Commodity markets Link X. Looking Ahead Link XI. Disclosures Link


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I. Highlights Macro • Economic data dived due to COVID-19 related disruptions. We expect more weakness in 2Q’2020 before recovery sets

in. Of our macro indicators, global manufacturing PMI index collapsed, the leading indicator for global industrial production weakened further, and macro-economic surprises remained negative. Financial conditions, however, eased.

• Global inflation moved down as base effects receded. Our leading inflation indicator predicts further declines. • Implied and realized cross-asset volatility eased, led by equities. Bottom-up • 2020 Earnings growth expectations are being slashed. From 10%yoy at the start of 2020, we are at -16% for MSCI AC

World in $ terms and could end up at -25% by the time 2Q’20 ends. Value and cyclicals are seeing bigger chops than Growth. The 3-month earnings revisions breadth dropped sharply too.

• The ratio of global credit rating upgrades to total rating changes dropped to just 11%, with IG at 22% and HY at 8%. We expect the rating environment to remain extremely weak in coming months.

Valuations • US Treasuries remained super expensive while IG and High Yield spreads remained cheap. • Global Equities made their way back into neutral from cheap after deep earnings cuts and price gains during April. US

growth and large caps remained expensive. US Value cheapened further vs. US Growth. Europe, Japan and EMs cheapened relative to US.

Markets • Multi-Assets: Our global multi-asset index (details here) returned 5.9% in Apr’2020 as risk assets recovered. YTD’20

returns stayed weak at -9.7%. Asset-class correlations remained high, limiting diversification benefits. • Global Equities re-entered a bull market (technically) in clocking gains north of 20% from Mar’2020 lows. All 40

markets gained, with a median local currency return of 8.9%. • Fixed Income: PGAA’s global policy rate indicator dropped -4bps to another all-time low of 1.1%. DM policy rate

ended at -0.01% and EM policy rate at 2.94% (both well below their GFC lows). 10-yr yields eased, particularly in EMs. Returns from spread products were strong, in both absolute terms and relative to treasuries.

• Currencies: In a mini reversal of fortunes brought about by better orientation towards risk, the US$ weakened against 21 of the 30 currencies we track it against. Expensive valuations and declining yield advantage raise the hurdle for sustained $ appreciation but political risks and COVID-19 related uncertainty is likely to keep it supported.

• Commodities: Oil prices had a roller coaster ride, with May’2020 WTI crude futures hitting -$37.6 briefly on overflowing oil at Cushing, Oklahoma (the delivery point for WTI futures settlement). Low nominal and real yields kept Gold supported.

Key risks At this stage, the key risks we envision are- • COVID-19 isn’t contained timely enough or resurfaces in a hard-to-contain form. • Bankruptcies pick up dramatically despite all the aid provided by governments. • The US election cycle starts creating volatility in two ways-

o the probability of control of all 3 branches of the Govt. by one party starts rising (historically it hasn’t been good for markets)

o US-China relationship comes under stress as China becomes a focal point of US elections • From a longer-term perspective, Govt intervention in allocation of resources will come with strings attached. Laws

could be tightened around buybacks, distributions, leverage etc.


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II. Macro-Economic summary It was a month of recovery for risk assets. Key factors at play were – • COVID-19 curves showed signs of flattening in many parts of the world (details here). • Monetary and fiscal policy support accelerated (details here). • Growth dropped massively as expected (details here and here). We expect a steeper decline in 2Q’2020 in most parts

of the world barring China which is in recovery mode. 2020 is headed for a deep recession. • Flows returned to fixed income, equities & commodities even as the money market kitty swelled (details here). Table 1: Summarizing our fundamental, valuation and technical indicators

Model Link Indicator Apr’20 Mar’20 Dec’19 Dec’18 1 month

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1 PGAA Global Manufacturing PMI Index 40.2 48.1 48.5 52.0 ↓ 2 PGAA Leading Industrial Production Indicator2 45.2 47.2 47.0 50.0 ↓ 3 PGAA Global Inflation Index1 2.6% 2.7% 2.1% 2.3% = 4 PGAA Global Financial Conditions Index 0.23 -0.06 .45 0.03 ↑ 5 PGAA Global Economic Surprise Index3 -0.25 -0.19 0.28 -0.10 ↓

6 PGAA Global 3-month Earnings Revision Ratio 0.22 0.32 0.43 0.38 ↓

PGAA Global 3-month EPS change (in US$) -19% -10% -1% -3% ↓

Global 2020 EPS growth expectation -16% -1% 10% 10% ↓

7 Global Credit Rating Upgrade/Downgrade Ratio 12% 18% 43% 52% ↓

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on 8 PGAA Equity Valuation Composite (MSCI AC World) -0.40 0.70 -0.9 0.5 ↓

9 PGAA High Yield Spread4 2.1 3.3 -1.2 -0.1 =

PGAA Investment Grade Spread4 1.8 3.9 -1.4 -0.1 =

PGAA 10-yr Treasury Valuation4 -3.0 -3.0 -0.8 0.4 =

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10 PGAA Cross Asset Volatility Index 100 131 52 81 ↑

11 PGAA Cyclical Risk Environment Index -1.83 -1.94 -0.80 -0.91 =

12 PGAA Reflation Positioning Indicator -0.31 -0.46 -0.23 -0.19 ↑

Note: ↑ indicates positive for markets, ↓ indicates negative, = indicates stable momentum with +ve level, = indicates stable momentum with -ve level; 1= 3-month Moving Average as of prior month, 2= 3m Moving Average, 3 = 3m time-weighted Moving Average, 4 = rolling 10-yr Z score

• Our global multi-asset index comprising 45% equities, 5% commodities, 20% global govt. bonds, 15% Global IG, 10% global HY and 5% EM$ bonds returned 5.9% in Apr’2020 to take YTD’2020 return to -9.7%, its worst return at end-April any year in the past twenty. Equities contributed positively while commodities were a drag yet again, given challenges in oil markets (details here). Asset class correlations remained high though a tad lower than March, causing the diversification benefit from multi-asset portfolios to edge up to 19% but well below the long-term average of 25%.

Chart S1: Return Snapshot Chart S2: Diversification benefit in multi-asset portfolios

Source: Bloomberg/Factset/Principal Global Asset Allocation; Left chart: returns are in US$; equity indices, other than S&P500 are from MSCI; bond indices are from ICE BofAML; Commodities represent Goldman Sachs Commodity Index; +ve readings indicate $ gains for currencies; Diversification benefit is based on internal multi-asset models; As of 4/30/2020

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III. Monetary Policy, Flows & Other important developments • Key Central Banks in Action: There were more stimulative actions. 9 more central banks out of the 31 we track cut

rates in April, which took the cut-hike scorecard to 92:6 for the last 12 months. Fiscal taps remained open too. Highlights of key announcements during the month were-

Region Monetary measures announced in April’2020 Fiscal measures announced in April’2020 USA • Relief for banks on leverage ratios for a year by exempting treasuries and

reserves from assets requiring capital; FOMC meeting confirmed unanimous Fed resolve to do more if required. New facilities were added, and scope of existing ones expanded as under- 1. PMCCF & SMCCF expanded to $750b from $200bn (treasury capital

$75bn from $20bn). Leverage within the SPV at 10x for IG and 3x-7x for others. Eligible issuers (banks excluded) to include BB rated fallen angels that had an IG rating on 3/22/20. ETFs to include High Yield.

2. TALF ($100bn with $10bn in treasury capital) can now buy new AAA-rated static CLOs and legacy AAA CMBSs.

3. Main Street Business Lending Program (MSBLP) to fund $600bn loans (up to 4 years) purchased by an SPV (treasury capital $75bn) from banks to qualifying companies (<10,000 employees or <$2.5bn turnover). Banks to retain 5% of each loan. Administered through “Main Street New Loan” and “Main Street Expanded Loan” facilities.

4. Municipal Liquidity Facility (MLF) will fund $500bn of direct loans (up to 2 years) by an SPV (treasury capital $35bn) to states/ municipalities.

• Paycheck Protection Program Lending Facility (PPPLF) will refinance 100% of loans by lenders to small enterprises @35bps. Loans must be guaranteed by the Small Business Administration (SBA). Initial $350bn expanded to $660bn on quick uptake.

• Phase 4: $484bn including $310bn additional for the Paycheck Protection Program and the balance for hospitals and medical facilities.

Euro Area • ECB cut the interest rate on TLTRO III operations from -25bps to -50bps for June’2020 to June’2021. Counterparties reaching the lending threshold, the rate will be -50bps below the deposit rate i.e. -100bps. Lending threshold was lowered from increase in stock of eligible loans to just maintaining it between Mar’20 and Mar’21.

• A series of 7 pandemic emergency longer-term refinancing operations (PELTROs) will start in May’20 at -25bps below refinancing rate (0%).

• ECB will accept marketable collaterals that get downgraded below its minimum threshold (BBB-) to BB (but not lower) after 7Apr’2020.

• Relief on capital rules to investment banks on trading rules. • Greek Govt bonds accepted as collateral in funding banks.

• The EU Council endorsed a €540bn package, to be activated from June. The EC and Eurogroup will also work on a Recovery Fund as part of the 7-yr EU budget but discussions on a common corona-bond (debt mutualization) made little progress.

• Germany to adopt an open-ended relief program for small/medium enterprises.

Japan • Unchanged rates (-0.1% policy rate, 0% 10-yr yield) but significant increase in asset purchases and greater flexibility to operate them as under-

i. CPs: ↑by ¥7.5 trn by 9/30/20, maintain existing at ¥2 trn ii. Corp Bonds: ↑by ¥7.5 trn by 9/30/20, maintain existing at ¥3 trn

iii. Govt bonds/T-bills: No limit on purchases iv. Scope of Special funds supplying facilities to companies expanded from

¥8 trn to ¥23 trn by including household debt. 0.1% interest on reserves to the extent of such loans made by banks.

v. Annual ETF purchases (¥12 trn) & REITS (¥180bn) maintained

• Phase 3 could be US$990bn (20% GDP). The earlier phases were miniscule.

Canada • C$50 bn of Provincial Bond Purchase Program, C$10 bn of IG Corp bond purchases, extension of repo term to 24 months.

China • Medium-term lending facility rate ↓-20bps to 2.95%; 1-yr LPR (lending price rate) ↓-20bps to 3.85%, 5-yr ↓-10bps to 4.65%. RRR for small banks ↓ -100bps enabling $56bn of liquidity; Interest rate on excess reserves↓ 0.35% from 0.72% to encourage lending. Min coverage ratio of NPLs for small banks lowered -20% temporarily to a range of 100-130%.

• Politburo shifted fiscal stance from enlarging to greatly enlarging i.e. significant fiscal support is on its way.

• Special bond issuance ↑ $150bn.

India • -25bps Reverse rate to 3.75% to discourage cash hoarding by banks; Min $7bn TLTRO 2.0 to channel bank investments in debt papers issued by shadow banks (NBFCs); $7bn special refinance to three institutions (SIDBI, NABARD & NHB) against social financing; $7bn refinance facility to enable banks to replace mutual funds in funding the shadow banking sector; temporary relaxation in borrowing limits for provincial Govts; and easier NPL norms for banks that offer moratorium on loan payments.

• $39bn (1.5% GDP) bank loan guarantee program for loans to small business enterprises is being considered.

Hong Kong SAR • Phase 2 US$18bn (5% GDP), doubling deficit to 10% GDP. Package includes 50% wage subsidy to employers for 6 months, creation of civil service jobs, rent reductions on Govt. property etc.


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South Korea • BOK to start outright purchases of Govt/Agency bonds and extend repo facilities to several state-owned Korean entities.

• US$46bn (2.9% GDP) via liquidity to exporters, advance purchases by public institutions and loans/guarantees to venture capital firms.

Singapore • Additional $6.3bn (1.7% GDP), putting FY20 budget gap at 9.6% GDP.

Indonesia • Cut in bank reserve ratio by -200bps. Bank Indonesia to buy newly issued Govt bonds if market doesn’t clear them.

Philippines • Policy rate -50bps to 2.75% (emergency cut). New loans to medium-small enterprises can be counted towards fulfilling reserve requirement.

Malaysia • US$2.3bn (0.6% GDP) through grants, wage/interest subsidies for smaller firms.

Thailand • BOT exploring asset purchases and yield curve control. Mexico • Surprise cut of -50bps to 6%; easier access its ordinary liquidity facility;

corporate bond repos; size of refinancing facilities 3% GDP.

Colombia • Policy rate -50bps to 3.25%. Peru • Policy rate -100bps to 0.25%. Israel • Policy rate -15bps to 0.10%. South Africa • Policy rate -100bps to 4.25%. • $25bn (6.5% GDP) including $10bn loan

guarantees. Russia • Policy rate -50bps to 5.5%. Turkey • Policy rate -100bps to 8.75%. Poland • Policy rat -50bps to 0.50%. Hungary • Policy rate unchanged but significant purchases of bonds to control yields • Stimulus worth 20% GDP.

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 4/30/2020 • Fund/ETF Flows: Another $566bn went into money market funds to double their intake for the year. Bonds regained

investor faith, encouraged by large bond buying programs of the Fed, ECB and BOJ. However, EM bonds remained out of favor. Equities too found takers, led by DMs. EM flows remained negative. China onshore markets gained $8bn through the stock connect route while their onshore investors added $3bn to HK-listed stocks.

Chart S3: Fund Flows

Source: Jeffries Equity Research • COVID-19: Global infections crossed 3.3 million. Deaths were at 233k and Recoveries rose to 1 million. Encouragingly,

our preferred measure (the 7-day new infection rate as % of total infections) showed signs of a bottoming out for new cases. However, low levels of testing in emerging economies make firm conclusions hard. Also, uncertainty around recurrence and its intensity/duration make predictions challenging. Countries are adopting different models to prevent the virus from spreading. Lockdowns are being lifted gradually in certain countries. There is the realization that economic activity needs to resume, else the “livelihood” element in the debate on “life vs livelihood” could become a very serious issue, particularly in countries that do not have the fiscal resources to support economies long enough. Critically, a lot of effort is being made on finding the right clinical solutions. Gilead’s drug Remdisivir was approved for emergency use on COVID patients by USDA after trials showed it shortened recovery times in at least 50% of the patients. Other countries are trying out combinations using hydroxychloroquine, the drug used to treat malaria. The race to develop a vaccine has also started in earnest, though we are still some distance from finding one. Antibody tests and alternate therapies like plasma therapy are also being trialed.

YTD YTD Flow in Flow in YTD YTD Flow in Flow inFund Flows (US$ Bn) Apr-20 Mar-20 Apr-20 2019 Fund Flows (US$ Bn) Apr-20 Mar-20 Apr-20 2019Bonds (106) (114) 8 485 Equities (16) (39) 23 (150) DM (64) (79) 15 445 DM - (37) 37 (134) EM (42) (35) (7) 40 EM (16) (2) (14) (16) US (19) (22) 3 311 US (6) (34) 28 (39) Other DM (45) (57) 12 134 Europe (16) (15) (1) (96) IG Corporate 16 (21) 37 62 Japan 9 (7) 16 (5) High Yield (9) (38) 29 44 Asia Pac (70) (59) (11) 4 Sovereign IG 24 26 (2) 58 - Inflation Protected (9) (5) (4) (6) Commodities 41 18 23 14 Bank Loans (16) (13) (3) (30) Energy 19 8 11 (1)

Precious Metals 17 8 9 15 Money Markets 1,132 566 566 491 Others 5 2 3 -


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Chart S4: COVID-19 progress

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 4/30/2020. • IMF’s forecasts show a global contraction of -3% in 2020, dwarfing 2009's -0.1%. The output loss in 2020 will not be

recouped in 2021 for most countries. IMF may have been too optimistic about strong recoveries in China and India. Meanwhile, GDP releases for 1Q’2020 showed contractions of -4.8% in US, -3.8% in Euro-Area and -9.8% in China (all numbers are QoQ annualized). 2Q’2020 will show much larger contractions in US and Europe but a definite recovery in China.

Chart S5: IMF’ global growth projections

2019 2020 2021 Cumulative 2020-21

World Economic Output (Real) 2.9% -3.0% 5.8% 2.6% Advanced Economies 1.7% -6.1% 4.5% -1.9% Emerging Economies 3.7% -1.0% 6.6% 5.5% USA 2.3% -5.9% 4.7% -1.5% Euro Area 1.2% -7.5% 4.7% -3.1% Germany 0.6% -7.0% 5.2% -2.1% France 1.3% -7.2% 4.5% -3.0% Italy 0.3% -9.1% 4.8% -4.7% Spain 2.0% -8.0% 4.3% -4.0% UK 1.4% -6.5% 4.0% -2.8% Japan 0.7% -5.2% 3.0% -2.4% China 6.1% 1.2% 9.2% 10.5% India 4.2% 1.9% 7.4% 9.4% Brazil 1.1% -5.3% 2.9% -2.5% Mexico -0.1% -6.6% 3.0% -3.8%

Source: The International Monetary Fund • Oil: a fiasco and then a deal: After the March disaster, oil producers came together for the largest ever coordinated

production cut. Relative to April’2020 outputs, OPEC+ made a cut of 9.7mbpd in May-June, 7.6mpbd in 2H’2020 and 5.6mbpd from Jan’2021 through April’2022. Measured from 1Q’2020, cuts were smaller (Saudis, Russia, UAE & Kuwait had ramped up production in April). The agreement itself be reviewed in Dec’2021. US, Canada, and Brazil will contribute 3.7mbpd of cuts, although they appear to be market-based declines caused by low prices, not voluntary (US output declined -1mbpd in April to 12mbpd). Compliance with the cuts will be critical (compliance outside core-OPEC has tended to be around 50% in the past). Bulking up of strategic reserves by US, China, India would help at a time when core demand could shrink as much as 20% (20mbpd) during 2Q’2020.

Mbpd (million barrels per day) 1Q’2020 Average

Output New Quota

(May-June’ 2020) Output Cut

OPEC - Core (Saudi, UAE & Kuwait) 15.8 13.1 -2.7 OPEC – Others 9.3 7.5 -1.8 Russia 10.4 8.5 -1.9 Others Voluntary (Kazakhstan, Mexico, Malaysia etc.) 6.0 5.0 -0.9 Involuntary (US, Canada, Brazil) 20.6 16.9 -3.7 Total 62.1 51.1 11.0

Source: Bloomberg/Factset/Principal Global Asset Allocation;

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IV. PGAA’s Macro & Technical Model

Growth & Inflation • Our provisional global Manufacturing PMI index crashed to 40.2 from 48.1 as several countries experienced large

drops. China was the only country to stay above 50. • Our Leading Global IP Indicator dropped to 41 from 46.5 with the 3m average dropping to 45.2, well into the sub-

trend growth (trend=50) zone. Global Industrial production shrank at a pace of -3.1%yoy in Feb’2020. • Inflation: Global inflation eased to 2.2% yoy (-0.5%) in Mar’2020. The EM-DM gap eased to 2.8% (DMs 1.1%, EMs

3.9%). Our leading indicator continues to predict softness in coming months.

Chart M1: Global Manufacturing PMIs

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 4/30/2020; EM=Emerging Markets, DM=Developed Markets, US PMI based on survey

Chart M2: PGAA’s Leading Global Industrial Production Indicator

Source: Bloomberg/Factset/Principal Global Asset Allocation; 3MA = 3 month moving average; As of 4/30/2020

Chart M3: Inflation

Source: Bloomberg/Factset/Principal Global Asset Allocation; projected inflation uses constant input prices; As of 4/30/2020

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Global Financial Conditions eased noticeably. All sub-components eased. Rates, credit spreads, rates and volatility were all lower while momentum (equities recovered) and monetary growth was higher. This month’s move put financial conditions back into an “easy” zone. Chart M4: Global Financial Conditions

Source: Bloomberg/Factset/Principal Global Asset Allocation; PGAA FCI=PGAA’s Financial Conditions Index; DM=Developed Economies, EM=Emerging Economies; Higher=easier financial conditions; As of 4/30/2020 PGAA’s Global Macro Economic Surprise Index (PGAA Global ESI) stayed in negative territory for a third successive month. Countries diverged. China’s recovery from COVID-19 exceeded expectations, led by strong beats in industrial and monetary releases, though consumption disappointed massively. Japan’s positive surprise was powered by industrial and monetary beats while consumption disappointed. US recorded its worst miss ever with employment lagging expectations significantly. Housing too disappointed while consumption and trade were broadly in line. Europe’s 5-month streak of beats ended with its worst-ever miss, dragged by continental Europe, which recorded its worst ever miss. Internals were interesting as consumption recorded its 17th successive beat (a mild one this time) and monetary releases were strong too, but industrial releases came crashing down. UK, on the other hand, recorded a mild beat with industrial and consumption releases slightly ahead of expectations. The outlook remains challenging globally. Global inflation surprises were unsurprisingly negative with Europe the only region with a positive surprise. The inflation outlook remains soft in the near term. Chart M5: Macro Economic Surprises

Source: Bloomberg/Factset/Principal Global Asset Allocation; ESI=PGAA’s Macro Economic Surprise Index; 3WMA=3m weighted average; As of 4/30/2020 Global Volatility: PGAA’s Cross-Asset Implied Volatility index dropped but remained above its long-term average. Equities (-28%), Fixed Income (-30%), Currencies (-18%) dropped a lot more than commodities (-5%) which experienced an extremely volatile month. Overall Realized Volatility fell too but a roller coaster ride for oil prices took commodity volatility to an all-time high. Oil prices swung wildly in a month that saw near-month futures trade at -$37 just ahead of settlement due to storage woes (details here).

PGAA FCI Apr-20 1M Chg 3M Chg 12M ChgGlobal 0.23 0.28 (0.23) (0.04)U.S. 0.27 0.55 (0.18) 0.17China -0.01 0.24 (0.06) (0.08)Euro Core 0.44 0.19 (0.26) (0.08)Euro Periphery 0.42 0.12 (0.27) (0.10)UK 0.15 0.14 (0.35) (0.25)Japan 0.29 0.17 (0.24) (0.26)India -0.18 0.15 (0.45) (0.27)Korea 0.24 0.21 (0.16) (0.09)Brazil 0.66 0.15 (0.13) 0.16Mexico -0.55 0.03 (0.63) (0.37)DM 0.32 0.32 (0.23) (0.01)EM 0.02 0.18 (0.21) (0.12)

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PGAA Economic Surprise Index (ESI) Apr-20 Mar-20 Feb-20 Jan-20

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Global (0.23) (0.21) (0.41) 0.26 (0.25)U.S. (0.83) (0.10) 0.34 (0.15) (0.39)China 1.11 (0.83) (2.07) 0.55 (0.07)Europe (0.97) 0.31 0.51 0.38 (0.30)Japan 0.26 0.78 0.31 0.47 0.44PGAA Inflation Surprise Index Apr-20 Mar-20 Feb-20 Jan-20

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Global (0.48) (0.16) 0.67 (0.23) (0.18)U.S. (0.24) 0.22 0.24 0.18 (0.01)China (2.27) (0.29) 1.24 (0.67) (1.03)Europe 1.08 (0.41) 0.51 (0.18) 0.49Japan (0.50) (0.85) 0.20 0.22 (0.50)

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Chart M6.1: Global Volatility - Implied

Source: Bloomberg/Factset/Principal Global Asset Allocation; Implied Volatility is re-based to 100 as of end-Dec’02; As of 4/30/2020 Chart M6.2: Global Volatility – Realized

Source: Bloomberg/Factset/Principal Global Asset Allocation; Implied Volatility is re-based to 100 as of end-Dec’02; As of 4/30/2020 PGAA’s Cyclical Risk Environment Index (CREI) recovered slightly from its all-time low. 50% of the factors turned risk-on vs. 8% the prior month. Credit (noticeably tighter spreads) saw the biggest positive change, followed by equities (energy, materials outperformed defensives like staples and telecoms). Fixed income (lower safe haven yields) and commodities (lower oil and raw material prices) slid further into the risk-off zone while currencies (mixed month for US$ versus cyclical currencies) were little changed. The chart with the EQ and FI components of CREI shows the extent to which cyclical equities have underperformed defensives since the global financial crisis despite overall equities having done rather well. The FI component shows that sovereign bond yields have gone lower and lower, reflecting persistent headwinds to cyclical growth. Chart M7: PGAA Cyclical Risk Environment Index

Source: Bloomberg/Factset/Principal Global Asset Allocation; CREI=PGAA’s Cyclical Risk Environment Index; As of 4/30/2020

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Realized Volatity

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(2.5) (2.0) (1.5) (1.0) (0.5)

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PGAA CREI PGAA CREI 3M Change

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PGAA CREI Components: LT "Z" Scores EQ FI


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Tactical Positioning Indicators

Systematic investors: PGAA’s proprietary indicators showed mixed signals. While lower volatility and recovering momentum attracted inflows into multi-asset and risk-on strategies, rebalancing flows will cause outflows from equities after a strong showing last month. For unlevered volatility targeting strategies, the jump in volatility had caused forced selling to the tune of 65% of their AUMs by the end of Mar’2020. Subsiding volatility indicates a 20% re-risking flow for such strategies in Apr’2020. Chart T1: Volatility Targeting strategies Chart T2: Rebalancing flows

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 4/30/2020. Both charts pertain to hypothetical systematic multi-asset portfolios

Reflation Positioning: Overall reflation positioning was mildly less deflationary. The biggest change was in commodities (oil) where net longs were added. Rates, equity and currency positioning didn’t change much.

Chart T3: Reflation Positioning Index

Source: Bloomberg/Factset/Principal Global Asset Allocation; Higher implies an increase in reflation positioning; As of 4/30/2020

Overbought/Oversold using RSI and Bollinger bands: Recovering prices took most risk assets out of their oversold zone barring oil, commodities and LatAm currencies (particularly Brazilian Real against the $).

Equity breadth recovered as remarkably in some respects as it had dropped in Mar’2020. All forty markets in our universe ended with gains in Apr’2020 in sharp contrast to Mar’2020 when all had dropped. 26/40 closed above their 50 DMA (day moving average) versus nil the prior month; but only 2/40 closed above their 200 DMA. While 15% of NYSE listed stocks closed above their 200 DMA versus 7% the month prior, it was way below the 10-year median of 56%.

Retail Positioning: The AAII retail investor bull-bear ratio for equities eased but only a tad, rising to -13 from -19 versus a 10-year median of 5. Hedging was lowered, the US equity Index put/call ratio dropping to 0.96 from 1.14 and very close to its 10-year median of 0.99.

0%10%20%30%40%50%60%70%80%90%

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New Portfoio Size as % of Original Unlevered

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Rebalancing Flows % of Multi-Asset AUM

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PGAA Reflation Positioning Index

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PGAA Reflation Positioning Index

Currency Commodity


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V. PGAA’s Valuation Indicators (a) Equity Valuations

Absolute: Earnings cuts for 2020 and price recovery in April pushed equities into a fair value zone from cheap. Several markets now look expensive on forward looking earnings estimates but very cheap on P/B. Relative: US remained as expensive as it has ever been vs. ex-US markets. US Value cheapened further relative to Growth. Small and Mid-caps remained cheap relative to Large caps. Asia/EMs, Europe and Japan cheapened relative to US.

Chart V1: Equity Valuations

Source: Bloomberg/Factset/Principal Global Asset Allocation; Valuation Composite (-ve = overvalued, we changed the methodology in Dec’19) is derived using earnings, book and dividend yield indicators. Green cells represent cheapness, Red cells expensiveness; As of 4/30/2020 Chart V2: Relative Equity Valuations

Source: Bloomberg/Factset/Principal Global Asset Allocation; Green cells represent cheapness, Red cells expensiveness; As of 4/30/2020

April-20 Composite 1M Chg 3M Chg 12M Chg Times Cheaper

Price to NTM EPS

1M Chg 3M Chg 12M Chg Times Cheaper

Price to Book

1M Chg 3M Chg 12M Chg Times Cheaper

MSCI AC World -0.4 (1.1) 0.5 0.1 54% 16.6 24% 3% 9% 97% 2.1 10% -12% -9% 48%MSCI World Index -0.5 (1.1) 0.5 0.0 63% 17.5 26% 4% 11% 98% 2.2 10% -12% -9% 51%MSCI EAFE 0.4 (0.8) 0.5 0.2 27% 14.3 19% -1% 5% 65% 1.4 5% -16% -15% 12%MSCI EM (Emerging Markets) 0.2 (0.6) 0.4 0.2 46% 12.2 16% 0% -1% 79% 1.5 7% -10% -10% 10%MSCI AC Asia Pacific ex JP 0.1 (0.6) 0.5 0.2 46% 13.5 15% 0% -1% 80% 1.5 7% -10% -10% 9%MSCI World ex USA 0.5 (0.8) 0.5 0.3 24% 14.3 20% -1% 5% 66% 1.4 6% -16% -15% 11%MSCI EM Latin America 1.3 (0.5) 1.3 1.1 4% 11.1 19% -16% -9% 35% 1.5 8% -26% -23% 3%MSCI EM Eastern Europe 0.8 (0.3) 0.2 0.2 19% 7.3 26% 0% 11% 49% 0.8 6% -17% -17% 21%MSCI BRIC -0.1 (0.4) 0.2 0.1 56% 12.1 15% 3% 4% 77% 1.7 5% -8% -7% 43%MSCI USA -1.0 (1.2) 0.6 (0.0) 89% 19.7 29% 6% 14% 100% 3.3 13% -11% -6% 88%MSCI Europe 0.1 (1.0) 0.3 0.1 37% 14.5 22% 2% 6% 76% 1.5 6% -16% -14% 15%MSCI Japan 0.6 (0.2) 0.4 0.2 18% 13.4 13% -5% 6% 28% 1.1 4% -15% -12% 19%MSCI Germany -0.2 (1.4) 0.0 (0.2) 56% 13.6 27% 0% 6% 81% 1.3 10% -15% -18% 10%MSCI United Kingdom 1.0 (0.7) 0.4 0.5 8% 13.1 24% 3% 4% 63% 1.4 4% -16% -17% 3%MSCI China -0.2 (0.2) (0.0) (0.0) 67% 12.3 10% 8% 4% 68% 1.7 3% -2% -4% 38%MSCI USA Large Cap -1.1 (1.2) 0.5 (0.1) 91% 19.7 28% 7% 14% 100% 3.4 13% -10% -4% 92%MSCI USA Mid Cap -0.1 (1.2) 0.8 0.3 43% 19.6 32% 2% 10% 100% 2.4 13% -18% -18% 33%MSCI USA Small Cap 0.5 (0.9) 0.5 0.6 18% 23.3 46% 10% 11% 90% 1.7 14% -20% -25% 6%MSCI USA Value 0.3 (1.0) 0.9 0.6 28% 15.0 31% 4% 8% 83% 1.9 11% -17% -19% 33%MSCI USA Growth -2.2 (1.1) 0.2 (0.9) 99% 26.6 24% 4% 18% 100% 7.6 16% -6% 21% 98%MSCI India 0.4 (0.8) 0.6 0.8 32% 17.0 27% -7% -8% 60% 2.5 16% -15% -15% 8%MSCI Korea 0.3 (0.4) 0.2 (0.3) 34% 10.6 16% -3% -3% 85% 0.9 9% -9% -12% 0%MSCI Hong Kong 1.1 (0.4) 0.2 1.0 9% 14.4 10% 2% -8% 23% 1.1 6% -9% -20% 5%MSCI Taiwan 0.0 (0.5) 0.3 (0.0) 55% 15.4 16% 0% 0% 89% 1.8 10% -7% 0% 41%MSCI Singapore 1.3 (0.5) 0.6 0.8 5% 12.0 13% -5% -8% 10% 1.0 8% -17% -23% 0%MSCI Thailand 0.0 (0.9) 0.6 0.6 44% 16.3 29% 9% 11% 100% 1.7 13% -15% -19% 5%MSCI Malaysia 0.9 (0.5) 0.4 1.0 5% 15.6 10% 3% -2% 76% 1.4 5% -9% -14% 0%MSCI Philippines 1.3 (0.3) 1.0 1.6 5% 12.2 15% -16% -26% 11% 1.5 6% -22% -32% 8%MSCI Indonesia 1.3 (0.1) 1.1 1.5 10% 12.1 8% -19% -20% 27% 1.8 2% -27% -34% 1%MSCI China A Onshore Large Cap 0.0 (0.2) 0.1 (0.1) 56% 11.4 8% -1% -1% 50% 1.9 5% -3% 1% 51%MSCI Brazil 0.6 (0.5) 1.3 0.8 24% 11.0 23% -16% -4% 64% 1.6 10% -29% -21% 40%MSCI Russia 0.7 (0.2) 0.1 0.0 23% 6.7 27% 1% 21% 59% 0.8 5% -16% -10% 31%MSCI Mexico 1.8 (0.3) 0.7 0.7 2% 12.3 15% -12% -9% 18% 1.7 6% -16% -17% 0%

April-20 Price to NTM EPS 1M Chg 3M Chg 12M Chg Times Cheaper

Price to Book 1M Chg 3M Chg 12M Chg Times Cheaper

MSCI USA VS MSCI AC World 1.2 4% 3% 4% 100% 1.5 3% 1% 3% 100%MSCI Europe VS MSCI AC World 0.9 -1% -1% -3% 10% 0.7 -4% -5% -6% 0%MSCI Japan VS MSCI AC World 0.8 -9% -8% -3% 0% 0.5 -5% -3% -4% 0%MSCI EM (Emerging Markets) VS MSCI AC World 0.7 -7% -3% -9% 23% 0.7 -2% 2% -1% 9%MSCI AC Asia ex JP VS MSCI AC World 0.8 -8% -1% -10% 22% 0.7 -3% 5% 0% 15%MSCI USA VS MSCI Europe 1.4 5% 4% 7% 99% 2.1 7% 6% 10% 100%MSCI AC Asia ex JP VS MSCI EM (Emerging Markets) 1.1 -2% 2% -1% 29% 1.0 0% 3% 2% 71%MSCI China VS MSCI EM (Emerging Markets) 1.0 -5% 8% 4% 46% 1.1 -4% 9% 7% 73%MSCI USA Value VS MSCI USA Growth 0.6 6% -1% -9% 1% 0.3 -4% -12% -33% 0%MSCI USA Large Cap VS MSCI USA Mid Cap 1.0 -3% 5% 4% 97% 1.4 0% 10% 17% 99%MSCI USA VS MSCI World ex USA 1.4 7% 7% 8% 100% 2.3 7% 6% 10% 100%


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(b) Bond Valuations Based on our 10-yr rolling z-score models, • US Treasuries remained super expensive after a month of stable yields. • IG & HY spreads remained cheap though levels of cheapness eased, both in absolute terms and the excess carry they

provide over treasuries. Chart V3: Sovereign and Corporate Bond Yields

Source: Bloomberg/Factset/Principal Global Asset Allocation; YTW=Yield to Worst; OAS=Option Adjusted Spread; Excess Spread=OAS-UST 10yr; Z scores calculated using 10-yr rolling periods; IG Investment Grade, HY= High Yield; Negative=Expensive; As of 4/30/2020

(c) Currency Valuations using Purchasing-power parity-based models Cheap: High Yielding EM currencies (Turkish Lira, Mexican Peso and South African Rand) occupy the top three spots. Expensive: The US$ remained in the expensive club, sitting just above CNY and the THB Baht. Chart V4: Real-Effective Exchange Rates based currency values

Currencies (overvalued in red) Time-Weighted

CPI REER Change Time-Weighted

PPI REER Change CPI based

Rank PPI based

Rank Combined

Position Turkey -31% -23% 1 1 1 Mexico -26% -19% 2 1 2 S Africa -25% -17% 3 2 3 UK -10% -9% 7 5 4 Sweden -13% -8% 6 8 5 Brazil -30% -5% 1 14 6 Norway -19% -6% 4 11 6 Malaysia -9% -7% 8 10 8 Hungary -5% -9% 13 6 9 Singapore 1% -16% 18 3 10 Taiwan -1% -9% 16 7 11 Korea -6% -6% 12 13 12 Chile -16% 5% 5 20 12 Japan -7% 0% 9 16 12 Poland -4% -6% 14 12 15 Canada -6% -4% 11 15 15 Switzerland -6% 0% 10 17 17 Philippines 12% -11% 25 4 18 India 8% -8% 22 9 19 Euro Area -2% 5% 15 19 20 Russia 0% 8% 17 24 21 Australia 7% 6% 21 22 22 Czech R 12% 4% 26 18 23 Hong Kong 6% 23% 20 26 24 Indonesia 6% 28% 19 27 24 US 9% 7% 24 23 26 China 17% 5% 27 21 27 Thailand 9% 16% 23 25 27

Source: Bloomberg/Factset/Principal Global Asset Allocation; Models use JP Morgan’s CPI and PPI based currency values; As of 4/30/2020

UST 10-YearYield % YTW % OAS % Excess Spread % YTW % OAS % Excess Spread %

Current 0.64 2.54 1.91 1.27 8.05 7.44 6.80Max 3.47 4.27 2.55 1.88 9.51 8.80 8.13Min 0.64 2.33 0.82 -2.15 4.91 3.16 0.10Median 2.29 3.16 1.27 -1.03 6.39 4.59 2.25Mean 2.27 3.21 1.32 -0.95 6.62 4.82 2.55Std. Dev. 0.55 0.43 0.32 0.72 1.09 1.24 1.531m Change -0.03 -0.69 -0.64 -0.61 -1.39 -1.36 -1.333m Change -0.87 0.01 0.93 1.80 2.53 3.54 4.4112m Change -1.86 -0.98 0.87 2.73 1.93 3.86 5.72Current Z-Score -2.97 -1.55 1.84 3.09 1.31 2.12 2.78

BarCap US Investment Grade Credit BarCap US Corporate High Yield


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VI. EQUITIES HK SAR & China 30-Apr-20 Month 1Q'20 YTD'20 1yr 5 yrs 10 yrs 4Q'19 3Q'19 2Q'19 Hang Seng HK$ 24,644 4% -16% -13% -17% -3% 2% 8% -9% -2% H-Shares HK$ 10,041 5% -14% -10% -13% -7% -2% 9% -6% -4% Shanghai Comp CNY 2,860 4% -10% -6% -7% -8% 0% 5% -2% -4% Shenzhen Comp CNY 1,763 6% -3% 2% 8% -5% 5% 8% 2% -8% MSCI China USD 577 6% -10% -5% -2% 2% 5% 15% -5% -4% Developed S&P500-US USD 2,912 13% -20% -10% -1% 7% 9% 9% 1% 4% Nasdaq-US USD 8,890 15% -14% -1% 10% 12% 14% 12% 0% 4% Russell 2000-US USD 1,311 14% -31% -21% -18% 1% 6% 10% -3% 2% DAX-Germany EUR 10,862 9% -25% -18% -12% -1% 6% 7% 0% 8% FTSE100-UK GBP 5,901 4% -25% -22% -20% -3% 1% 2% 0% 2% CAC 40-France EUR 4,572 4% -26% -24% -18% -2% 2% 5% 3% 4% ASX 200-Australia AUD 5,522 9% -24% -17% -13% -1% 1% 0% 1% 7% Nikkei 225-Japan JPY 20,194 7% -20% -15% -9% 1% 6% 9% 2% 0% Asia/Other EM India-Sensex INR 33,718 14% -29% -18% -14% 5% 7% 7% -2% 2% Thai-SET Index THB 1,302 16% -29% -18% -22% -3% 5% -4% -5% 6% Singapore-STI SGD 2,624 6% -23% -19% -23% -6% -1% 3% -6% 3% Korea-KOSPI KRW 1,948 11% -20% -11% -12% -2% 1% 7% -3% 0% Taiwan-TWSI TWD 10,992 13% -19% -8% 0% 2% 3% 11% 1% 1% Malaysia-KLCI MYR 1,408 4% -15% -11% -14% -5% 0% 0% -5% 2% Brazil-BOVESPA BRL 80,506 10% -37% -30% -16% 7% 2% 10% 4% 6% Russia-RTSI$ USD 1,125 11% -35% -27% -10% 2% -3% 16% -3% 15% MSCI: Net Total Return (US$) MSCI US USD 7,909 13% -20% -9% 0% 8% 11% 9% 1% 4% MSCI Japan USD 5,976 5% -17% -12% -3% 2% 4% 8% 3% 1% MSCI AsiaPac xJ USD 459 10% -21% -13% -9% 1% 4% 11% -4% 1% MSCI Europe USD 5,753 6% -24% -20% -14% -1% 3% 9% -2% 4% MSCI AC World USD 246 11% -21% -13% -5% 4% 7% 9% 0% 4% MSCI EM USD 440 9% -24% -17% -12% 0% 1% 12% -4% 1%

Source: Bloomberg/Factset/Principal Global Asset Allocation; Annualized for > 1yr time periods; As of 4/30/2020 As abruptly as we were plunged into an equity bear market in Mar’2020, we were lifted into another bull market (at least technically) in Apr’2020 with several markets recovering north of 20% from their lows. The month was all about COVID-19 progress which was positive at the margin (details here), even more monetary and fiscal easing by global policy makers (details here) and declining equity volatility (details here) which encouraged shorts to be covered and risk positions to be added by price insensitive investors (systematic volatility targeters, risk-parity and momentum strategies) as detailed here. While the price recovery was going on, the fundamental earnings outlook took an expected turn for the worse, with significant cuts (particularly in cyclical sectors) and strong likelihood of more to come (details here). Chart E1: A V-shaped price action

Source: Bloomberg/Factset/Principal Global Asset Allocation’ As of 4/30/2020

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$↓ From 52wk Hi ↑ From 52wk Lo


14

Every single market recovered. The median local currency return for the month was 8.9%, the best since GFC’2009. S&P 500 recorded a return of 12.7%, its highest monthly haul since 2007. Several markets that had been battered in Mar’2020 made impressive recoveries. Argentina (34% vs -30%), Thailand (16% vs -16%), India (14% vs -23%) and global small caps (13% vs -21%) belonged to this club. Nasdaq had a strong month (15%) though it hadn’t fallen much (-10%) the month prior, showcasing the resilience of the technology sector with low debt levels and high cash flows. Europe, on the other hand, failed to show the same resilience, recovering a below average 6% despite a large drop the month prior. It ended Apr’2020 as the worst performing region globally over multiple timeframes (YTD’2020, 1yr, 5yrs and 10yrs). Styles & Sectors • Value and Min Volatility were the worst styles during the month. They remained the worst performing styles over all

periods up to five years. • Momentum, Quality and Growth shared top spots during the month, with Momentum winning in Asia & EMs, Growth

in US and Europe, and Quality in Japan. They remained winners over longer timeframes too, with Growth ahead of the other two.

• Large Caps underperformed Small Caps 2-6% barring China where they outperformed 1%. For the year though, large caps retained a healthy lead over small caps in all countries.

Chart E2: Style Returns

Source: Bloomberg/Factset/Principal Global Asset Allocation’ As of 4/30/2020 • Among sectors, noticeable trends were-

o Defensives lagged cyclicals o IT outperformed in almost every region, extending its relative outperformance for 2020. o Consumer Discretionary outperformed, particularly in US. o Energy stocks jumped from distressed levels in all regions barring Europe and China, showing surprising

immunity against all the volatility that gripped oil prices. However, it remained the worst performing sector since the start of the year.

o Financials continued to underperform, worsening their return relative to broad markets. o Industrials remained challenged, particularly in US. o US Reits recovered but their recovery lagged broad markets with fundamental issues continuing to dog the

sector. The complex hsd delivered a total return of -21% for 2020 thus far vs S&P500 total return of -9%.

Returns ($) 30-Apr-20Style Return-1m Momentum Value Growth Quality Min Vol Best-Worst Style Return-6m Momentum Value Growth Quality Min Vol Best-WorstUS 12% 11% 15% 12% 9% 6% US 0% -13% 7% 2% -7% 21%EM 15% 8% 10% 10% 9% 6% EM -7% -17% -4% -11% -10% 13%AsiaxJ 14% 9% 10% 11% 9% 5% AsiaxJ -1% -14% -1% -5% -10% 13%Europe 7% 4% 7% 6% 5% 3% Europe -5% -24% -7% -7% -10% 19%Japan 6% 4% 6% 6% 2% 5% Japan -2% -16% -5% -1% -12% 14%

Style Return-3m Momentum Value Growth Quality Min Vol Best-Worst Style Return-12m Momentum Value Growth Quality Min Vol Best-WorstUS -8% -16% -3% -6% -12% 13% US 5% -11% 12% 8% 0% 23%EM -10% -16% -9% -11% -9% 8% EM -3% -20% -4% -9% -12% 17%AsiaxJ -1% -13% -6% -5% -8% 12% AsiaxJ 0% -17% 0% -4% -11% 17%Europe -10% -24% -12% -11% -14% 14% Europe 1% -25% -3% -1% -5% 26%Japan -6% -16% -7% -4% -12% 12% Japan 7% -13% 3% 12% -4% 25%

Style Rank-1m Momentum Value Growth Quality Min Vol Style Rank-6m Momentum Value Growth Quality Min VolUS 3 4 1 2 5 US 3 5 1 2 4 EM 1 5 3 2 4 EM 2 5 1 4 3 AsiaxJ 1 4 3 2 5 AsiaxJ 1 5 2 3 4 Europe 2 5 1 3 4 Europe 1 5 3 2 4 Japan 3 4 2 1 5 Japan 2 5 3 1 4

10 22 10 10 23 9 25 10 12 19

Style Rank-3m Momentum Value Growth Quality Min Vol Style Rank-12m Momentum Value Growth Quality Min VolUS 3 5 1 2 4 US 3 5 1 2 4 EM 3 5 2 4 1 EM 1 5 2 3 4 AsiaxJ 1 5 3 2 4 AsiaxJ 1 5 2 3 4 Europe 1 5 3 2 4 Europe 1 5 3 2 4 Japan 2 5 3 1 4 Japan 2 5 3 1 4

10 25 12 11 17 8 25 11 11 20


15

Chart E3: Sector returns: the winners and losers in YTD returns: Last month vs the month prior

Source: Bloomberg/Factset/Principal Global Asset Allocation Bottom-up Earnings (FY20) • 2020 Earnings growth expectations are being slashed. From 10%yoy at the start of 2020, we are at -16% for MSCI

AC World in $ terms and could end up at -25% by the time 2Q’20 ends. Value and cyclicals are seeing bigger chops than Growth. The 3-month earnings revisions breadth dropped sharply, with downgrades well in excess of upgrades.

• 1Q’2020 Earnings season: Halfway through, 1Q’2020 S&P 500 earnings contracted -9%yoy, broadly in line with expectations. Financials delivered a large negative surprise (large provision for expected bad loans). EuroStoxx EPS growth is running at -35%. In Japan, Topix companies are clocking -16%. Corporate guidance has been very weak.

Chart E4: Projected Revenue and Earnings Growth

April-20 Sales Growth EPS Growth Margin Growth Dividend Yield Payout Ratios CCY 2020 2021 2019 2020 2021 2020 2021 2020 2021 2020 2021 MSCI AC World USD -5% 7% -3% -16% 23% -12% 15% 3% 3% 48% 42% MSCI World Index USD -5% 7% -2% -18% 24% -13% 16% 3% 3% 50% 43% MSCI World ex USA USD -7% 6% -4% -20% 23% -14% 15% 3% 4% 57% 52% MSCI EM (Emerging Markets) USD -3% 10% -14% -4% 21% -2% 10% 3% 3% 39% 37% MSCI AC Asia Pacific ex JP USD 0% 9% -11% -2% 19% -2% 9% 3% 3% 42% 39% S&P 500 USD -4% 8% 1% -18% 25% -14% 16% 2% 2% 45% 38% MSCI Europe EUR -9% 7% 1% -25% 28% -17% 19% 4% 4% 64% 57% MSCI Japan JPY -3% 2% -14% -7% 15% -5% 13% 3% 3% 40% 36% MSCI Germany EUR -3% 6% -7% -20% 35% -17% 28% 3% 4% 52% 44% MSCI China CNY 6% 13% 5% 0% 18% -6% 4% 2% 2% 28% 26% MSCI United Kingdom GBP -16% 10% -4% -29% 27% -16% 16% 5% 6% 78% 71% MSCI India INR -2% 9% 3% 3% 21% 5% 11% 2% 2% 35% 33% MSCI Korea KRW -1% 9% -44% 21% 39% 23% 28% 3% 3% 32% 25% MSCI Taiwan TWD 1% 6% -7% 4% 14% 4% 7% 4% 4% 63% 61% MSCI Brazil BRL -1% 11% -10% -2% 32% -1% 19% 3% 4% 49% 49% MSCI USA Large Cap USD -3% 8% 0% -16% 24% -13% 15% 2% 2% 45% 38% MSCI USA Mid Cap USD -6% 7% -2% -19% 25% -15% 16% 2% 2% 39% 32% MSCI USA Small Cap USD -6% 6% -2% -33% 43% -29% 35% 2% 2% 57% 41% S&P 500 Value USD -6% 7% 1% -25% 29% -21% 20% 3% 3% 55% 44% S&P 500 Growth USD 0% 11% 1% -7% 22% -7% 10% 1% 1% 34% 30% MSCI AC Asia ex JP USD 0% 10% -11% 0% 20% 0% 9% 3% 3% 38% 35% MSCI Hong Kong HKD -9% 10% 1% -9% 18% 0% 7% 4% 4% 56% 50% MSCI Singapore SGD -2% 6% -1% -16% 12% -14% 6% 5% 6% 66% 62% MSCI Malaysia MYR -2% 7% -11% -7% 12% -5% 5% 4% 4% 61% 58% MSCI Thailand THB -7% 7% -18% -16% 17% -10% 9% 3% 3% 51% 50% MSCI Indonesia IDR 0% 10% -4% 1% 12% 0% 2% 4% 4% 49% 45% MSCI Philippines PHP -1% 12% 10% -5% 15% -4% 3% 2% 2% 27% 24% MSCI Mexico MXN 7% 6% 1% 1% 21% -6% 13% 4% 4% 51% 49% MSCI Russia USD -23% 14% -4% -39% 24% -20% 9% 8% 8% 64% 56% MSCI Australia AUD -3% 3% -2% -20% 10% -17% 7% 4% 4% 69% 70% MSCI New Zealand NZD -8% 4% 23% -4% 9% 5% 5% 2% 2% 66% 72%

Source: Bloomberg/Factset/Principal Global Asset Allocation; Estimates are sell-side analysts’ bottom-up aggregated expectations; As of 4/30/2020

YTD 4-20 Returns US Europe Japan AC World EMsAsia-x-Japan China

Broad Market -10% -19% -15% -13% -17% -11% -5%IT 0% -9% -11% -3% -10% -10% -4%Cons Disc -1% -23% -17% -9% -11% -10% -4%Energy -37% -37% -28% -36% -32% -22% -26%Materials -16% -20% -19% -18% -21% -15% -7%Financials -26% -31% -23% -27% -28% -18% -12%Industrials -20% -24% -19% -21% -21% -17% -7%RelativeValue vs Growth -18% -16% -10% -16% -11% -9% -15%Large vs Small Cap 13% 3% 2% 9% 6% 5% 5%IT vs Market 9% 9% 3% 11% 7% 1% 1%Cons Disc vs Market 8% -4% -2% 4% 6% 1% 1%Energy vs Market -27% -18% -13% -22% -15% -10% -20%Materials vs Market -6% -1% -4% -4% -4% -3% -2%Financials vs Market -17% -13% -9% -14% -11% -7% -7%Industrials vs Market -10% -5% -4% -7% -3% -6% -2%

YTD 3-20 Returns US Europe Japan AC World EMsAsia-x-Japan China

Broad Market -20% -23% -18% -22% -24% -19% -11%IT -13% -17% -17% -14% -18% -18% -10%Cons Disc -19% -29% -21% -22% -18% -17% -9%Energy -51% -34% -32% -44% -40% -32% -27%Materials -27% -26% -23% -28% -31% -26% -15%Financials -33% -33% -26% -32% -32% -23% -14%Industrials -27% -28% -22% -27% -28% -24% -13%RelativeValue vs Growth -12% -13% -8% -12% -9% -8% -12%Large vs Small Cap 13% 7% 3% 10% 9% 8% 3%IT vs Market 7% 6% 1% 8% 6% 0% 1%Cons Disc vs Market 1% -6% -3% 0% 6% 2% 1%Energy vs Market -31% -11% -13% -23% -16% -14% -17%Materials vs Market -7% -2% -5% -6% -7% -7% -4%Financials vs Market -13% -10% -8% -10% -8% -4% -4%Industrials vs Market -6% -5% -4% -5% -4% -6% -2%


16

Chart E5: Sectoral Earnings Growth Heatmap for 2020: Cyclicals getting decimated

Source: Bloomberg/Factset/Principal Global Asset Allocation; Chart E6: EPS Trend (Rebased to 12/31/19=100) Chart E7: Earnings Revision Ratio (up/up+down)

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 4/30/2020, Earnings Revision ratio = Upgrades/(Upgrades+Downgrades), 0.5= neutral

Bang+ Index Our Bang+ Index outperformed markets yet again, rising 15.1% vs. S&P 500 return of 12.8% and MSCI ACWI return of 10.7% (its return of 11.9% dwarfs that of S&P 500 (-9.3%) and MSCI ACWI (-12.9%) for the year thus far). Bang+ US zoomed 19.7% and Bang+ Asia 4.8%. All thirteen stocks gained, with returns ranging from 0.1% to 49.2%, driven by idiosyncratic factors. Bang+US retained its substantial lead over Bang+Asia, with a gain of 24.3% annualized over five years.

2020 EPS Growth as of 4'20 Currency Overall Financials Cons Disc Real Estate

Materials Industrials Energy IT Comm Services

Staples Health Care

Utilities

MSCI AC World USD -16% -23% -29% -3% -10% -21% -81% 4% -5% -2% 1% -1%MSCI World Index USD -18% -28% -33% -5% -17% -22% -92% 2% -7% -2% 1% -2%MSCI World ex USA USD -20% -25% -31% -9% -18% -21% -76% 5% -2% -3% 3% -7%MSCI EAFE USD -19% -27% -31% -9% -19% -21% -72% 5% -1% -4% 4% -7%MSCI EM (Emerging Markets) USD -4% -7% 0% 5% 25% -8% -50% 23% 4% 2% 1% 7%MSCI AC Asia Pacific ex JP USD -2% -6% -6% 1% -8% -8% -37% 23% 5% 9% 0% 19%MSCI USA USD -16% -32% -36% -3% -14% -24% -114% 1% -9% 0% 0% 2%MSCI Europe USD -26% -36% -41% -7% -21% -30% -75% -5% -4% -7% 2% -5%MSCI Japan JPY -7% -2% -20% -15% -18% -11% -41% 15% 1% 11% 15% -23%MSCI Germany EUR -20% -20% -41% 2% -36% -36% -3% 9% -19% 9% -1%MSCI United Kingdom GBP -29% -42% -27% -9% -14% -18% -79% -9% -10% -3% 0% -4%MSCI Australia AUD -20% -24% -19% -11% -16% -28% -55% -18% -3% 2% -1% -5%MSCI China CNY 0% 1% 11% 10% 0% -6% -52% 22% 2% 26% -1% 5%MSCI India INR 3% 17% -16% -9% -7% -3% 1% 148% 7% 13% 7%MSCI Korea KRW 21% -11% -6% 44% 25% -9% 41% 96% 10% 51% -153%MSCI Taiwan TWD 4% -5% -6% -13% -19% -66% -43% 16% -8% 4% -158%MSCI Brazil BRL -2% 1% -36% -36% -457% -14% -102% -47% 0% 8% 15% -6%MSCI Russia USD -39% -28% -9% -51% -6% -3% 5%

Apr-20 Mar-20 Jan-20 Oct-19 Apr-19AC World USD 80 90 99 101 106 World USD 80 91 99 101 106 World x US USD 78 88 99 101 106 EM USD 81 86 99 100 109 Asia-Pac x J USD 85 89 99 100 107 S&P 500 USD 81 92 100 101 105 Europe EUR 76 87 100 102 107 Japan JPY 88 96 100 102 110 Germany EUR 78 87 99 102 110 China CNY 91 93 100 102 106 UK GBP 73 85 99 105 110 India INR 85 94 99 101 108 Korea KRW 86 95 101 99 108 Taiwan TWD 92 94 101 97 97 Brazil BRL 78 86 100 103 109 US Large USD 82 93 100 101 106 US Mid USD 78 91 99 102 109 US Small USD 66 84 100 99 107 US Value USD 76 90 99 100 104 US Growth USD 87 96 100 103 106 Asia x J USD 87 90 100 100 108 HK HKD 86 89 99 102 108 Singapore SGD 85 91 100 104 111 Malaysia MYR 86 91 100 103 111 Thailand THB 75 82 97 106 123 Indonesia IDR 89 92 97 99 107 Philippines PHP 89 96 99 105 97 Mexico MXN 89 99 99 103 115 Russia USD 62 64 97 98 101 Australia AUD 81 93 101 103 108 New Zealand NZD 90 97 100 100 103

Apr-20 Mar-20 Jan-20 Oct-19 Jul-190.22 0.32 0.45 0.39 0.41 0.19 0.30 0.44 0.38 0.41 0.20 0.29 0.43 0.38 0.41 0.26 0.34 0.45 0.40 0.41 0.24 0.33 0.45 0.39 0.42 0.18 0.31 0.45 0.40 0.43 0.17 0.26 0.40 0.39 0.42 0.23 0.32 0.47 0.37 0.36 0.13 0.24 0.41 0.38 0.30 0.29 0.38 0.48 0.42 0.46 0.18 0.26 0.32 0.35 0.41 0.16 0.28 0.42 0.43 0.34 0.25 0.33 0.43 0.33 0.42 0.22 0.32 0.58 0.48 0.45 0.25 0.31 0.47 0.44 0.38 0.19 0.33 0.47 0.40 0.45 0.17 0.29 0.45 0.40 0.41 0.21 0.31 0.43 0.38 0.42 0.17 0.29 0.43 0.37 0.42 0.20 0.34 0.49 0.46 0.45 0.25 0.34 0.46 0.40 0.42 0.15 0.24 0.38 0.25 0.41 0.20 0.35 0.43 0.29 0.43 0.22 0.33 0.51 0.30 0.24 0.11 0.16 0.30 0.31 0.27 0.16 0.18 0.37 0.33 0.55 0.27 0.41 0.49 0.49 0.48 0.26 0.32 0.34 0.32 0.29 0.37 0.45 0.40 0.42 0.45 0.18 0.27 0.37 0.36 0.44 0.23 0.42 0.61 0.41 0.44

US SmallUS ValueUS Growth

IndiaKoreaTaiwanBrazilUS LargeUS Mid

UK

AC WorldWorldWorld x USEMAsia-Pac x JS&P 500EuropeJapanGermanyChina

Asia x JHKSingaporeMalaysiaThailand

New Zealand

IndonesiaPhilippinesMexicoRussiaAustralia


17

Chart E8: PGAA’s Bang+ Index

Source: Bloomberg/Factset/Principal Global Asset Allocation; all returns are from MS CI indices except for the Bang+ index; As of 4/30/2020 BANG+ is a proprietary index created by Principal Global Asset Allocation in 2017. The index was created to monitor and track the largest U.S. and Asia technology stocks. The BANG+ index contains global "bellwether" technology companies that, in concert, inform the performance pattern of leading technology firms around the globe. It comprises 13 stocks (Apple, Amazon, Alphabet, Facebook, Microsoft, Intel, Nvidia, Tesla, Netflix, Tencent, Alibaba, Baidu and Samsung) with returns measured in US$. The index is rebased to 100 as of 31 December 2008. The performance shown is presented for illustrative purposes and are provided solely for conceptual discussion only and does not represent an actual strategy managed by Principal Global Asset Allocation. The proprietary index historical return was created with the benefit of hindsight and no representation is being made that any account will or is likely to achieve profits or losses like those shown. Proprietary model output is based upon certain assumptions that may change, are not guaranteed and should not be relied upon as a significant basis for an investment decision. It should not be assumed that securities identified above will prove to be profitable or have been chosen for investment within our portfolios. Any reference to a specific security does not constitute a recommendation to buy, sell or hold such security.

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Bang+ Index EQ Wgt S&P 500 Total Return Nasdaq Total Return

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Bang+ Index EQ Wgt Bang+ Asia Bang+ US


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VII. FIXED INCOME Key Policy Rates (%) 30-Apr-20 Month 1Q'20 YTD'20 1yr 5 yrs 10 yrs 4Q'19 3Q'19 2Q'19 US-Fed Funds USD 0.25 - (1.50) (1.50) (2.25) - - -0.25 -0.50 0.00 UK Bank Rate GBP 0.10 - (0.65) (0.65) (0.65) (0.40) (0.40) 0.00 0.00 0.00 ECB Ref Rate EUR 0.00 - - - - (0.05) (1.00) 0.00 0.00 0.00 Australia Cash Rate AUD 0.25 - (0.50) (0.50) (1.25) (2.00) (4.00) -0.25 -0.25 -0.25 China 7-day Rev Repo CNY 2.20 - (0.30) (0.30) (0.35) (1.15) - -0.05 0.00 0.00 Sovereigns (%) USA-10y USD 0.64 -0.03 -1.25 -1.28 -1.86 -1.39 -3.01 0.25 -0.34 -0.40 UK-10y GBP 0.23 -0.13 -0.47 -0.59 -0.95 -1.60 -3.62 0.33 -0.35 -0.17 GER-10y EUR -0.59 -0.12 -0.29 -0.40 -0.60 -0.95 -3.60 0.39 -0.24 -0.26 Australia-10Y AUD 0.89 0.13 -0.61 -0.48 -0.90 -1.76 -4.82 0.35 -0.30 -0.45 Japan-10y JPY -0.03 -0.05 0.03 -0.02 0.01 -0.37 -1.32 0.20 -0.06 -0.08 HK SAR -10 HKD 0.50 -0.12 -1.09 -1.21 -1.17 -1.19 - 0.49 -0.25 0.04 China-10y CNY 2.52 -0.07 -0.56 -0.63 -0.89 -0.92 -0.89 0.00 -0.09 0.17 Singapore-10y SGD 0.90 -0.39 -0.45 -0.84 -1.27 -1.34 -1.77 0.00 -0.26 -0.07 Korea-10y KRW 1.52 -0.04 -0.12 -0.16 -0.33 -0.91 -3.30 0.21 -0.14 -0.24 Credits (bps) 3m $ LIBOR-OIS USD 51 -87 103 16 33 38 40 2 14 -2 NA CDX 5y IG CDS USD 87 -26 67 42 29 23 -5 -15 6 -10 Europe 5y IG CDS EUR 81 -16 52 37 23 20 -6 -11 3 -13 Asia 5y IG CDS USD 115 -26 87 61 50 9 15 -23 11 -6 JPM EMBI Index USD 557 -20 313 280 193 181 283 -60 -28 -7

Source: Bloomberg/Factset/Principal Global Asset Allocation; Annualized > 1yr; As of 4/30/2020 Policy rates: Details of key central bank actions during the month can be found here. PGAA’s global policy rate indicator dropped -4bps to another all-time low of 1.1%. With DM policy rate already at -0.01% and EM policy rate dropping to 2.94% (both well below their GFC lows), a bulk of the incremental easing will likely be in the shape of balance sheet expansion, given a waning appetite for negative rates in the DM world. Chart F1: Massive monetary easing

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 4/30/2020 Implied Fed Funds Forwards Rates stabilized after crashing in Mar’2020, finishing just 2-4bps lower. Markets expect the Fed to stay put at current levels for at least two years before beginning a slow trek back up. Nominal Sovereign 10-yr Yields: PGAA’s Global Sovereign 10-yr yield indicator eased -13bps to 1.82% as rate cuts and promise of bond buying for an extended period by DM central banks aided sentiment. Negative yielding debt increased 15% to $12.0 trn from $10.6 trn. Overall, 25 out of the 29 markets ended with lower yields. PGAA’s DM yield composite dropped -4bps to 0.40%. EM yield declined -25bps to 3.95%, reflecting reduced risk premia. EMEA yields dropped -109bps (Turkey -175bps, Russia -135bps and South Africa -70bps) and Latin America yields -24bps (Mexico -68bps). Asian yields ended -9bps lower at 3.06% with Philippines (-119bps), Malaysia (-49bps) and Singapore (-39bps) at the forefront of drops. In Europe, German yields decreased while peripheral yields increased (Greece 49bps, Italy 24bps) as policymakers dithered on issuing common bonds. The UST-Bund spread widened 9bps to 123bps, close to a 6-year low. EM-US carry narrowed 23bps to 331bps, still not far from its all-time high of 382bps.

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Net Rate Cuts in the Last 12 Months


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Real Sovereign 10-yr real yields, derived from nominal 10-yr yields and CPI swaps were lower in US (-20 bps to -67bps) and Germany (-28bps to -135bps), driven primarily by higher inflation expectations. They remained negative in most countries. UK (-300bps) was the lowest and Japan (15bps) the highest. Based on CPI releases, real yields were stable. Our Global Real Yield indicator finished at -77bps vs -76bps the month prior, with DMs at -99bps and EMs at -44bps. The EM real yield carry over real USTs narrowed to 55bps from 76bps. UST real carry over German bunds widened 15bps to 115bps but has compressed -133bps in the last 12 months. Yield Curves (2-10s) steepened further. Our global indicator ended 16bp wider at 81bps, driven by 40bps of widening to 143bps in EMs due to rate cuts. US 2-10 spread widened a tad to 44bps. All curves were positive. Italy (116bps) continued to offer the best term carry in DMs and Brazil (363bps) in EMs. Chart F2a: Nominal yields Chart F2b: Real Yields

Source: Bloomberg/Factset/Principal Global Asset Allocation; Yields are current GDP weighted; As of 4/30/2020 Credit spreads compressed as central bank support brought liquidity back to markets, which were distinctly distorted at the end of Mar’2020. The rule was simple – the worse the hammering in Mar’2020, the better the recovery in Apr’2020. Flows returned to corporate bond funds, in contrast to the hemorrhage they witnessed in Mar’2020. Asian IG underperformed as it hadn’t widened as much as US IG in Mar’2020. Spreads remained cheap by historical standards (relative to 10-yr medians) though less so than Mar’2020. Asian HY looks the best in relative value terms. Chart F3: Global Credit Spreads

Source: Bloomberg/Factset/Principal Global Asset Allocation; Spreads are based on ICE BofAML indices and represent the Option Adjusted Spread vs Govt in BPs. IG= Investment Grade; HY=High Yield; EM=Emerging Markets adjusted for rebalancing effect; High/Low/Median are since Dec’09; As of 4/30/2020 Bond Returns: Long credit duration reaped rich rewards while treasury returns were uninspiring. Liquidity fears eased as central banks promised significant support through liquidity enhancing schemes and asset purchase programs. Currency effects were marginally positive in the DM world but negative in EMs where several high yielders dropped yet again against the greenback.

10-yr Nominal Yields Apr-20 1M Chg 3M Chg 12M ChgGlobal 1.82 (0.12) (0.35) (1.21) DM 0.40 (0.04) (0.45) (1.20) EM 3.95 (0.25) (0.21) (1.23) G7 0.40 (0.04) (0.47) (1.24) DM ex US 0.17 (0.05) (0.04) (0.57) US 0.64 (0.03) (0.87) (1.86) Japan (0.03) (0.05) 0.04 0.01 Germany (0.59) (0.12) (0.15) (0.60) EM-US 3.31 (0.22) 0.65 0.64 US - DM ex US 0.47 0.02 (0.83) (1.29) US - Japan 0.67 0.02 (0.90) (1.87) US - Germany 1.23 0.08 (0.72) (1.26)

10-yr Real Yields (deflated by CPI) Apr-20 1M Chg 3M Chg 12M ChgGlobal (0.77) (0.01) (0.67) (1.92) DM (0.99) 0.07 (0.59) (1.29) EM (0.44) (0.13) (0.77) (2.85) G7 (1.00) 0.07 (0.65) (1.38) DM ex US (0.98) 0.07 (0.11) (0.49) US (0.99) 0.07 (1.10) (2.13) Japan (0.53) 0.08 0.04 (0.19) Germany (2.19) (0.08) (0.52) (0.80) EM-US 0.55 (0.20) 0.33 (0.72) US - DM ex US (0.01) (0.00) (0.99) (1.64) US - Japan (0.46) (0.01) (1.14) (1.94) US - Germany 1.19 0.15 (0.58) (1.33)

Option Adjusted Spread (bps)

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EUR HY Corp

Asia HY $ EM HY $

Asia - US IG

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US - EU HY US Global Asia EM EU

Apr-20 217 183 264 299 763 634 1,130 969 47 367 82 206 34 129 546 574 866 670 451 YTD Chg 116 89 140 149 403 326 570 475 24 167 33 72 27 77 287 301 430 326 237 1m Chg (88) (55) (17) (71) (114) (120) (246) (185) 71 (132) 17 (71) (33) 6 (26) (59) (229) (114) (65) 3m Chg 108 88 131 137 360 299 548 470 23 188 29 110 20 61 252 273 417 333 211 6m Chg 100 80 124 132 348 262 567 437 24 219 32 89 20 86 248 263 443 305 182 12m Chg 100 73 131 137 390 269 628 487 31 238 37 97 27 121 290 299 497 350 196 24m Chg 103 90 129 141 417 332 711 604 26 294 38 187 13 85 314 338 582 463 242 36m Chg 94 69 126 135 382 304 742 529 32 360 41 147 25 78 288 307 616 394 235 High 305 337 298 370 877 974 1,376 1,154 67 499 135 454 67 206 575 633 1,095 784 650 Low 91 75 111 127 328 233 321 320 (24) (323) 34 (16) (71) (237) 215 228 151 193 144 Median 146 128 166 211 482 432 543 635 20 41 59 126 10 40 332 364 368 421 305 Current-Median 71 55 98 88 281 202 587 334 27 326 23 80 24 89 214 210 498 249 146 Current-Low 126 108 153 172 435 401 809 649 71 690 48 222 105 366 331 346 715 477 307 Standard Deviation 39 51 40 49 127 150 152 166

Relative Spreads High Yield - IG Spreads


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Chart F4: Fixed Income returns

Source: Bloomberg/Factset/Principal Global Asset Allocation; Returns are from ICE BofAML indices; IG=Investment Grade, HY=High Yield; As of 4/30/2020 Rating Actions: On the sovereign side, there were a slew of negative rating actions i.e. • Fitch ↓ UK to AA- from AA and kept a negative outlook. Moody’s and S&P ratings are AA, but under review. • S&P ↓ Australia’s Outlook to Negative (rated AAA), due to rising fiscal expenditures to support the economy. • Fitch ↓ Mexico to BBB, Stable, expecting the economy to contract at least -4% in 2020, pushing Govt Debt/GDP ratio

to a 40-year high of 50%. Moody's ↓ it to Baa1, Negative from A3, citing material weakening of mid-term economic growth and deteriorating financial and operating standing of Pemex (the state-owned oil producer).

• S&P kept Indonesia at BBB but ↓ its outlook to Negative in view of a wider fiscal deficit (5% GDP) and sharply deteriorating growth environment. If the growth slump is prolonged, it could lead to a rating cut.

• Fitch ↓ Hong Kong to AA-, Stable from AA Negative, its second downgrade in 7 months (had ↓ from AA+ to AA in Sep’2020 when protests were at their peak). The current downgrade reflects additional growth shocks from COVID-19, depletion of fiscal reserves from 40% of GDP to 30% due to stimulus measures of 10% of GDP. The other reason was more structural i.e. as HK integrates even more with China, its ratings will move towards China’s (A+, Stable).

• Fitch downgraded Italy to BBB-, Stable while S&P re-affirmed it at BBB, Negative. Moody’s has it at Baa3, Stable. • S&P ↓ South Africa to BB-, Stable from BB as existing fiscal problems were compounded by the COVID-19 crisis.

Moody’s has the country at the same level i.e. Ba1, Negative while Fitch has it at a notch higher (BB, Negative). • Moody’s ↓ Saudi Arabia’s outlook to Negative from Stable while keeping its A1 rating.

On the corporate side too, downgrades abounded, far outstripping upgrades as COVID-19 concerns multiplied. The ratio of global rating upgrade to total rating changes dropped to just 11%, with IG at 22% and HY at 8%. We expect the rating environment to remain extremely weak in coming months. Chart F5: Corporate Ratings

Source: Bloomberg/Factset/Principal Global Asset Allocation; Ratios represent rating and outlook upgrades as % of total changes by Moody’s, S&P & Fitch; Global=US + W Europe + Asia-Pac, IG=Investment Grade, HY=High Yield; As of 4/30/2020

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VIII. CURRENCIES CURRENCIES 30-Apr-20 Month 1Q'20 YTD'20 1yr 5 yrs 10 yrs 4Q'19 3Q'19 2Q'19 DXY Index 99.02 0% 3% 3% 2% 1% 2% -3% 3% -1% BB Asia $ Index 101.99 -1% 4% -3% 4% 2% 1% -2% 2% 1% BB LatAm $ Index 41.36 2% 22% -20% 31% 13% 10% -2% 8% -1% USD/EURO 1.10 1% 2% -2% 2% 0% 2% -3% 4% -1% USD/GBP 1.26 -1% 7% -5% 3% 4% 2% -7% 3% 3% USD/AUD 0.65 -6% 15% -7% 8% 4% 4% -4% 4% 1% Yen/USD 107.18 0% -1% -1% -4% -2% 1% 0% 0% -3% HKD/USD 7.75 0% -1% -1% -1% 0% 0% -1% 0% -1% CNY/USD 7.06 0% 2% 1% 5% 3% 0% -3% 4% 2%

Source: Bloomberg/Factset/Principal Global Asset Allocation. +ve numbers indicates USD appreciation; Annualized > 1yr; As of 4/30/2020 In a mini reversal of fortunes brought about by better orientation towards risk, the US$ weakened against 21 of the 30 currencies we track it against. Performance diverged across regions. Within the DM side of things, a counter-trend rally pushed the $ lower against cyclical currencies like AUD (-6%), NZD (-3%), Norwegian Krone & Swedish Krona (-2% each). It was relatively stable against EUR, JPY and GBP. In Asia, the $ weakened against every single currency, with the largest drop against the Indonesian Rupiah (-9%). In LatAm, it continued its upward march, with strong gains against Brazilian Real (5%) and Argentinian Peso (4%). However, the Colombian and Chilean pesos managed to eke out gains of 2% each against it. It was a mixed bag in EMEA, with the greenback gaining 6% against Turkish Lira and 4% against the South African Rand (both countries had large rate cuts) while dropping -5% against the Russian Ruble. For the year thus far, the $ has had a great run, rising against 25 of the 30 currencies. It made gains exceeding 5% against twenty currencies and gains exceeding 10% against ten. The broad trade weighted $ value has appreciated 9% thus far. The Bloomberg EM-8 carry index dropped -0.4%, taking YTD’2020 return to a very disappointing -13.6%. On real effective exchange rates, our valuation matrix can be accessed here. The US$ is firmly in the expensive club. Currencies in EEMEA and Latin America are cheap while those in Asia (excluding China) slightly expensive. Implied Currency Volatility: DM and EM volatilities were down -22% and -12% respectively. While DM volatility is now about 10% below its long-term average, EM volatility is still 30% above. Basis Swaps: Our global basis indicator for currencies like EUR, JPY was stable, indicating orderly $ funding conditions. $ Carry: $ carry vs German and other DM currencies decreased further in Apr’2020 as it did all of 2019. The 2-yr USDEUR swap differential finished -15bps at 66bps (cycle high of 312bps) as US swaps dropped -18bps. Lower carry and expensive valuations should punctuate the $ march going forward. Chart CU1: CPI based real effective rates

Source: Bloomberg/Factset/Principal Global Asset Allocation;

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Real Effective Exchange Rates (CPI) Asia-x-J-x-CH LATAM EEMEA


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IX. COMMODITIES Commodities 30-Apr-20 Month 1Q'20 YTD'20 1yr 5 yrs 10 yrs 4Q'19 3Q'19 2Q'19 GS Commodity Index USD 257.0 1% -41% -41% -42% -10% -7% 8% -5% -2% Nymex Crude USD/bl 18.8 -8% -66% -69% -71% -21% -14% 13% -8% -3% Brent Crude USD/bl 25.3 11% -66% -62% -65% -18% -12% 9% -9% -3% Gold USD/toz 1,694.2 7% 4% 11% 32% 7% 4% 4% 4% 9% Silver USD/toz 14.9 5% -21% -17% 0% -2% -2% 5% 11% 1% Copper USD/T 5,179.0 5% -20% -16% -19% -4% -4% 8% -5% -8% Aluminum USD/T 1,481.0 -2% -16% -18% -17% -5% -4% 5% -4% -6% Corn USc/bu 311.5 -9% -12% -20% -12% -3% -2% 0% -8% 18% Soybean USc/bu 850.3 -4% -6% -10% 1% -3% -2% 4% 1% 2% Wheat USc/bu 529.8 -7% 2% -5% 27% 3% 1% 13% -6% 15% Sugar USc/lb 10.4 0% -22% -23% -13% -4% -4% 13% -3% -2%

Source: Bloomberg/Factset/Principal Global Asset Allocation; Annualized > 1yr; As of 4/30/2020 The GS commodity index eked out a tiny 1% gain (-41%YTD’20) with help from precious metals and energy. Energy: The GS energy index experienced extreme volatility (details here) despite the OPEC+ deal (details here). It closed the month with a 3% gain (YTD’2020 -59%), which was an acceptable outcome given wild swings in near-month futures. The May WTI future contract expiring 21 April traded at -$37.60 towards the end of 19 April as longs rushed for the exits in the face of difficulty in taking delivery of oil (WTI contracts settle physically with delivery at Cushing, Oklahoma), given rapidly shrinking storage (the entire capacity of 80 million barrels will be filled up by the time oil is delivered mid-May). Hence, investors either sold their positions outright or rolled over into the next contract by selling the maturing contract, which caused prices to spiral down in the absence of enough buying power from real end-users. Forced liquidation of positions of a failed Singapore trading firm and a Korean structured product added to the woes. While near term oversupply issues are real, they will get worked out over the next few months as supply cuts and a pick-up in demand from resumption of economic activity help rebalance the market. Indeed, while near-term oil futures contracts have slumped this year due to a massive drop in demand (April oil demand probably dropped -25%yoy) and technical reasons, the medium-term picture isn’t as dire, as depicted by shallower drops at the far end. This has put the oil curve in a state of deep contango, in sharp contrast to the backwardation that existed at the start of the year. Were the demand outlook to not improve and supply cuts not materialize, far-end contracts too will come under pressure but that isn’t our base case. Precious metals stayed in demand despite an improving sentiment towards risk assets as both real and nominal rates dropped further. The entire complex (gold, silver, platinum) found takers, with fund flows into gold funds staying strong. The GS Precious metals index gained 3% (9%YTD’2020). Industrial metals: The sector fairly well in relative terms, rising 1% (-16% YTD’2020), with gains in copper (5%) reflecting hopes of a recovery in Chinese demand. Agricultural commodity prices dropped -4% (GS Agriculture index), to take YTD’20 return to -13%. Lockdowns could create a temporary two-speed world, with rising stockpiles at production centers but shortages in consumption centers. Chart CO1: Oil market dynamics: a case of excessive supply near term

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 4/30/2020;

-80%-70%-60%-50%-40%-30%-20%-10%

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%YTD '20 Change by Oil Contract Maturity

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WTI Futures30-Apr-20 31-Mar-20 31-Dec-19 31-Dec-18


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X. LOOKING AHEAD

1. Growth COVID-19 has turned the growth picture on its head as detailed here and here. We are certain to see a steep decline in global output in 2020. The recovery process from the depths of the contraction should start in 3Q’2020, initially V-shaped and at a gradual pace thereafter. Many countries are unlikely to reach pre-crisis levels of economic activity for several quarters. Linked to it, the corporate sector will see a deep contraction in profits, with signs looking ominous (details here) for several cyclical sectors. While governments have been quick to extend cash/liquidity lifelines to keep firms going, their debt will balloon and bankruptcies will rise, which will constrain corporate capex spending till balance sheets have been repaired. Looking ahead, as the virus and financial stresses are contained, the peak infection rate of COVID-19 will likely be eclipsed as the best signal to gauge market confidence by the speed and success of return-to-work strategies. Also, if there is a recurrence, the intensity/duration of it. Finally, the success in developing drugs/vaccines will be extremely important in restoring confidence.

2. Inflation One-off effects pushed inflation higher in 1Q’2020, both within DMs and particularly in EMs. However, we are past that phase and the inflation outlook in the months ahead is one of softness, as predicted by PGAA’s leading inflation indicator.

3. Monetary Policy & Global Financial Conditions Global monetary policy has never been easier, both in terms of policy rates and in terms of Central banks’ will to use their balance sheets. Their role has expanded from just containing term/risk premia to taking credit risk. We expect the balance sheets of the leading six central banks (Fed, ECB, BoJ, BoE, PBOC & SNB) to rise from 25% of GDP at the end of 2019 to 33% by end-2020, with risks tilted to the upside. Such a forceful commitment is bound to have a favorable effect on components of our financial conditions indices (yields, credit spreads, volatility, monetary growth and equity performance), keeping overall conditions easy. However, given multiple forces in action in determining these components, we expect the path to be rocky with markets testing central bank resolve to do “more” every now and then.

4. Valuations • Equity valuations were in cheap territory in Mar’2020 but the recovery in prices since then and the accompanying cut

in earnings has changed the picture somewhat (our equity valuation composites can be accessed here). While it is natural for multiples to expand during environments where forceful preventive action causes prices to recover while the earnings recovery lags, there has to be visibility on the timeliness and magnitude of the recovery, failing which valuations will start cheapening again. The trajectory of victory over the virus, therefore, holds the key as that is the one thing which will determine the speed with which companies and consumers return to normalcy.

• Corporate spreads widened dramatically in Mar’2020, entering the deep value zone (details here). While they came in last month, they are still fairly cheap despite our expectation that ratings downgrades and defaults will rise. Central bank intervention, particularly by the US Fed which will start buying corporate bonds this month will start creating the much need base for such assets.

• On the FX side of things, the $ is firmly in the “expensive’ club, based on purchasing power parity. Combined with shrinking interest rate differential for US$ fixed income assets, it will make it a steeper climb higher for the greenback. However, COVID-19 related uncertainty and the possibility of a rise in US-China tensions as we approach US elections could keep the greenback strong. A weaker dollar will be a big positive for risk assets in emerging economies.

5. Sentiments & Technical indicators The market isn’t as oversold now as it was at the end of March’2020. Declining volatility implies systematic and risk-parity investors already started adding risk last month, as detailed here. Momentum strategies may also have done the same with the turn in near-term momentum indicators. Hedge fund beta to equities showed signs of picking up too though nowhere near exaggerated levels. Rebalancing flows from global multi-asset strategies will be negative in May due to noticeable outperformance of equities in April. Assuming $4 trillion of such AUM, outflows from equities could be to the tune of $70bn. Finally, some large sovereign wealth funds representing countries primarily dependent on oil revenues may sell financial assets to fund domestic budgets, especially now that markets have recovered.


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6. What could cause risk assets to rally? Progress has been made on many in our checklist of pre-conditions needed for risk assets to run higher. However, we don’t rule out more episodes of heightened volatility, driven by bad news on the virus, economic growth and political risks.

a. Positive progress on the virus – this remains a key necessary condition b. Return to work strategies – the importance of this factor can hardly be over-emphasized as it will

significantly shape the path of economic recovery c. Recognition of extreme de-growth – The market base case has shifted to a deep recession in 2Q’2020.

Bottom-up analysts have started capitulating but there’s some more room to go. d. Monetary policy – Central banks have delivered sufficiently in our view and are ready to do more. We expect

an expansion of the asset purchase program in Europe in coming months (probably as early as next month) while the Fed continues to tweak its own programs for maximum effectiveness. Central banks in emerging economies are also stepping up with meaningful liquidity measures and rate cuts to keep risk premiums low.

e. Fiscal policy – Several measures have already been announced. While the magnitude looks reasonable, execution and readiness to do more, should the virus setback last longer, will be important.

f. Valuations – Anti-fragile assets (US$, gold and treasuries) are expensive. Equities are in fair value zone while commodities and credit spreads are cheap.

g. Positioning – It isn’t as light as it was at the end of Mar’2020 but isn’t extended either. From a near-term perspective, it isn’t sending any clear signal at this point.

7. Key risks At this stage, the key risks we envision are- • COVID-19 isn’t contained timely enough or resurfaces in a hard-to-contain form. • Bankruptcies pick up dramatically despite all the aid provided by governments. • The US election cycle starts creating volatility in two ways-

o the probability of control of all 3 branches of the Govt. by one party starts rising (historically it hasn’t been good for markets)

o US-China relationship comes under stress as China becomes a focal point of US elections • From a longer-term perspective, Govt intervention in allocation of resources will come with strings attached. Laws

could be tightened around buybacks, distributions, leverage etc. Binay Chandgothia Managing Director – Portfolio Manager, Principal Global Investors (Hong Kong) Ltd. 04 May 2020 The piece was written with contributions from my HK-based colleagues, Han Peng and Raj Singh


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Important Information Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of May 2020. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. This material contains general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account. Subject to any contrary provisions of applicable law, Principal Global Investors and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in this document or in the information or data provided in this document.

Past performance is no guarantee of future results and should not be relied upon to make an investment decision. Investing involves risk, including possible loss of principal. All figures shown in this document are in US dollars unless otherwise noted.

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Moreover, any historical performance information included in this material is presented by way of example only. Any changes to assumptions that may have been made in preparing this material could have a material impact on the data presented. Reliance upon information in this material is at the sole discretion of the reader.

Proprietary model output is based upon certain assumptions that may change, are not guaranteed and should not be relied upon as a significant basis for an investment decision. Indices are unmanaged and do not take into account fees, expenses and transaction costs are not available for direct investment.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investing involves risk, including possible loss of principal. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Risk is magnified in emerging markets, which may lack established legal, political, business or social structures to support securities markets. Small and mid-cap stocks may have additional risks including greater price volatility. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. Lower-rated securities are subject to additional credit and default risks. Equity markets are subject to many factors, including economic conditions, government regulations, market sentiment, local and international political events, and environmental and technological issues that may impact return and volatility. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. There is a risk that an investment will decline in value. Investment in foreign currency can result in losses and values may fluctuate based on foreign exchange rates, exchange restrictions, or other actions of governments or central banks. Investing in derivatives entails specific risks relating to liquidity, leverage, and credit, which may reduce returns and/or increase volatility. The strategies discussed are strictly for illustrative and educational purposes only there is no guarantee that any strategies discussed will be effective.

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