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Multi-Asset perspectives

Principal Global Asset Allocation (PGAA) Monthly Market Perspectives: March 2020 Macro • Data weakened due to COVID-19 related disruptions. We expect more weakness as effects of lockdowns become

visible across the globe (China is an exception, being in recovery mode). Our economists expect a deep contraction in global activity in 2Q’2020. Of our macro indicators, global manufacturing PMI index rose (China was strong) but remained in contractionary territory, the leading indicator for global industrial production remained weak, and financial conditions tightened considerably. Macro-economic surprises, however, held up well.

• Global inflation moved down as base effects receded. Our leading inflation indicator predicts a meaningful decline. • Implied and realized cross-asset volatility shot up towards the GFC highs. Bottom-up • 2020 Earnings growth was slashed from 8% to -1% (MSCI AC World, $ terms). The number will get lower as analysts

get a better sense of the growth challenge. The 3-month earnings revisions breadth (bottom-up, local currency) also dropped. We don’t see chances of an immediate recovery.

• Global credit rating upgrade/downgrade ratio dropped to just 0.23 (as low as it got during the global financial crisis). We expect downgrades to dominate in coming weeks.

Valuations • US Treasuries got super expensive while IG and High Yield spreads got super cheap. • Global Equities made their way into the cheap zone. Only US growth and large-caps remained expensive. US Value

cheapened further vs. US Growth as did Small/Mid-caps vs Large caps. Markets • Multi-Assets: Our global multi-asset index (details here) returned -10.8% in Mar’2020 as risk assets suffered. Very

high asset-class correlations implied significantly lower diversification benefits. • Global Equities ended their bull market. All 40 markets dropped, with a median local currency return of -15.8%, its

worst reading since the drop of -21.2% in Oct’2008. • Fixed Income: PGAA’s global policy rate indicator dropped -62bps to just 1.14%, its lowest ever as central banks cut

rates aggressively. 10-yr yields didn’t move much though, barring a few markets like US and HK where they dropped sharply. Returns from spread products were very weak, in both absolute terms and relative to treasuries.

• Currencies: The US$ strengthened yet again with very particularly large moves against the against commodity currencies and those in LatAM and EEMEA. The Asian complex was better placed. Expensive valuations and declining yield advantage raise the hurdle for sustained $ appreciation (assuming COVID-29 doesn’t worsen).

• Commodities: The combination of COVID-19 and OPEC’s spectacular U-turn on output cuts took global commodities to one of their worst months ever. Oil prices fell drastically, even trading negative in places due to high storage costs.

Key risks At this stage, the key risks we envision are- • COVID-19 takes much longer to contain despite quarantines. • Bankruptcies pick up dramatically despite the promise of aid by governments. • Global Governments remain divided. While central banks are working together, the world needs more co-ordination

among heads of Governments. • The US election cycle starts creating volatility, especially if markets start pricing a control of all 3 branches by one

party (that hasn’t been a great period for markets going by history). • From a longer term perspective, socialization of economic activity through Govt. aid will have strings attached. It

could come with stricter laws on buybacks, distributions, leverage etc.


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Multi-Asset Perspectives: March 2020 It was a terrible month for risk assets with red ink all over. Key factors at play were – • COVID-19 took centerstage, spreading to several countries and hitting risk sentiment ferociously as governments

started implementing strict containment measures (details here). The cocktail of fundamental factors (a deep imminent contraction) and technical factors (forced risk selling) proved poisonous (details here).

• Monetary and fiscal policy support accelerated (details here). • Growth dropped but help up better than our expectations (details here). We expect 2Q’2020 to see a steeper decline

in most parts of the world barring China which is in recovery mode. A US recession is our base case (details here). • Flows left both fixed income and equities in pursuit of the safety offered by money market funds (details here). Table 1: Summarizing our fundamental, valuation and technical indicators

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

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1 PGAA Global Manufacturing PMI Index 48.1 47.0 48.5 52.0 ↑

2 PGAA Leading Industrial Production Indicator2 47.3 47.7 47.0 50.0 ↓ 3 PGAA Global Inflation Index1 2.7% 2.6% 2.1% 2.3% = 4 PGAA Global Financial Conditions Index -0.06 0.35 .45 0.03 ↓ 5 PGAA Global Economic Surprise Index3 -0.17 -0.04 0.28 -0.10 ↓

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

PGAA Global 3-month EPS change (in US$) -7% -2% -1% -3% ↓

Global 2020 EPS growth expectation -1% 8% 10% 10% ↓

7 Global Credit Rating Upgrade/Downgrade Ratio 0.23 0.57 0.73 1.07 ↓

Val

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on 8 PGAA Equity Valuation Composite (MSCI AC World) 0.70 -0.2 -0.9 0.5 ↑

9 PGAA 10-yr Treasury Valuation4 -3.0 -2.2 -0.8 0.4 ↓

PGAA Investment Grade Spread4 3.9 -0.5 -1.4 -0.1 ↑

PGAA High Yield Spread4 3.3 0.2 -1.2 -0.1 ↑

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10 PGAA Cross Asset Volatility Index 131 100 52 81 ↓

11 PGAA Cyclical Risk Environment Index -1.99 -1.29 -0.80 -0.91 ↓

12 PGAA Reflation Positioning Indicator -0.40 -0.40 -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 -10.8% in Mar’2020 to take 1Q’2020 return to -14.7%, putting 3-month returns in the worst percentile of returns going back to 1999! Commodities and equities were big detractors. Asset class correlations jumped, cutting the expected diversification benefit from multi-asset portfolios.

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 3/31/2020

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Other Highlights

• Key Central Banks in Action: The world of Central Banking was filled with emergency stimulative actions as panic

engulfed the global economy. 23 out of the 31 central banks we track cut rates in March (many of them more than once) which took the cut-hike scorecard to 84:6 for the last 12 months. The Danish Central bank was an exception, hiking +15bps to -0.60% to alleviate pressure on its currency which maintains a peg with EUR. Complimenting the rate cuts were relaxed capital requirements, lowered reserve ratios and a possible cessation of certain accounting rules in the weeks to come as desperate efforts were made to ensure flow of capital to the impacted sectors. Fiscal taps were opened simultaneously. Highlights of monetary and fiscal announcements during the month were-

Region Monetary Fiscal USA • 2 emergency cuts (-150bps), Fed funds rate to 0-0.25%. Discount

window cost cut to just 0.25%. Negative rates unlikely, economic forecasts to resume in June’2020.

• Reserve requirement ↓ to zero, ↓capital & liquidity buffers. • Initial $700bn asset purchases ($500bn treasuries, $200bn MBSs)

made open-ended with $600bn of purchases in the week of March 23 alone. Agency CMBSs included.

• $300 bn in new financing through 3 new facilities: US Treasury to put $30bn of equity in these SPVs under its Exchange Stabilization Fund (ESF) program. Details are- 1. Primary Market Corp Credit Facility (PMCCF) till 9/30/20: Fed

to provide secured funding to an SPV (treasury to own $10bn equity) that invests into Bonds or Loans issued by US companies with min rating of BBB- and a max maturity of 4 years. Issues will be at market rates and issuers will pay a commitment fee @100bps to the SPV for taking part.

2. Secondary Market Corp Credit Facility (SMCCF) till 9/30/20: Fed to provide secured funding to an SPV (treasury to own $10bn equity) that invests into Bonds (Inv grade, max maturity 5yrs) or Bond ETFs (US IG or Govt bonds).

3. Term Asset-Backed Securities Loan Facility (TALF): Fed to provide secured funding to an SPV (treasury to own $10bn equity) that will make available 3-year non-recourse loans to borrowers against eligible new ABSs. Initial target: US$100bn.

• Other facilities announced were - 1. Main Street Business Lending Program (MSBLP): The Fed will

set up MSBLP to support lending to eligible small-and-medium sized businesses.

2. CP Facility (CPFF) for a year: Fed will provide secured funding to an SPV (treasury puts $10bn equity capital) investing into CPs issued by US companies and Munis, including Asset-backed CPSs, with min rating of P1/A1 at OIS+110bps. For those downgraded from P1/A1 to P2/A2, one time investment by the SPV at OIS+200bps allowed.

3. Money Market Liquidity Facility (MMLF): Fed will extend secured loans to institutions against high quality liquid assets bought from MMMFs up to a year of maturity, including single state and tax-exempt municipal MMMFs. Cost will be Primary Credit Rate (PCR) for Govt obligations, PCR+25bps for Muni papers and PCR+100bps for others.

4. Primary Dealer Credit Facility (PDCF): to provide funding to primary dealers.

5. Expanded repo program, Tbill purchases extended to securities of all maturities.

6. Swap Lines at much lower cost with 14 central banks and addition of 84-day swaps.

• Phase 1: $8.3bn in health care spending.

• Phase 2: $105bn under the “Families First” Act as under- 1. $105bn tax credit for paid sick

and family sick leave. 2. Defer Federal Income tax due

15th April to 15th October up to $1m (Individuals) and $10m (companies) => $300bn of temporary liquidity.

• Phase 3: CARES Act totaling US$2.4 trillion with unprecedented co-ordination between US Treasury and Fed. Details as under-

1. US$730bn Fiscal stabilizers - o $292bn through $1200/$2400

cheques to individuals/families, plus $500 additional per child.

o $125bn through unemployment insurance @$600 per week for max 16 weeks to add to state unemployment insurance. Actual number will depend upon the no of jobless claims filed and their duration.

o $153bn through permanent tax provisions.

o $163bn through temporary tax provisions.

2. $480bn direct spending programs- o $340bn via Federal Agencies. o $140bn via state/local support.

3. $849bn Loan programs- o $454bn of capital to various Fed

Lending facilities. Fed’s loans to such entities could create a 10x impact i.e. US$4.5trn.

o $349bn of small business administration guarantees.

o $29bn for airlines/air cargo companies.

o $19bn for defense (Boeing) 4. US$352bn through employer payroll

tax deferment for FY2020 & FY2021 and payable in instalments from FY2022.

UK • Cuts totaling -65bps, policy rate at 10bps. • £20bn (0.70% GDP) of direct spending


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• Removal of countercyclical capital buffer of 1% to create £190bn of bank lending & suspension of bank stress tests.

• £200bn of flexible government bond buying program. • TLTRO-style funding to banks for 4 years at 5% of a bank’s real

economy loans at policy rate+spread (spread=0 for banks that don’t shrink lending, and 25bps for those that do). Banks can avail additional refinance by increasing lending (at 5x of net lending increase to SMEs and 1x that to non-SMEs).

• A cheap lending program for COVID-19 impacted companies.

• £330bn (11% GDP) of guaranteed loans for businesses.

• Govt to pay 80% of worker salaries that firms cannot afford to keep, up to £2500 for a minimum period of 3 months.

Euro Area • Unchanged rates (deposit rate at -0.50%). • Looser bank capital norms and easier collateral standards. • A new flexible Asset Purchase Program worth €120bn to be

executed in 2020. • Pandemic Emergency Purchase Program (PEPP) worth at least

€750bn in 2020 with flexibility on timing, sector (Govt vs Corporates) and quantum. Greece included.

• Funding to banks meeting lending criteria at Main Refinancing Rate less 75bps (i.e. -0.75%).

• Germany and France let banks tap capital buffers – all of Europe will ultimately allow that.

• Germany €156bn (0.4% GDP) in supplementary budget; €100bn (0.25% GDP) stabilization fund that can take equity stakes; €400bn (1.2% GDP) corporate guarantees.

• Italy €25bn (0.80% GDP) to spur lending of €250bn.

• France working on €40bn (1.5% GDP).

Japan • Unchanged rates (cash rate -0.1%) but negative rates not applicable to deposits by companies impacted by COVID-19.

• Upper limit for annual purchases of assets ↑ by ¥8.1 trn (US$77bn) comprising ETFs (¥6 trn to ¥12 trn), REITS (¥90bn to ¥180bn), CPs (¥2.2 trn to ¥3.2trn) and Corporate bonds (¥3.2 trn to ¥4.2 trn). BOJ already owns 50% of JGBs and 5% of Topix market cap through ETFs and J-Reits.

• Several rounds of unscheduled QE in JGBs already.

• Phase 1 & 2 were just $5bn. • Phase 3 could be $280bn (5.5%

GDP).

Australia • Cuts totaling -50bps to 0.25%, 3-yr yield capped at 0.25% and Sovereign bond purchases activated.

• US$10.5bn (0.70% GDP). More to come.

New Zealand • Cuts totaling -75bps to 0.25% & US$ 17bn worth asset purchases over 12 months.

• US$7bn (4% GDP).

Canada • Cuts totaling -150bps, policy rate at 0.25%. • US$57bn (3.5% GDP). Norway • Cuts totaling -125bps, policy rate at 0.25%. • US$10bn (loan program).

Guarantees to airlines for US$550m. • Payroll tax cut likely.

Sweden • Liquidity support (it has vowed to not use negative rates again). • US$29bn (5.5% GDP). Switzerland • No change (they are already at -75bps). • CHF 42bn (6% GDP), 50% in liquidity

support & loan guarantees. China • Reserve requirement ↓50-100bps, an additional 100bps for

qualified joint-stock banks, unlocking US$ 80bn of funding. • Reverse repo ↓ -20bps to 2.20%.

• Existing stimulus 3% GDP • Politburo announced a potentially

large package on 27th March- 1. Special treasury bond issuance

(only the 3rd time in 23 years) to finance spending.

2. Enhanced bond quotas for local and municipal Governments.

3. Expansion of fiscal deficit. India • -75bps Repo rate to 4.4%, -90bps Reverse repo rate to 4%.

• Liquidity measures => 5% of GDP through -100bps of cash reserve ratio to 3% ($17bn liquidity), significant increase in bond purchases under TLTROs & higher refinance to banks at a lower rate.

• FX swap auctions to provide $ liquidity. • Relaxation of liquidity & deferment of capital buffer ratios. • Moratorium on term loans and deferment of working capital

interest for a certain period without attracting NPL provisions.

• US$22bn (0.8%GDP) to support the poor. Provinces announced additional measures.

Hong Kong SAR

• Cut in policy rate in line with the US rate. • Capital buffers waived to free US$6bn of lending power.

• US$15bn (4% GDP), includes resident payouts.

South Korea • Policy rate -50bps to 0.75%. • US$65bn (4% GDP).


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• $60bn swap agreement with US Fed. • Subsidized lending (at 0.25%) to SMEs under the fiscal program of

support to them. • Unlimited liquidity to financial institutions through weekly repo

operations for3 months.

• An Emergency fund US$80bn of which $16bn to buy bonds/CPs, $9bn for stock markets, $15bn for credit to weak companies and $40bn to support SMEs.

Taiwan • Policy rate -25bps to a record low of 1.125%. Liquidity program worth 1% of GDP for banks.

• Plans for US$6bn (2% GDP).

Singapore • Unprecedented lowering of the midpoint of its currency band to current levels and lowering of slope to zero, implying weaker exchange rate to support growth.

• US$38bn (11% GDP).

Indonesia • Policy rate -25bps to 4.5% & Reserve requirement -50bps. Repo facility term extended to 12 months and more frequent FX swap auctions to alleviate $ shortage.

• US$25bn (2.5% GDP). Budget deficit cap relaxed of 5% GDP from 3%. 2020 Corporate tax rate cut to 22% from 25%.

Philippines • Policy cut -50bps to 3.25%, Reserve requirement -200bps, US$6bn of security purchases & regulatory relief measures.

• US$0.6bn (0.20% GDP), additional spending likely.

Malaysia • Policy rate -25bps to 2.5%, reserve ratio to 2% from 3%. • US$4.6bn (1.2% GDP). Thailand • Policy rate -25bps to 0.75%, $30bn liquidity mechanism for bond

markets • US$12.7bn (2.5% GDP).

Brazil • Policy rate -50bps to 3.75% & multiple FX swaps to manage burgeoning $ demand.

• US$ 36bn (2.2% of GDP).

Chile • Cut totaling -125bps, policy rate at 0.50%. • US$12bn (4.7% of GDP). Mexico • Policy rate -50bps to 6.5%. Peru • Policy rate -100bps to 1.25%. South Africa • Policy rate -100bps to 5.25%. • US$2bn (0.6% GDP) likely. Turkey • Policy rate -100bps to 9.75%. • US$15.4bn (2% GDP). Poland • Policy rate -50bps to 1%. • US$16bn (2.8% GDP). Czech Rep • Policy rate -50bps to 1.75%. • US$4bn (1.5% GDP).

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 3/31/2020 • Fund/ETF Flows: A massive $566bn went into money market funds in the most risk-off month since the Global

Financial Crisis of 2008-09 (GFC). Bonds saw outflows of -$257bn and Equities -$71bn (as of 26 March 2020). China onshore markets lost -$10bn through the stock connect route while their onshore investors added $18bn to HK-listed stocks, as the relative cheapness of offshore HK markets made them attractive.

Chart S3: Fund Flows

Source: Jeffries Equity Research • Coronavirus became a pandemic: COVID-19 spread with fury, engulfing almost the entire globe. As of 3/31/2020,

based on the World Health Organization (WHO), the number of cases had surpassed 330,000 (14,500 deaths) with China’s share (81,600 cases, 3,276 deaths) dwarfing progressively in contrast to the initial few weeks when it accounted for almost all the reported cases. Italy was impacted the most, reporting 59,138 cases and 5,476 deaths. US (31,573 cases, 402 deaths), Spain (28,572 cases, 1720 deaths) and Germany (24,774 cases, 94 deaths) were not far behind. The difference in mortality rates of different countries lay partly in demographics (with older people and those with pre-existing medical conditions being particularly vulnerable, as was the case in Italy where the average

YTD YTD Flow in Flow in YTD YTD Flow in Flow inFund Flows (US$ Bn) Mar-20 Feb-20 Mar-20 2019 Fund Flows (US$ Bn) Mar-20 Feb-20 Mar-20 2019Bonds (114) 143 (257) 485 Equities (39) 32 (71) (150) DM (79) 130 (209) 445 DM (37) 24 (61) (134) EM (35) 13 (48) 40 EM (2) 8 (10) (16) US (22) 83 (105) 311 US (34) 4 (38) (39) Other DM (57) 47 (104) 134 Europe (15) 9 (24) (96) IG Corporate (21) 14 (35) 62 Japan (7) 6 (13) (5) High Yield (38) 1 (39) 44 Asia Pac x Japan (49) 7 (56) 4 Sovereign 26 18 8 58 - Inflation Protected (5) 2 (7) (6) Commodities 18 12 6 14 Bank Loans (13) (3) (10) (30) Energy 8 3 5 (1)

Precious Metals 8 5 3 15 Money Markets 566 38 528 491 Others 2 4 (2) -


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age of those who unfortunately succumbed was 79 years) and their ability to treat impacted people at short notice. As testing picked up, thousands of asymptomatic persons found themselves carrying the virus. The psychological and economic implications of the pandemic were enormous to say the least, unmatched even by the GFC. Quarantines, restriction on movements, country lockdowns (imagine a country like India with 1.3bn people locking itself down for at least 21 days!) and work-from-home became global norms as several countries moved to a red-alert mode to contain the virus. China’s success in controlling it through strict quarantine rules became the global template. The downside of that was a very steep curtailment of economic activity in certain sectors (travel, shopping malls, leisure, consumption of non-durables etc.). Economic activity will take a severe hit in 2Q’2020 with the world hitting its first recession since the GFC (commentary in Jan’2020 that the decade gone by was the first ever without a recession seems to have jinxed the longest expansion in the post-World War period!). We expect the 2nd quarter contraction to be deeper than that during the GFC.

• The Oil fiasco: from Price defense to Market share defense: Saudi Arabia’s failure to strike a deal with Russia for

further production cuts to balance a market likely to see its largest ever supply glut sent shivers down the oil markets. it couldn’t have come at a worse time, given that growth sentiment was already extremely fragile due to the spreading virus. It implied the failure of a cartel that had worked so well since 2017 to maintain supply discipline in pursuit of a price defense strategy. It is hard to know exactly what transpired during the talks but seems like Russia preferred a wait and watch approach while Saudis were keen to cut aggressively. In the end, they came out not just without a deal, but with a vowed commitment to increase supply to take the incremental high-cost producer out. US shale output could become a serious casualty at current prices. It is worth noting that the US trade account has turned from a large deficit to a small surplus over the last decade, as oil and gas output jumped. At about 13mbpd of oil production, it was indeed the largest producer of oil globally in Mar’2020.

• Brexit: Talks were pushed to the backburner as Governments focused their energies on fighting the common enemy i.e. COIVD-19.


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PGAA’s Macro Indicators

Growth & Inflation • Our provisional global Manufacturing PMI index recovered to 48.1 from 47.1 as China recovered strongly to 52 from

35.7. US PMI (49.1) didn’t drop as much as expected. Europe came at 44.8 vs 50. PMIs will drop further in April. • Our Leading Global IP Indicator was lower at 46.5 from 47.2 and the 3m average ticked down to 47.3, staying in the

sub-trend growth (trend=50) zone. • Inflation: Global inflation eased to 2.7% yoy in Feb’2020 as expected. The EM-DM gap eased to 3% (DMs 1.5%, EMs

4.5%). Our leading indicator predicts inflation to go significantly lower in coming months.

Chart M1: Global Manufacturing PMIs

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 3/31/2020; 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 3/31/2020

Chart M3: Inflation

Source: Bloomberg/Factset/Principal Global Asset Allocation; projected inflation uses constant input prices; As of 3/31/2020

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Global Financial Conditions tightened considerably. While the rate component eased further (sharply lower policy rates), credit spreads, momentum (adverse performance of financials relative to broad markets) and volatility tightened global financial conditions. However, we are still quite some distance from the lows of GFC (we bottomed at -1.45 back then vs -0.06 in Mar’2020) nor do we expect to revisit them either, given the sizeable fiscal/monetary stimulus put in place globally at such short notice. 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 3/31/2020 PGAA’s Global Macro Economic Surprise Index (PGAA Global ESI) stayed in negative territory but its magnitude declined as China’s data didn’t lag expectations as much as it did in Feb’2020. US releases were broadly in line. Housing and Employment beat estimates comfortably (a 6-month streak for each) while consumption lagged. Europe had a fifth successive month of beats. In continental Europe, consumption (16-month streak) led yet again. UK too was powered by a strong consumption release. Stocking of essential items as the virus scare gathered steam probably played a major role. Japan’s positive surprise was powered by beats all around. It has now clocked twelve months of positive surprises out of the last thirteen. While we expect China’s surprises to recover further in coming weeks, the outlook for the rest of the world remains highly uncertain. While expectations have dropped sharply, the data releases may lag them still. Global inflation surprises were marginally negative overall with US the only region to clock a positive surprise. The inflation outlook has weakened considerably in recent weeks. 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 3/31/2020 Global Volatility: PGAA’s Cross-Asset Implied Volatility index jumped yet again, driven by higher Equity (↑25%), Commodity (↑140%) and Currency volatilities (↑54%). Fixed income (-8%) eased. Vols closed the month lower than intra-month highs. Realized volatility jumped sharply too. The moves took volatility levels well above their long-term averages and towards 2008-09 highs.

PGAA FCI Mar-20 1M Chg 3M Chg 12M ChgGlobal -0.06 (0.41) (0.51) (0.29)U.S. -0.30 (0.63) (0.67) (0.35)China -0.32 (0.37) (0.42) (0.38)Euro Core 0.28 (0.21) (0.44) (0.17)Euro Periphery 0.33 (0.20) (0.44) (0.04)UK -0.01 (0.45) (0.52) (0.35)Japan 0.14 (0.28) (0.42) (0.36)India -0.30 (0.55) (0.54) (0.34)Korea 0.02 (0.28) (0.38) (0.25)Brazil 0.48 (0.26) (0.23) (0.24)Mexico -0.62 (0.61) (0.65) (0.42)DM 0.00 (0.41) (0.54) (0.27)EM -0.20 (0.40) (0.43) (0.34)

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PGAA Economic Surprise Index (ESI) Mar-20 Feb-20 Jan-20 Dec-19

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Global (0.17) (0.38) 0.23 0.44 (0.17)U.S. (0.01) 0.46 (0.20) 0.13 0.11China (0.83) (2.07) 0.55 0.31 (1.01)Europe 0.33 0.47 0.34 0.89 0.37Japan 0.80 0.34 0.54 (0.32) 0.60PGAA Inflation Surprise Index Mar-20 Feb-20 Jan-20 Dec-19

3M Wgt MA

Global (0.08) 0.63 (0.23) 0.25 0.13U.S. 0.39 0.14 0.18 (0.04) 0.27China (0.29) 1.24 (0.67) 0.57 0.16Europe (0.33) 0.51 (0.18) 0.23 (0.02)Japan (0.85) 0.20 0.22 (0.09) (0.32)

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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 3/31/2020 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 3/31/2020 PGAA’s Cyclical Risk Environment Index (CREI) crashed to an all-time low, surpassing even the level reached during GFC. 92% of the factors stayed risk-off. Credit (wider spreads), Fixed income (lower safe haven yields), commodities (significantly lower oil prices), equities (massively underperforming global cyclicals vs. defensives) and currencies (stronger $ against cyclical currencies) went the same way for a second successive month. The chart with the EQ and FI components is telling – shows the extent to which cyclical equities have underperformed defensives since the global financial crisis despite overall equities having risen so much. 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 3/31/2020

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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 show a significant amount of risk reduction by systematic investors. The jump in volatility forced volatility-targeting and risk-parity strategies to reduce risks considerably. Over February and March, a traditional multi-asset volatility targeting unlevered portfolio with 45% in equities, 5% in commodities and 50% in fixed income would have had to shed risk to about 45% of its original to stay within the volatility target. Momentum targeting strategies are likely to have turned distinctly risk-off after the sharp drawdown in Mar’2020. Chart T1: Volatility targeting strategies Chart T2: ST Momentum signals – deeply negative

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 3/31/2020. Both charts pertain to hypothetical systematic multi-asset portfolios

Reflation Positioning: Overall reflation positioning was relatively unchanged but there was divergence within. Rates and commodity positioning turned less deflationary (probably due to the sizeable drop in interest rates and the crash in oil prices). Equity positioning was unchanged while currency positioning went risk-off.

Chart T3: Reflation Positioning Index

Source: Bloomberg/Factset/Principal Global Asset Allocation; Higher implies an increase in reflation positioning; As of 3/31/2020

Overbought/Oversold using RSI and Bollinger bands: Almost all risk assets were in the oversold zone while anti-fragile assets like treasuries were firmly in the overbought camp.

Equity breadth dropped remarkably. All markets in our universe dropped in Mar’2020. None closed above its 50 DMA (day moving average) and only 1 above its 200 DMA. Just 7% of NYSE listed stocks closed above their 200 DMA, well below its 10-year median of 56%.

Retail Positioning: The AAII retail investor bull-bear ratio for equities dropped to -19 vs. a 10-year median of 5. Hedging was lowered, the US equity Index put/call ratio dropping to 1.14 from 1.27 vs. its 10-year median of 0.99.

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PGAA’s Valuation Indicators (a) Equity Valuations

Absolute: Global equities moved into cheap zone. US Growth and US Large Caps were the only expensive markets. Relative: US remained expensive vs. ex-US markets. US Value cheapened even further relative to Growth. Small and Mid-caps cheapened relative to Large caps. Asia/EMs were fair-value on earnings but cheap on P/B.

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 3/31/2020 Chart V2: Relative Equity Valuations

Source: Bloomberg/Factset/Principal Global Asset Allocation; Green cells represent cheapness, Red cells expensiveness; As of 3/31/2020

March-20 Composite 1M Chg

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Times Cheaper

Price to NTM EPS

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MSCI AC World 0.7 0.9 1.6 0.9 21% 13.4 -10% -18% -9% 31% 1.9 -13% -20% -15% 30%MSCI World Index 0.6 0.9 1.6 0.9 25% 13.9 -10% -18% -9% 32% 2.0 -13% -21% -15% 32%MSCI EAFE 1.2 0.7 1.4 0.9 8% 12.0 -10% -18% -10% 23% 1.3 -13% -22% -17% 8%MSCI EM (Emerging Markets) 0.8 0.8 1.2 0.7 13% 10.5 -11% -18% -11% 38% 1.4 -12% -18% -15% 3%MSCI AC Asia ex JP 0.7 0.7 1.1 0.5 20% 11.5 -9% -15% -11% 33% 1.4 -11% -16% -14% 7%MSCI World ex USA 1.3 0.7 1.4 1.0 8% 11.9 -10% -18% -10% 21% 1.3 -13% -22% -17% 6%MSCI EM Latin America 1.8 1.4 1.8 1.8 1% 9.3 -26% -31% -23% 13% 1.4 -25% -33% -29% 0%MSCI EM Eastern Europe 1.1 0.2 0.5 0.4 2% 5.8 -11% -22% -11% 23% 0.8 -13% -23% -21% 10%MSCI BRIC 0.2 0.4 0.7 0.5 39% 10.6 -9% -14% -8% 44% 1.6 -10% -15% -13% 37%MSCI USA 0.3 1.0 1.8 0.9 31% 15.3 -10% -18% -9% 48% 2.9 -13% -21% -15% 60%MSCI Europe 1.1 0.8 1.5 1.0 11% 11.9 -10% -19% -11% 27% 1.5 -13% -22% -17% 10%MSCI Japan 0.8 0.2 0.6 0.3 9% 11.9 -7% -18% -4% 6% 1.1 -8% -20% -14% 13%MSCI Germany 1.1 0.9 1.5 0.8 7% 10.8 -14% -23% -11% 18% 1.2 -16% -24% -21% 2%MSCI United Kingdom 1.7 0.5 1.3 1.2 4% 10.6 -9% -20% -15% 14% 1.4 -10% -22% -20% 2%MSCI China -0.1 0.2 0.3 0.1 58% 11.2 -3% -8% -4% 51% 1.7 -5% -9% -7% 34%MSCI USA Large Cap 0.1 0.9 1.7 0.8 40% 15.4 -9% -17% -8% 55% 3.0 -12% -20% -13% 76%MSCI USA Mid Cap 1.1 1.2 2.1 1.3 6% 14.9 -16% -24% -14% 14% 2.2 -19% -28% -25% 18%MSCI USA Small Cap 1.4 0.9 1.5 1.4 3% 16.0 -18% -28% -22% 11% 1.5 -22% -32% -33% 3%MSCI USA Value 1.3 1.1 2.0 1.4 6% 11.4 -12% -24% -16% 15% 1.7 -16% -27% -25% 27%MSCI USA Growth -1.1 0.7 1.2 0.0 84% 21.5 -9% -14% -1% 85% 6.6 -11% -17% 6% 96%MSCI India 1.2 1.0 1.5 1.6 5% 13.4 -21% -28% -28% 17% 2.1 -22% -27% -31% 1%MSCI Korea 0.7 0.4 0.8 (0.1) 13% 9.1 -11% -21% -8% 43% 0.8 -11% -18% -16% 0%MSCI Hong Kong 1.5 0.6 0.9 1.3 4% 13.1 -7% -12% -17% 5% 1.0 -14% -19% -25% 3%MSCI Taiwan 0.5 0.6 0.9 0.2 16% 13.2 -12% -19% -11% 47% 1.7 -14% -19% -6% 11%MSCI Singapore 1.8 0.8 1.2 1.0 3% 10.6 -12% -18% -14% 2% 0.9 -19% -25% -24% 0%MSCI Thailand 0.9 0.8 1.8 1.3 14% 12.6 -8% -19% -13% 64% 1.5 -14% -28% -27% 4%MSCI Malaysia 1.5 0.6 1.2 1.5 4% 14.2 -3% -11% -11% 33% 1.4 -9% -16% -17% 0%MSCI Philippines 1.6 1.0 1.7 2.0 3% 10.6 -22% -33% -36% 1% 1.4 -22% -32% -37% 5%MSCI Indonesia 1.4 0.7 1.4 1.6 8% 11.2 -19% -28% -24% 22% 1.8 -20% -31% -35% 0%MSCI China A Onshore Large Cap 0.2 0.2 0.3 0.1 40% 10.6 -6% -11% -8% 39% 1.8 -6% -9% -5% 37%MSCI Brazil 1.1 1.4 1.8 1.6 10% 8.9 -29% -33% -21% 27% 1.5 -28% -36% -28% 25%MSCI Russia 0.9 0.2 0.3 0.2 9% 5.3 -10% -20% -3% 29% 0.8 -11% -20% -14% 25%MSCI Mexico 2.1 0.7 0.9 0.9 0% 10.7 -18% -23% -18% 4% 1.6 -16% -20% -20% 0%

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MSCI USA VS MSCI AC World 1.1 0% 0% 1% 92% 1.5 0% -1% 0% 96%MSCI Europe VS MSCI AC World 0.9 0% -1% -2% 16% 0.8 -1% -2% -2% 0%MSCI Japan VS MSCI AC World 0.9 4% 1% 6% 13% 0.6 5% 1% 1% 7%MSCI EM (Emerging Markets) VS MSCI AC World 0.8 -1% 0% -2% 49% 0.7 0% 2% 0% 14%MSCI AC Asia ex JP VS MSCI AC World 0.9 2% 3% -2% 55% 0.7 1% 5% 1% 23%MSCI USA VS MSCI Europe 1.3 0% 0% 3% 93% 2.0 0% 1% 3% 99%MSCI AC Asia ex JP VS MSCI EM (Emerging 1.1 2% 3% 1% 41% 1.0 1% 3% 2% 78%MSCI China VS MSCI EM (Emerging Markets) 1.1 8% 12% 8% 58% 1.2 8% 12% 9% 79%MSCI USA Value VS MSCI USA Growth 0.5 -4% -11% -15% 0% 0.3 -5% -12% -29% 0%MSCI USA Large Cap VS MSCI USA Mid Cap 1.0 8% 8% 7% 98% 1.4 8% 11% 16% 100%MSCI USA VS MSCI World ex USA 1.3 0% 0% 2% 98% 2.2 0% 1% 3% 99%


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(b) Bond Valuations Based on our 10-yr rolling z-score models, • US Treasuries got super expensive after another month of significant decline in yields. • IG & HY spreads moved into the super cheap zone 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 3/31/2020

(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. JPY is no longer cheap, having appreciated notably since the start of the year. Expensive: The US$ entered the expensive club, sitting just above the most expensive (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 -27% -20% 1 2 1 Mexico -25% -21% 2 1 1 S Africa -24% -16% 3 2 3 Sweden -15% -10% 6 6 4 UK -10% -9% 8 7 5 Norway -20% -6% 4 11 5 Switzerland -10% -7% 7 9 7 Hungary -6% -11% 12 5 8 Brazil -26% -3% 1 17 9 Malaysia -7% -8% 11 8 10 Canada -8% -6% 10 13 11 Hong Kong 5% -13% 20 4 12 Japan -9% -1% 9 18 13 Korea -6% -5% 13 14 13 Poland -4% -6% 16 12 15 Chile -18% 9% 5 24 16 Philippines 12% -15% 26 3 16 India 8% -7% 22 10 18 Taiwan -2% -5% 18 16 19 Singapore 2% -5% 19 15 19 Euro Area -2% 4% 17 20 21 Russia -5% 8% 15 23 22 Indonesia -5% 15% 14 26 23 Australia 7% 6% 21 22 24 Czech R 12% 4% 25 19 25 China 18% 6% 27 21 26 US 10% 10% 24 25 27 Thailand 9% 17% 23 27 28

Source: Bloomberg/Factset/Principal Global Asset Allocation; Models use JP Morgan’s CPI and PPI based currency values; As of 3/31/2020

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

Current 0.67 3.23 2.55 1.88 9.44 8.80 8.13Max 3.65 4.27 2.55 1.88 9.51 8.80 8.13Min 0.67 2.33 0.82 -2.33 4.91 3.16 0.10Median 2.30 3.18 1.27 -1.06 6.39 4.59 2.22Mean 2.30 3.22 1.32 -0.98 6.63 4.81 2.51Std. Dev. 0.54 0.44 0.31 0.70 1.09 1.21 1.481m Change -0.48 0.90 1.38 1.86 3.21 3.80 4.283m Change -1.25 0.44 1.65 2.90 4.25 5.44 6.6912m Change -1.74 -0.32 1.42 3.16 3.01 4.89 6.63Current Z-Score -3.00 0.01 3.92 4.09 2.59 3.29 3.80

BarCap US Investment Grade Credit BarCap US Corporate High Yield


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I. EQUITIES HK SAR & China 31-Mar-20 Month 1Q'20 1yr 5 yrs 10 yrs 4Q'19 3Q'19 2Q'19 1Q'19 2019 Hang Seng HK$ 23,603 -10% -16% -19% -1% 1% 8% -9% -2% 12% 9% H-Shares HK$ 9,595 -7% -14% -16% -5% -3% 9% -6% -4% 12% 10% Shanghai Comp CNY 2,750 -5% -10% -11% -6% -1% 5% -2% -4% 24% 22% Shenzhen Comp CNY 1,666 -8% -3% -2% -3% 3% 8% 2% -8% 34% 36% MSCI China USD 543 -7% -10% -6% 4% 4% 15% -5% -4% 18% 23% Developed S&P500-US USD 2,585 -13% -20% -9% 5% 8% 9% 1% 4% 13% 29% Nasdaq-US USD 7,700 -10% -14% 0% 9% 12% 12% 0% 4% 16% 35% Russell 2000-US USD 1,153 -22% -31% -25% -2% 5% 10% -3% 2% 14% 24% DAX-Germany EUR 9,936 -16% -25% -14% -4% 5% 7% 0% 8% 9% 25% FTSE100-UK GBP 5,672 -14% -25% -22% -3% 0% 2% 0% 2% 8% 12% CAC 40-France EUR 4,396 -17% -26% -18% -3% 1% 5% 3% 4% 13% 26% ASX 200-Australia AUD 5,077 -21% -24% -18% -3% 0% 0% 1% 7% 9% 18% Nikkei 225-Japan JPY 18,917 -11% -20% -11% 0% 5% 9% 2% 0% 6% 18% Asia/Other EM India-Sensex INR 29,468 -23% -29% -24% 1% 5% 7% -2% 2% 7% 14% Thai-SET Index THB 1,126 -16% -29% -31% -6% 4% -4% -5% 6% 5% 1% Singapore-STI SGD 2,481 -18% -23% -23% -6% -2% 3% -6% 3% 5% 5% Korea-KOSPI KRW 1,755 -12% -20% -18% -3% 0% 7% -3% 0% 5% 8% Taiwan-TWSI TWD 9,708 -14% -19% -9% 0% 2% 11% 1% 1% 9% 23% Malaysia-KLCI MYR 1,351 -9% -15% -18% -6% 0% 0% -5% 2% -3% -6% Brazil-BOVESPA BRL 73,020 -30% -37% -23% 7% 0% 10% 4% 6% 9% 32% Russia-RTSI$ USD 1,014 -22% -35% -15% 3% -4% 16% -3% 15% 12% 45% MSCI: Net Total Return (US$) MSCI US USD 6,992 -13% -20% -8% 6% 10% 9% 1% 4% 14% 31% MSCI Japan USD 5,670 -7% -17% -7% 2% 4% 8% 3% 1% 7% 20% MSCI AsiaPac xJ USD 418 -14% -21% -15% 1% 3% 11% -4% 1% 11% 19% MSCI Europe USD 5,431 -14% -24% -16% -1% 2% 9% -2% 4% 11% 24% MSCI AC World USD 222 -14% -21% -11% 3% 6% 9% 0% 4% 12% 27% MSCI EM USD 403 -15% -24% -18% 0% 1% 12% -4% 1% 10% 18%

Source: Bloomberg/Factset/Principal Global Asset Allocation; Annualized for > 1yr time periods; As of 3/31/2020 The equity bull market that started in 2009 came to an abrupt end in March, driven by worries about global growth as COVID-19 took centerstage (details here). So ferocious was the drop that trading in several markets had to be halted a few times as benchmarks hit circuit breakers. Equity Volatility briefly surpassed even that during the global financial crisis (details here). All it took was a few trading sessions for global equities to lose 35-40% from 52-week highs. Drawdowns for the year hit 30-40% in $ terms. Thin liquidity compounded woes as price insensitive investors (systematic volatility targeters, risk-parity and momentum strategies (details here) were forced to cut risks aggressively. Cyclicals bore the brunt of the fall (energy stocks were crushed as oil prices tanked after OPEC+Russia’ s spectacular failure in stitching a deal on output cuts, which led to an open war to gain market share – details here). Equities recovered 12-25% from their lows towards the end of the month as monetary and fiscal authorities (details here) pressed the panic button to support growth and keep the system liquid. Chart E1: The steep fall, followed by a quick recovery, all in the space of a few weeks

Source: Bloomberg/Factset/Principal Global Asset Allocation’ As of 3/31/2020

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Not one market could defy the bear onslaught. The median local currency return for the month was -15.8%, the worst reading since the drop of -21.2% in Oct’2008. The best performing market was Shanghai Composite index (-4.5%) while the worst performer was Argentina (-30%). Brazil, India and Italy were not too far behind. $ returns for several markets were far worse given steep drops in their currency values. For instance, Brazil’s Bovespa dropped -30% and its currency weakened -16% make it one of the worst months ever for the largest economy of Latin America! 1Q’2020 was more than an outlier in terms of the pain it imposed on investors. The irony lay in the fact that we had started the year with visible signs of growth improvement globally. The unexpected blow from COVID-19 turned the tables upside down, to such an extent that we face one of the deepest drops in global economic growth in modern history. It is hard to forecast the depth or magnitude of this drop as its source is a completely new health issue and its prevention involves significant quarantining of populations. In other words, reduced activity is probably the only prevention on hand, unless we discover a vaccine or medication in quick time. Styles & Sectors • Value was crushed yet again as collapsing growth expectations took a heavy toll on growth proxies like financials and

energy. It remained the worst style over 1 and 3year time frames in every region. • Quality was the best style on average, finishing at the top in three markets. • Growth, Momentum and Minimum Volatility finished behind Quality, without any clear bias for either of them. • Large Caps outperformed Small Caps everywhere barring Japan where large cap global cyclicals fell more due to a

worsening growth environment. Thus far this year, large caps hold a healthy lead over small caps in all countries. Chart E2: Style Returns

Source: Bloomberg/Factset/Principal Global Asset Allocation’ As of 3/31/2020 • Among sectors, noticeable trends were-

o Defensives beat cyclicals handsomely o IT outperformed in almost every region barring China and extended its relative outperformance for 2020 o Consumer Discretionary had mixed performance, lagging in US, Europe and Japan but doing well in EMs o Financials underperformed globally o Energy was crushed in all regions barring Europe o US Reits were crushed with retail, diversified and office Reits coming under particular pressure, hurt by

growth and leverage issues. The complex delivered -22% vs S&P500 total return of -12.4%.

Returns ($) 31-Mar-20Style Return-1m Momentum Value Growth Quality Min Vol Best-Worst Style Return-6m Momentum Value Growth Quality Min Vol Best-WorstUS -11% -16% -10% -9% -12% 7% US -10% -21% -4% -6% -15% 16%EM -17% -18% -13% -14% -12% 6% EM -16% -21% -8% -16% -16% 13%AsiaxJ -12% -16% -12% -11% -11% 5% AsiaxJ -8% -19% -6% -10% -15% 13%Europe -9% -19% -10% -9% -10% 10% Europe -8% -25% -11% -9% -12% 17%Japan -2% -11% -3% -2% -4% 10% Japan -4% -15% -6% -1% -11% 14%

Style Return-3m Momentum Value Growth Quality Min Vol Best-Worst Style Return-12m Momentum Value Growth Quality Min Vol Best-WorstUS -15% -26% -14% -15% -17% 12% US -4% -17% 2% 1% -7% 19%EM -24% -28% -19% -22% -20% 9% EM -14% -25% -10% -15% -18% 15%AsiaxJ -15% -25% -17% -17% -19% 10% AsiaxJ -10% -23% -7% -11% -17% 16%Europe -15% -31% -18% -18% -17% 16% Europe -4% -25% -6% -4% -8% 21%Japan -10% -21% -13% -10% -14% 11% Japan 2% -15% -1% 6% -7% 20%

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

14 25 14 8 14 11 25 9 10 20

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

10 25 11 13 16 10 25 9 11 20


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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 an expectation of 10% at the start of the year, we are

already down to -1% for MSCI AC World in $ terms. COVID-19 is sure to cause it to be chopped further as analysts take cue from 1Q’2020 results. Cyclicals will bear the brunt of the cuts.

• 2020 Earnings Per Share (EPS) estimates dropped in March, reflecting both local currency downgrades and translation effects ($ strength). The 3-month earnings revisions breadth (bottom-up, local currency) also dropped. The number of downgrades comfortably exceeded upgrades.

Chart E4: Projected Revenue and Earnings Growth

March-20 Sales Growth Earnings Growth Margin Growth Dividend Yield CCY 2019 2020 2019 2020 2019 2020 2019 2020 MSCI AC World USD 1% -1% -3% -1% -4% -1% 3% 3% MSCI World Index USD 2% -1% -2% -2% -4% -2% 3% 3% MSCI World ex USA USD 1% -3% -4% -6% -5% -3% 4% 4% MSCI EM (Emerging Markets) USD -7% 0% -14% 4% -7% 4% 3% 3% MSCI AC Asia Pacific ex JP USD -4% 2% -11% 4% -8% 2% 3% 3% S&P 500 USD 5% 2% 1% 0% -4% -2% 2% 2% MSCI Europe EUR 2% -5% 1% -8% 0% -3% 4% 5% MSCI Japan JPY 2% 1% -14% 4% -15% 3% 3% 3% MSCI Germany EUR 2% 0% -7% -5% -9% -5% 3% 4% MSCI China CNY 3% 6% 5% 3% 2% -3% 2% 2% MSCI United Kingdom GBP -1% -10% -4% -11% -3% -1% 5% 6% MSCI India INR 1% 5% 3% 16% 2% 10% 2% 2% MSCI Korea KRW -1% 3% -44% 39% -43% 35% 2% 3% MSCI Taiwan TWD -2% 2% -7% 8% -5% 6% 4% 5% MSCI Brazil BRL 7% 0% -10% 12% -16% 12% 4% 4% MSCI USA Large Cap USD 4% 2% 0% 1% -4% -1% 2% 2% MSCI USA Mid Cap USD -4% 0% -2% -1% 2% -2% 2% 2% MSCI USA Small Cap USD 7% 0% -2% -5% -9% -5% 2% 3% S&P 500 Value USD 6% 0% 1% -5% -4% -5% 3% 4% S&P 500 Growth USD 3% 6% 1% 6% -2% 0% 1% 2% MSCI Hong Kong HKD 13% -6% 1% -5% -10% 1% 3% 4% MSCI Singapore SGD -3% 1% -1% -8% 2% -9% 5% 6% MSCI Malaysia MYR 1% 1% -11% 0% -12% -1% 4% 4% MSCI Thailand THB -10% -4% -19% -7% -10% -3% 3% 4% MSCI Indonesia IDR 2% 6% -4% 7% -6% 1% 3% 4% MSCI Philippines PHP 6% 8% 10% 4% 4% -4% 2% 3% MSCI Mexico MXN 4% 6% 1% 16% -3% 9% 4% 4% MSCI Russia USD -3% -24% -4% -33% -1% -12% 8% 9% MSCI Australia AUD 0% 0% -2% -5% -2% -6% 5% 5% MSCI New Zealand NZD 1% -3% 23% 3% 22% 7% 2% 3%

Source: Bloomberg/Factset/Principal Global Asset Allocation; Estimates are sell-side analysts’ bottom-up aggregated expectations; As of 3/31/2020

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%

YTD 2-20 Returns US Europe Japan AC World EMsAsia-x-Japan China

Broad Market -8% -10% -11% -9% -10% -7% -4%IT -4% -5% -11% -5% -6% -6% 8%Cons Disc -6% -13% -12% -8% -7% -6% -2%Energy -25% -22% -15% -22% -20% -18% -17%Materials -14% -14% -13% -15% -15% -10% -4%Financials -14% -12% -11% -12% -12% -9% -9%Industrials -9% -10% -13% -10% -12% -10% -5%RelativeValue vs Growth -8% -6% 0% -7% -6% -6% -10%Large vs Small Cap 3% -1% 5% 3% 2% 2% -1%IT vs Market 4% 4% 0% 5% 4% 2% 12%Cons Disc vs Market 2% -3% -1% 1% 3% 1% 2%Energy vs Market -16% -12% -3% -13% -10% -10% -13%Materials vs Market -6% -5% -1% -6% -5% -3% 0%Financials vs Market -6% -2% 0% -3% -3% -2% -5%Industrials vs Market -1% 0% -2% -1% -2% -3% -2%


16

Chart E5: Sectoral Earnings Growth Heatmap for 2020: Cyclicals dominate

Source: Bloomberg/Factset/Principal Global Asset Allocation; Chart E6: Earnings Per Share Trend Chart E7: Earnings Revision Ratio (up/up+down)

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 3/31/2020, Earnings Revision ratio = Upgrades/(Upgrades+Downgrades), 0.5= neutral

Bang+ Index Our Bang+ Index outperformed markets yet again, dropping just -7.2% vs. significantly larger broad market drops as technology stocks weathered the global storm much better. Bang+ US dropped -6.4% and Bang+ Asia -9.1%. Two of the thirteen stocks even managed gains. Returns ranged from -22% to 4%, driven by idiosyncratic factors. Bang+US retained its substantial lead over Bang+Asia, with its gain of 23% annualized over five years.

2020 EPS Growth as of 3'20 Currency Overall Financials Cons Disc Real Estate

Materials Industrials Energy IT Comm Services

Staples Health Care

Utilities

MSCI AC World USD -1% -1% -4% 1% 6% -2% -59% 11% 6% 3% 6% 2%MSCI World Index USD -2% -2% -6% -1% -2% -3% -66% 8% 6% 3% 6% 0%MSCI World ex USA USD -6% -7% -9% -7% 0% -4% -55% 17% 2% 2% 6% -2%MSCI EAFE USD -5% -7% -9% -7% 0% -4% -53% 17% 3% 1% 6% -2%MSCI EM (Emerging Markets) USD 4% 0% 12% 8% 41% 6% -40% 30% 5% 6% 5% 11%MSCI AC Asia Pacific ex JP USD 4% -1% 6% 3% 1% 2% -26% 30% 5% 11% 4% 22%MSCI USA USD 1% 3% -4% 3% -4% -2% -79% 7% 7% 4% 7% 2%MSCI Europe USD -8% -9% -15% -2% 0% -7% -57% 12% 4% -1% 5% 1%MSCI Japan JPY 4% 5% 1% -13% 12% 0% -6% 25% 2% 14% 16% -20%MSCI Germany EUR -5% 5% -24% 5% -13% -12% 8% 6% -12% 10% 0%MSCI United Kingdom GBP -11% -10% -3% -6% 2% 1% -61% -2% 7% 1% 3% 4%MSCI Australia AUD -5% -6% -9% -1% -3% -6% -37% -7% -3% 6% 12% -4%MSCI China CNY 3% 3% 13% 12% 4% 4% -46% 27% 3% 28% 2% 10%MSCI India INR 16% 31% 11% 7% 12% 9% 9% 178% 15% 15% 9%MSCI Korea KRW 39% -3% 34% 88% 45% 118% 57% 98% 11% 65% -154%MSCI Taiwan TWD 8% -1% -3% -13% -7% -47% -2% 18% -8% 3% -158%MSCI Brazil BRL 12% 5% -10% -26% -507% 60% -82% -24% 3% 13% 19% 2%MSCI Russia USD -33% -15% -14% -46% -10% -2% 6%

Mar-20 Feb-20 Dec-19 Sep-19 Mar-19AC World USD 93 98 100 101 106 World USD 94 98 100 101 106 World x US USD 91 96 100 101 107 EM USD 89 95 100 100 112 Asia-Pac x J USD 92 96 100 100 109 S&P 500 USD 96 99 100 102 104 Europe EUR 93 99 100 102 107 Japan JPY 96 97 100 103 112 Germany EUR 91 97 100 103 113 China CNY 96 99 100 102 106 UK GBP 91 98 100 107 109 India INR 97 99 100 104 114 Korea KRW 90 93 100 103 122 Taiwan TWD 96 100 100 96 101 Brazil BRL 84 92 100 108 114 US Large USD 96 100 100 102 105 US Mid USD 96 99 100 104 110 US Small USD 92 99 100 100 109 US Value USD 94 99 100 100 103 US Growth USD 98 101 100 104 106 Asia x J USD 92 96 100 100 110 HK HKD 90 95 100 103 106 Singapore SGD 94 98 100 105 106 Malaysia MYR 93 95 100 103 110 Thailand THB 87 93 100 108 121 Indonesia IDR 95 96 100 101 109 Philippines PHP 97 99 100 102 102 Mexico MXN 97 97 100 106 116 Russia USD 80 95 100 100 99 Australia AUD 97 101 100 105 107 New Zealand NZD 98 100 100 100 104

Mar-20 Feb-20 Dec-19 Sep-19 Jun-190.38 0.42 0.43 0.40 0.43 0.40 0.44 0.42 0.40 0.44 0.35 0.39 0.41 0.38 0.41 0.35 0.41 0.43 0.40 0.41 0.35 0.40 0.43 0.40 0.41 0.49 0.53 0.46 0.44 0.49 0.37 0.39 0.39 0.40 0.43 0.33 0.39 0.44 0.36 0.34 0.34 0.36 0.41 0.36 0.30 0.38 0.43 0.45 0.43 0.45 0.35 0.37 0.30 0.41 0.43 0.31 0.35 0.38 0.36 0.38 0.27 0.34 0.37 0.37 0.34 0.39 0.48 0.56 0.47 0.42 0.37 0.44 0.49 0.46 0.40 0.51 0.56 0.48 0.45 0.49 0.45 0.49 0.43 0.42 0.48 0.45 0.48 0.44 0.40 0.45 0.46 0.50 0.43 0.42 0.47 0.52 0.57 0.49 0.49 0.52 0.35 0.41 0.43 0.40 0.41 0.25 0.31 0.31 0.29 0.46 0.39 0.42 0.28 0.44 0.47 0.37 0.41 0.40 0.30 0.29 0.28 0.34 0.34 0.33 0.26 0.29 0.34 0.41 0.38 0.42 0.45 0.53 0.51 0.51 0.54 0.32 0.34 0.33 0.32 0.40 0.51 0.43 0.31 0.46 0.45 0.28 0.33 0.40 0.39 0.41 0.45 0.53 0.49 0.42 0.45

US SmallUS ValueUS Growth

IndiaKoreaTaiwanBrazilUS LargeUS Mid

UK

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

Asia x JHKSingaporeMalaysiaThailand

New Zealand

IndonesiaPhilippinesMexicoRussiaAustralia


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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 3/31/2020 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.

0500

1,0001,5002,0002,5003,0003,5004,000

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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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II. FIXED INCOME Key Policy Rates (%) 31-Mar-20 Month 1Q'20 1yr 5 yrs 10 yrs 4Q'19 3Q'19 2Q'19 1Q'19 2019 US-Fed Funds USD 0.25 (1.50) (1.50) (2.25) - - -0.25 -0.50 0.00 0.00 -0.75 UK Bank Rate GBP 0.10 (0.65) (0.65) (0.65) (0.40) (0.40) 0.00 0.00 0.00 0.00 0.00 ECB Ref Rate EUR 0.00 - - - (0.05) (1.00) 0.00 0.00 0.00 0.00 0.00 Australia Cash Rate AUD 0.25 (0.50) (0.50) (1.25) (2.00) (3.75) -0.25 -0.25 -0.25 0.00 -0.75 China 7-day Rev Repo CNY 2.20 (0.20) (0.30) (0.35) (1.35) - -0.05 0.00 0.00 0.00 -0.05 Sovereigns (%) USA-10y USD 0.67 -0.48 -1.25 -1.74 -1.25 -3.16 0.25 -0.34 -0.40 -0.28 -0.8 UK-10y GBP 0.36 -0.09 -0.47 -0.64 -1.22 -3.58 0.33 -0.35 -0.17 -0.28 -0.5 GER-10y EUR -0.47 0.14 -0.29 -0.40 -0.65 -3.56 0.39 -0.24 -0.26 -0.31 -0.4 Australia-10Y AUD 0.76 -0.06 -0.61 -1.01 -1.56 -5.02 0.35 -0.30 -0.45 -0.54 -0.9 Japan-10y JPY 0.02 0.18 0.03 0.10 -0.38 -1.38 0.20 -0.06 -0.08 -0.08 0.0 HK SAR -10 HKD 0.61 -0.32 -1.09 -0.81 -1.00 - 0.49 -0.25 0.04 -0.54 -0.3 China-10y CNY 2.59 -0.15 -0.56 -0.48 -1.04 -0.88 0.00 -0.09 0.17 -0.24 -0.2 Singapore-10y SGD 1.29 -0.10 -0.45 -0.78 -0.99 -1.54 0.00 -0.26 -0.07 0.03 -0.3 Korea-10y KRW 1.55 0.23 -0.12 -0.28 -0.61 -3.40 0.21 -0.14 -0.24 -0.13 -0.3 Credits (bps) 3m $ LIBOR-OIS USD 138 115 103 117 124 129 2 14 -2 -20 -6 NA CDX 5y IG CDS USD 112 46 67 48 49 24 -15 6 -10 -24 -43 Europe 5y IG CDS EUR 97 32 52 32 40 18 -11 3 -13 -23 -44 Asia 5y IG CDS USD 141 70 87 69 30 44 -23 11 -6 -25 -43 JPM EMBI Index USD 591 237 313 218 181 329 -60 -28 -7 -62 -157

Source: Bloomberg/Factset/Principal Global Asset Allocation; Annualized > 1yr; As of 3/31/2020 Policy rates: Details of key central bank actions during the month can be found here. PGAA’s global policy rate indicator dropped -62bps to just 1.14%, its lowest ever. With DM policy rate already at -0.01% and EM policy rate at 3.06% (both below their GFC lows), a lot of incremental easing is likely to take the shape of balance sheet expansion, particularly in the DM world where the appetite for negative rates has waned. Chart F1: Massive monetary easing

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 3/31/2020 Implied Fed Funds Forwards Rates crashed as the Fed chopped its policy rate towards the zero band from 1.5-1.75%. Markets now 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: Despite significant rate cuts, PGAA’s Global Sovereign 10-yr yield indicator eased a modest -5bps to 1.95% as markets baked in significant fiscal and monetary expansion being undertaken to restore collapsing growth. Negative yielding debt dropped to $10.6 trn from $14.6 trn as German bund yields moved up on increasing signs of a large fiscal stimulus and issuance of jointly-guaranteed Corona bonds (fiscal unionization of Euro Area?). 10-yr JGBs also moved into positive territory. Overall, 18 out of the 29 markets ended with higher yields. PGAA’s DM yield composite dropped -18bps to 0.44%, almost entirely due to sharply lower UST yields (-48bps). EM yields increased 14bps to 4.20% as a majority (12 out of 18) saw higher yields due to currency pressures. Latin American yields jumped 83bps and EMEA 64bps. Asian yields ended -5bps lower at 3.15%. Hong Kong (-70bps, HKMA eased inter-bank liquidity considerably by freeing counter-cyclical buffers maintained by banks) was the runaway leader among decliners

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GDP-Weighted Policy Rates Global DM EM

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Net Central Banks Cutting Rates in the Last 12 Months


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while Indonesia (96bps) led among those that saw higher yields. Since the start of the year, while HK yields came in -109bps, Indonesian yields jumped 85bps as carry trades got punished. In Europe, German yields increased on expectation of a large fiscal stimulus and ECB’s decision to be flexible in execution of its asset purchase program (they will front load purchases of Italian and Greek bonds to dampen peripheral spreads; at one point Italian 10s had widened to 280bps over Bunds before closing the month at 200bps). The UST-Bund spread crashed -62bps to just 114bps, its lowest in six years. EM-US carry widened 62bps to 353bps, within striking distance of its all-time high of 382bps. Real Sovereign 10-yr real yields, derived from nominal 10-yr yields and CPI swaps were unchanged in US (-47bps) as nominals declined at the same pace as inflation swaps. However, they rose in Germany and Japan. They remained negative in most countries. UK (-296bps) was the lowest and Japan (20bps) the highest. Based on CPI releases too, real yields declined. Our Global Real Yield indicator finished at -76bps vs -56bps the month prior, with DMs at -106bps and EMs at -31bps. The EM real yield carry over real USTs widened to 58bps from 76bps. UST real carry over German bunds shrank -58bps to 104bps, having compressed -143bps in the last 12 months. Yield Curves (2-10s) steepened further. Our global indicator ended 25bp wider at 65bps. US 2-10 spread widened to 42bps. All curves were positive. Italy (118bps) continued to offer the best term carry in DMs and Brazil (308bps) in EMs. Chart F2a: Nominal yields Chart F2b: Real Yields

Source: Bloomberg/Factset/Principal Global Asset Allocation; Yields are current GDP weighted; As of 3/31/2020 Credit spreads widened massively despite narrowing from intra-month wides. Carry trades through credit saw a major reversal as investors hoarded the safety of money market funds in an environment of heightened growth anxiety. Forced sales amidst thin liquidity put incessant pressure on spreads. High Yield, particularly Energy (spread 2013bps, average price to par 53%) blew out. IG spreads ended 115-171bps wide of their medians since 2009 and HY spreads 349-844bps! Asian HY spreads underperformed significantly, widening to 452bps over US HY vs. a median of 38bps. At current levels, spreads are at their widest since GFC, having pierced the levels reached during both the Euro-area crisis of 2011 and the deflationary bust of 2015-16. 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 3/31/2020

10-yr Nominal Yields Mar-20 1M Chg 3M Chg 12M ChgGlobal 1.95 (0.05) (0.50) (0.93) DM 0.44 (0.18) (0.74) (1.07) EM 4.20 0.14 (0.14) (0.72) G7 0.45 (0.20) (0.77) (1.11) DM ex US 0.22 0.11 (0.25) (0.44) US 0.67 (0.48) (1.25) (1.74) Japan 0.02 0.18 0.03 0.10 Germany (0.47) 0.14 (0.29) (0.40) EM-US 3.53 0.62 1.10 1.02 US - DM ex US 0.45 (0.59) (1.00) (1.30) US - Japan 0.65 (0.65) (1.28) (1.84) US - Germany 1.14 (0.62) (0.96) (1.33)

10-yr Real Yields (deflated by CPI) Mar-20 1M Chg 3M Chg 12M ChgGlobal (0.76) (0.20) (1.15) (1.73) DM (1.06) (0.28) (1.10) (1.18) EM (0.31) (0.07) (1.23) (2.55) G7 (1.07) (0.32) (1.15) (1.26) DM ex US (1.05) 0.06 (0.54) (0.42) US (1.06) (0.65) (1.68) (1.97) Japan (0.61) 0.21 (0.30) (0.30) Germany (2.10) (0.06) (0.79) (0.53) EM-US 0.76 0.58 0.45 (0.58) US - DM ex US (0.01) (0.71) (1.15) (1.55) US - Japan (0.45) (0.85) (1.38) (1.67) US - Germany 1.04 (0.58) (0.90) (1.43)

Option Adjusted Spread (bps)

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EUR IG Corp Asia IG $ EM IG $

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Asia - US IG

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US - EU HY US Global Asia EM EU

Mar-20 316 242 282 372 896 780 1,386 1,168 (34) 490 56 272 74 116 580 644 1,104 796 538 YTD Chg 215 148 158 222 536 472 826 674 (57) 290 7 138 67 64 321 371 668 452 324 1m Chg 185 127 135 186 395 371 754 588 (50) 359 1 193 58 24 210 274 619 402 244 3m Chg 215 148 158 222 536 472 826 674 (57) 290 7 138 67 64 321 371 668 452 324 6m Chg 194 130 145 205 494 414 766 603 (49) 272 11 109 64 80 300 340 621 398 284 12m Chg 189 117 145 201 491 388 886 685 (44) 395 12 194 72 103 302 351 741 484 271 24m Chg 199 145 148 217 524 465 987 812 (51) 463 18 288 54 59 325 395 839 595 320 36m Chg 192 122 149 209 504 423 998 713 (43) 494 17 209 70 81 312 365 849 504 301 High 316 337 298 372 896 974 1,386 1,168 67 490 135 454 74 206 580 644 1,104 796 650 Low 91 75 111 127 328 233 321 320 (34) (323) 34 (16) (71) (237) 215 228 151 193 144 Median 146 128 166 211 480 431 543 635 20 38 58 125 10 40 332 363 366 421 304 Current-Median 171 115 116 161 416 349 844 533 (54) 452 (2) 147 64 77 249 282 738 376 234 Current-Low 225 167 171 245 568 547 1,065 848 - 813 22 288 145 353 365 416 953 603 394

Relative Spreads High Yield - IG Spreads


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Bond Returns: Long duration US treasuries ruled while spread products endured a disastrous month. Default risk shot up on plummeting growth. The lower the credit quality, the more challenging was the performance. Currency effects ($ strength) added to the woes for cross-currency investors running unhedged carry trades. 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 3/31/2020 Rating Actions: On the sovereign side, • Fitch reaffirmed USA at AAA, Stable. • S&P downgraded Mexico's foreign currency debt to BBB, Negative from BBB+. A weak currency, collapsing US growth

due to measures taken to contain the spread of COVID-19 and plummeting oil prices present significant policy challenges for Mexico.

• Fitch downgraded Colombia to BBB-, Negative on lower oil prices. On the corporate side, 1Q’2020 saw fewer rating changes than the historical norm. Downgrades far outstripped upgrades as COVID-19 concerns forced rating agencies to wield their chopping knives during this period. The global credit rating ratio crashed to 0.23 from to 0.57, touching the lows of GFC 2008-09. We expect significantly more rating downgrades in coming weeks but wider spreads (Chart F3) have broadly priced that in. Chart F5: Corporate Ratings

Source: Bloomberg/Factset/Principal Global Asset Allocation; represents rating and outlook change by Moody’s, S&P & Fitch; Global=US + W Europe + Asia-x-Japan, Upgrade/Downgrade ratio = Rating & Outlook Upgrades/ Downgrades; IG=Investment Grade, HY=High Yield; As of 3/31/2020

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Returns in US$ Mar-20

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III. CURRENCIES CURRENCIES 31-Mar-20 Month 1Q'20 1yr 5 yrs 10 yrs 4Q'19 3Q'19 2Q'19 1Q'19 2019 DXY Index 99.05 1% 3% 2% 0% 2% -3% 3% -1% 1% 0% BB Asia $ Index 101.33 2% 4% 5% 2% 1% -2% 2% 1% -1% 0% BB LatAm $ Index 42.11 14% 22% 28% 12% 10% -2% 8% -1% 1% 6% USD/EURO 1.10 0% 2% 2% -1% 2% -3% 4% -1% 2% 2% USD/GBP 1.24 3% 7% 5% 4% 2% -7% 3% 3% -2% -4% USD/AUD 0.61 6% 15% 16% 4% 4% -4% 4% 1% -1% 0% Yen/USD 107.54 0% -1% -3% -2% 1% 0% 0% -3% 1% -1% HKD/USD 7.75 -1% -1% -1% 0% 0% -1% 0% -1% 0% -1% CNY/USD 7.08 1% 2% 6% 3% 0% -3% 4% 2% -2% 1%

Source: Bloomberg/Factset/Principal Global Asset Allocation. +ve numbers indicates USD appreciation; Annualized > 1yr; As of 3/31/2020 The US$ strengthened against 24 out of the 30 currencies we track it against in typical moves associated with risk-off environments. LatAm and EMEA currencies bore the brunt. The greenback gained 14% against the LatAM block to top the 7% gain it made in Jan-Feb’2020. LatAm currencies tend to be volatile but even by their own standards, the drop represented 4-sigma move (historical realized monthly volatility for the block against US$ is 3.2% since 1996!). Three of the four worst sufferers globally were from LatAM with the greenback soaring 21% against Mexican Peso, 16% against Brazilian Real and 15% against the Colombian Peso. In EMEA, it jumped 18% against the Russian Ruble and 14% against the South African Rad. Moves in Asia were more circumspect though. It gained 14% against the Indonesian Rupiah (1.5 sigma move) and 4.8% against the Indian Rupee (India implemented a country-wide lockdown for 21 days to fight the virus). In the DM world, crashing commodity prices and weak growth caused the $ to jump 11% against the Norwegian Krone, 6% against the Aussie $ and 5% against the Kiwi. The currencies that defied the $ dominance were JPY, Euro, Swiss Franc, Philippine Peso and Taiwanese $. $ gains were equally impressive for 1Q’2020. It rose against 27 currencies (JPY, Swiss Franc and HK$ were the exceptions). The Bloomberg EM-8 carry index dropped -8.9, making it a disastrous month for EM FX carry strategies. Returns for the year at -13.1% are in the worst percentile of quarterly returns since 2005. On real effective exchange rates, our valuation matrix can be accessed here. The US$ finally joined the expensive club. Implied Currency Volatility: DM and EM volatilities were up about 50% each, pushing them above long-term averages. Basis Swaps: Our global basis indicator eased for currencies like EUR, JPY but widened considerably for Korean Won as hedging demand surged given the recent weakness in KRW/USD. $ Carry: $ carry vs German and other DM currencies decreased father in Mar’2020 as it did all of 2019. The 2-yr USD-EUR swap differential finished at just 81bps (cycle high of 312bps) as the Fed chopped its policy rate aggressively. Lower carry and expensive valuations should punctuate the $ march going forward. Chart CU1: Shrinking carry for US$ Chart CU2: Expensive $, cheap Euro

Source: Bloomberg/Factset/Principal Global Asset Allocation;

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IV. COMMODITIES Commodities 31-Mar-20 Month 1Q'20 1yr 5 yrs 10 yrs 4Q'19 3Q'19 2Q'19 1Q'19 2019 GS Commodity Index USD 255.5 -29% -41% -41% -8% -7% 8% -5% -2% 16% 17% Nymex Crude USD/bl 20.5 -54% -66% -66% -16% -13% 13% -8% -3% 32% 34% Brent Crude USD/bl 22.7 -55% -66% -67% -16% -12% 9% -9% -3% 27% 23% Gold USD/toz 1,583.4 1% 4% 22% 6% 4% 4% 4% 9% 1% 19% Silver USD/toz 14.2 -14% -21% -6% -3% -2% 5% 11% 1% -3% 15% Copper USD/T 4,946.5 -12% -20% -24% -4% -4% 8% -5% -8% 9% 3% Aluminum USD/T 1,514.3 -11% -16% -20% -3% -4% 5% -4% -6% 4% -2% Corn USc/bu 340.8 -7% -12% -4% -2% 0% 0% -8% 18% -5% 3% Soybean USc/bu 886.0 0% -6% 0% -2% -1% 4% 1% 2% 0% 7% Wheat USc/bu 568.8 8% 2% 24% 2% 2% 13% -6% 15% -9% 11% Sugar USc/lb 10.4 -28% -22% -17% -3% -5% 13% -3% -2% 4% 12%

Source: Bloomberg/Factset/Principal Global Asset Allocation; Annualized > 1yr; As of 3/31/2020 The GS commodity index tanked -31%, its worst single month drop ever (the worst during the global financial crisis was a drop of -28% in Oct’2008) which took YTD’20 drop to -41%. All segments were in the red barring precious metals. Energy: The GS energy index almost halved, crashing -47% as growth worries and the failed OPEC deal hit sentiment hard (details here). The pivot from ‘price-defense” to “market-share defense” was ill-timed, coming as it did at a time when growth was under serious question due to COVID-19 related disruptions. Oil demand is sure to take a serious knock, saddling the market with a surplus of 5-7mbpd in 2Q’20 unless supply responds, or a new demand source comes up. On the supply side, US shale output could be vulnerable despite significant productivity gains over the years which has reduced their cost of production. US oil & rig counts were already down -28%yoy in March. It is also possible that OPEC-plus gets its act in order to return to the earlier arrangement. On the demand side, countries like China and US could boost their strategic reserves. In fact, countries with significant imported oil dependence (India being one of them) should use the current prices to lock themselves into long-term purchase contracts or build strategic reserves if they have storage capacity. Talking of which, certain lower grade crude varieties even traded at negative prices due to a shortage of physical storage facilities. Precious metals had a mixed picture. Gold defied the fall, attracting investment demand. Silver and platinum dropped 14-16% as their industrial demand outlook worsened. Even for gold, while recessionary environments tend to support prices, almost half their demand is linked to economic growth (industrial and jewelry) which will be threatened if growth drops too much. Industrial metals: The sector dropped -10% on growth worries, led by copper (-12%) and aluminum (-11%). Agricultural commodity prices dropped -4% (GS Agriculture index) along with other commodities. Chart CO1: Gold’s dominance over Crude Oil Chart CO2: Will US Shale Oil output start declining?

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 3/31/2020;

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V. LOOKING AHEAD

1. Growth COVID-19 has made a recession our base case. Our economists expect the US economy to contract -2% annualized in 2020, with growth contracting in each of the first three quarters before recovering in the fourth. The maximum pain will be felt in 2Q’2020 with a contraction of -10.5% (annualized, QoQ). Peak to trough GDP decline is expected at 3.8% vs. a decline of 4% during the financial crisis. Just that this time, it will happen in three quarters vs. six back then. Their downside case sees a more prolonged COVID-19 impact, with a peak-to-trough GDP contraction of -5.2% lasting five quarters and a -2.7% hit to growth in 2020 including a contraction of -12% (annualized, QoQ) in 2Q’2020. Their upside case (a very small probability) sees COVID-19 turning into a seasonal flu with resumption of economic activity in the middle of 2Q’2020, causing 2020 GDP to contract just -0.8%. They expect the pain to be felt globally. Europe will most likely be in a deep recession this year (Germany expects a contraction of -5% in 2020) but Japan and China will start recovering in 2Q’2020. Emerging markets like India, Brazil etc. will see output hits linked to their own COVID-19 cycles. By all account, it appears that the world economy is headed for its first recession since GFC.

2. Inflation One-off effects pushed inflation higher recently, both within DMs and particularly in EMs. However, the steep drop in global commodity prices and sharply lower growth imply much lower readings in coming months, as is being 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. On the other hand, fears of a deep recession have considerably tightened the spread, equity and volatility components of our financial condition indices. As the announced monetary and fiscal measures work their way through, we expect a positive impact on spread (tighter), equity (higher) and volatility (lower) which will start easing financial conditions. While that is our base case, uncertainty will remain high as long as visibility on containing the virus in USA is low.

4. Valuations • Equity valuations are in cheap territory despite earnings cuts in recent weeks (0ur equity valuation composites are can

be accessed here). We also looked at valuations from a slightly different perspective i.e. equity yields relative to risk-free rates and found markets to be fairly cheap even on this measure. Of course, we understand that 10yr yields are suppressed at this time but even if we peg them at more normalized levels, equities look cheap.

Chart LA1: Risk Premiums (Earnings Yield -10% local bond yield)

Mar-2020 % Time Higher than Current US 5.0 6% UK 5.6 8% Germany 6.7 6% Japan 7.4 4% India (0.6) 14% China 5.3 33% Hong Kong 7.4 24% Singapore 9.0 3% Korea 5.5 41% Taiwan 6.1 14% Brazil (0.3) 6% Mexico 2.5 1% Russia 17.4 0%

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 3/31/2020;


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• Corporate spreads widened dramatically in Mar’2020 and entered the deep value zone (details here). While we expect ratings downgrades and defaults to rise, Central bank intervention (both ECB and Fed will buy significant chunks of investment grade bonds) will start creating the much need base.

• On the FX side of things, the $ finally entered the “expensive three’ club, based on purchasing power parity. Valuations, combined with shrinking interest rate differentials will make it steeper climb higher for the greenback. However, we realize that COVID-19 uncertainty could keep the $ well bid for some more time. A weaker dollar will be a big positive for risk assets in emerging economies.

5. Market Sentiments Systematic and risk-parity investors have reduced risk positions considerably as detailed here. Momentum strategies are now short risk assets. Hedge fund beta to equities has reduced a fair bit. We expect rebalancing flows from global multi-asset strategies to be meaningful for risk assets (Chart LA2). Assuming $4 trillion of such AUM, flows into equities (represented by MSCI AC World in the chart) could be about $170bn. Almost a similar amount of money could flow out of sovereigns (represented by FTSE WGBI in the chart). On the other hand, some large sovereign wealth funds representing countries dependent primarily on oil revenues are likely to sell financial assets to fund domestic budgets. Chart LA2: Likely rebalancing flows at the end of 1Q’2020

Source: Bloomberg/Factset/Principal Global Asset Allocation; As of 3/31/2020; Estimates are based on our internal models. 6. What could cause risk assets to rally?

Substantial progress has been made on many in our checklist of pre-conditions needed to be met before risk appetite returns sustainably. However, we don’t rule out more episodes of heightened volatility, driven by bad news on the virus and the economic growth.

a. Positive progress on the virus – this has to be a necessary condition for risk appetite to return meaningfully. There are nascent signs that the cycle in Italy is peaking, much like what happened in China and Korea. How fast the cycle plays out in USA will hold the key. It will help immensely if a medicine or vaccine was found fast.

b. Recognition of extreme de-growth – The base case of the market needed to shift to a recession, which is beginning to happen now. Bottom-up analysts haven’t capitulated yet, but we expect them to do so as companies release 1Q’2020 numbers. We also expect companies to chop buybacks and cut dividends.

c. Monetary policy – Central banks have delivered sufficiently in our view. The leading central banks (Fed, ECB, BOE & BOJ) could end up buying $6 trillion of assets in this round of easing, which will be significant.

d. Fiscal policy – Several measures were announced in the last 2 weeks and more are likely to come. We think the magnitude is acceptable, execution will hold the key.

e. Valuations - They have cheapened no doubt, bordering on the extremes for credit spreads. Equities are cheap but can get cheaper. Commodities (oil) are cheap too. Anti-fragile assets like US$ and treasuries are expensive.

f. Positioning – It has lightened considerably and if central banks take out corporate risk from the system by buying corporate bonds, it will create fresh risk appetite in the system.

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7. Key risks At this stage, the key risks we envision are- • COVID-19 takes much longer to contain despite quarantines. • Bankruptcies pick up dramatically despite the promise of aid by governments. • Global Governments remain divided. While central banks are working together, the world needs more co-ordination

among heads of Governments. • The US election cycle starts creating volatility, especially if markets start pricing a control of all 3 branches by one

party (that hasn’t been a great period for markets going by history). • From a longer term perspective, socialization of economic activity through Govt aid will have strings attached. It

could come with stricter laws on buybacks, distributions, leverage etc. Binay Chandgothia Managing Director – Portfolio Manager, Principal Global Investors (Hong Kong) Ltd. 02 April 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 April 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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Principal Global Asset Allocation (PGAA) Monthly …...Fixed Income: PGAA’s global policy rate...

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Transcript of Principal Global Asset Allocation (PGAA) Monthly …...Fixed Income: PGAA’s global policy rate...