Market Perspectives

Market Perspectives
Apr. ‘20
Apr. 10th, 20120

www.finlightresearch.com
The First Bounce Is Never The Recovery

“ It's only when the tide goes out that
you learn who has been swimming
naked.."
- Warren Buffett
2
FinLight Research | www.finlightresearch.com
10/04/2020 08/11/2019 06/09/2019 14/06/2019 19/04/2019
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Executive Summary: Apr'20 Nov'19 Sep'19 Jun'19 Apr'19
Global Asset Allocation Equity

S&P 500
UW
OW
UW
OW
OW
OW
N
OW
OW
OW
Euro Stoxx 50 UW UW UW UW UW
 We started our previous Report with: “VIX has fallen back NIKKEI 225 OW OW N N N
to complacent levels. A severe vol breakout is looming MSCI Emerging Markets UW UW UW UW UW
around the corner […] We OW cash as a hedge […] Fixed Income OW N N N N
Amid concerns about current markets, we believe that T-Note 10Y N N N N N
tail risk and long volatility strategies may be Bund 10Y N N N N N
particularly worthy of consideration today” US TIPS OW OW N N N
 The Coronavirus pandemic has put pressure on risky

Euro HICP
Credit
N
UW
N
UW
N
UW
N
UW
N
UW
assets as they have started to price deeper recession risks
Inv. Grade OW OW OW OW OW
 Current extreme situation seems to point to a double digit US High Grade OW OW OW OW OW
decline in GDP, almost everywhere, in Q2-2020. Goldman EUR High Grade UW UW UW UW UW
Sachs now predicts a 24% decline in US GDP in next High Yield UW UW UW UW UW
quarter. That will make it the steepest one quarter drop on US High Yield OW N N N N
record by far. EUR High Yield N UW UW UW UW
 Risky assets have rebounded sharply from their lows,

EM Sovereigns
Forex
UW
N/A
OW
N/A
OW
N/A
OW
N/A
OW
N/A
thanks to CBs policy activism. But markets seem to be
EUR-USD N UW N N N
trading on sentiment alone, because no one has a clue
USD-JPY UW OW N UW N
what the fundamentals are today.
Commodity UW N N N N
 We believe that the economic case for being bullish is still Energy N UW UW UW N
pretty thin, at this stage. Another leg down is our central Base Metals UW UW UW UW UW
scenario. Precious Metals N UW UW OW N
 We are OW cash in the near term as we expect more

Agri
Alternatives
OW
OW
OW
OW
OW
OW
OW
OW
OW
OW
downside in risky assets and diversification is increasingly
Return Enhancers UW UW UW UW UW
difficult. We also like Yen and Gold to protect portfolios.
Risk Diversifiers OW OW OW OW OW
 We summarize our views as follows 
3
MACRO VIEW
 The Good
 China PMI is improving
 Central bank asset purchases are ramping up quickly, led by a $1.5trn increase in Fed assets. In
aggregate, DM central bank assets are rising by 25% YoY.
The Bad
 The General Business Activity Index in the Dallas Fed’s service sector survey fell 85.8 Pts to an all-time
low of -78.8, far below the bottom of -44.8 seen in 2009.
 Main indicators like global PMIs, US jobless claims and payrolls point to a greater economic shock than
the GFC
 US Initial jobless claims totaled 10 million over the last two weeks, and we should see a corresponding
jump in the unemployment rate in the April jobs report. Payroll employment dropped a net of over 700K
jobs, which is still understated because the survey period was in mid-March
 The Ugly:
 The Corona crisis is creating an unprecedented demand shock for the global economy, coupled
with tremendous uncertainty that weighs on consumer confidence.
 Main systemic risk resides in China because of high leverage, growing indebtedness, current
unsustainable housing bubble and the ongoing recession
 Trade tensions (US-China, US-Europe) remain a key risk to our outlook. Coronavirus could lead to
renegotiation of U.S.-China trade deal. Our worry is that the trade conflict resurfaces once the corona
crisis gets under control.
4
Hunting Recession – The Big Four Economic Indicators
 After having been trending lower since Nov. ‘14, the average of these 4 indicators has started showing
signs of improvement mid-2016 and set a new all-time high in Nov. ‘18.
 Sales and employment are especially interesting to watch, from here
5
Hunting Recession – The Corona Crisis
 At its current rate of

deceleration, Italy’s
epidemic curve could
flatten by mid-April
 The same would occur for
Europe-ex Italy by end-
April
 Markets seem to be
pricing the same scenario
for the US epidemic curve
(which is greatly optimistic
from our point of view),
inducing some relaxation
in containment measures
by May.
 US expectations about
the duration and depth of
the current recession
support the current
rebound in risky assets.
6
Hunting Recession – US Nonfarm Payrolls
 Payroll employment dropped a net of over 700K jobs in March, which is still understated because
the survey period was in mid-March. On a monthly basis, we’re back to levels last seen during the
GFC
7
Hunting Recession – US Consumer Sentiment
 In its he April preliminary,

the University of Michigan
Consumer Sentiment
came in at 71.0, its lowest
since 2011 and its largest
monthly decline in its
history.
 The Conference Board's
Consumer Confidence
Index and the NFIB Small
Business Optimism Index
should follow south!
8
Hunting Recession – Global PMIs
 Corona epidemic
induced a deep
plunge in the
services sector PMI
and composite PMI
in March.
 Service PMI sank
from 47.1 in Feb to
37.0 in Mar. ‘20.
 Composite PMI
moved from 46.1 in
Feb. to 39.4 in Mar.
 Only Manufacturing
PMI resisted thanks
to some normalcy
getting back in
China..
9
Hunting Recession – Italy Services PMI
 IHS Markit's services sector PMI for Italy is simply impressive!

 Italy sees near a total collapse of its service sector.
10
EQUITY
 In our previous report, we said: “We see signs for a market complacency: An extremely low short-
interest in S&P500, extreme short vol positioning, extremely low household free liquidity…”
 The S&P 500 fell 35% from its late Feb. highs amidst the worsening of the coronavirus epidemic. It
regained nearly 25% of its lows in 2 weeks on news of a massive stimulus plan and on the hope that the
worst of the virus is passing
 The divergence between Large Caps on one hand and Small Caps / EM on the other caused us great
consternation as we moved into 2020. We continue to focus on Large/Small Caps relative performance
as a way to guess if the fierce rebound in SPX is more than a bear market rally.
 With the VIX curve still in backwardation, history suggests the ongoing rebound in SPX is nothing more
than a bear market rally.
 Furthermore, and despite the unlimited QE, the expected downturn in SPX's earnings and
dividend points to more harm ahead. Consensus earnings expectations look very conservative for a
drop in nominal GDP that should exceed the GFC!
 It is worth noting that, despite the most recent correction, valuations of US stocks remain relatively
expensive
11
EQUITY
Bottom line :
 Our main scenario over the medium-term remains unchanged: Another capitulation decline in the
weeks ahead providing a new buying opportunity and igniting an ultimate leg up (target = 3500-3800
on the S&P500). Our scenario will be negated by a clean break below 1900.
 According to our positioning rules (please see our previous report), we’ve been Neutral above 3125 and
moved to UW below (on Feb 25)
 Our positioning rules are adjusted as follows:
 Remain UW below 2850 targeting a move back to 2060
 Neutral between 2850 et 2900
 Move to OW above 2900. Anything beyond this level takes us to 3000+. But if the rejection is clear
we're going way down with a first major support near 2470
 Neutral again above 3120
 We remain Neutral on Japan vs. US stocks and UW Europe vs US,

 We remain UW US small vs large caps. We maintain our OW defensives vs cyclicals (and avoid
financials above all) and OW value vs growth stocks.
 We remain UW EMs vs DMs. Our view has finally paid off in recent months. For us, and despite the
recent rally, it is still too early to buy into the current EM weakness. Uncertainty on EM growth remains
high, especially as US growth is slowing.
12
Equity – Uncertain Earnings
 SocGen’s Andrew Lapthorne

notes that consensus estimates
for corporate profits are likely
being artificially inflated by the
fact that only some companies
have issued updated forecasts to
reflect the new economic reality.
He says: “Removing these stale
forecasts and focusing only on
estimates posted during the past
20 days (so-called 'flash'
estimates) gives a more up-to-
date picture”
 According to SocGen study, EPS
estimates are probably falling
at twice the headline rate. Source: SocGen
 Globally, instead of Year 1

forecasts cut by 9.2%, so far this
year, the flash estimate shows a
17.2% cut, moving the Global
2020 consensus based P/E from
14.6x to 16.1x.“
13
US Equity – Uncertain Earnings
 Uncertainty in the
outlook for all corporate
profits have never been
greater in modern
history.
 Based on SocGen study,
the US consensus
should be revised down,
closing the gap between
consensus and trailing
earnings.
 Nevertheless, there is
absolutely no way,
from here, to know
what earnings are
going to look like for
the next quarters.
Source: Topdowncharts.com
14
S&P500 – A Bear-Market Rally?
 Look at how many powerful bear-market

rallies we had during the stock market
meltdowns in 2001 and 2008.
 In these graphs from Ycharts, the red lines
show the declines from peak to trough
 The black lines show bounces from lows.
 During previous 2 crisis, we witnessed
many 20%+ rallies en route to a 50%
decline
 Is the current rally a similar one?
15
S&P500 – VIX As a Sign of a Fragile Market
 With the VIX still at an

ominously high level of 40-
45% (and until it normalizes
towards the 20% range),
more panic selling may be
expected
 Another sign of a fragile

market is provided by
backwardation in VIX
structure. Historically, relief
rallies during VIX
backwardation have tended
to be followed by a
significant sell-off
Source: WingCapital Investments
16
S&P500 – VIX is Far From its Complacency Levels
 In our previous report of Nov. ‘19,

we said “VIX has fallen back to
complacent levels A severe vol
breakout is looming around
the corner. […] The VIX is at 12
and flashing red […] It could
mean it is time to start
considering buying volatility
(through VIX futures or CDX
protection).”
 We’ve always said that buying
CDS protection on CDX HY is a
straight way to go long equity
volatility.
 The chart here tends to confirm
our view.
 Buying protection on HY CDX in
Nov. ‘19 would have been a good
deal!
17
US Equity – Long-Term Valuations
 The chart shows the average of

the four market valuation
indicators we follow.
 The Crestmont Research
P/E Ratio
 The cyclical P/E ratio using
the trailing 10-year earnings
as the divisor
 The Q Ratio = price of the
market divided by its
replacement cost
 The distance of the S&P
Composite price to its
regression trendline
 At the end of Mar. ‘20, the
average stands at 91% (down
from 130% in Feb.)
18
US Equity – Long-Term Valuations
 The picture looks a little bit

different when we take 12-
month Trailing PE and 12-
month Forward PE…
 According to these measures,
US equities have moved from
extreme expensive levels back
to the mean.
 It’s worth noting that this chart
cover a shorter history (since
the 80s) compared to the
previous one (since 1900).
The mean is clearly biased by
the Tech Bubble.
Source: Updowncharts.com
19
Equity – Relative Valuation
 From our previous

report: “We remain
UW US small vs large
caps. We maintain our
OW defensives vs
cyclicals (and avoid
financials above all)
and OW value vs
growth […] We remain
UW EMs vs DMs.”
 Using MSCI World
indices (the picture is
similar for US stocks),
we see that only our
Value vs Growth
positioning has been a
loosing bet, so far.
20
S&P500 – Value vs. Growth Relative Valuation
 Value was poised for relative

outperformance vs Growth
given the slowing growth late-
cycle environment
 But the COVID 19 crisis
reversed that outlook,
weighing on the
fundamentals of some Value
stocks
 But given the steep
discount (relative to
history) at which Value
stocks trade now, we prefer
to maintain our bias.
21
S&P500 – A Medium-Term Tech. Perspective
 A final washout drop is

likely for the S&P 500.
 We believe the 50%
and 61.8% Fibonacci
levels (2814 and 2950
resp.) to be key for the
rebound
 The final drop may
reach the 2000 area.
22
S&P500 – A Short-Term Tech. Perspective
 According to our positioning rules (please see our previous report), we’ve been Neutral above 3125 and
moved to UW below (on Feb 25)
 Remain UW below 2850
 Neutral between 2850 et 2900
 Move to OW above 2900. Anything beyond this level takes us to 3000+. But if the rejection is clear
we're going way down with a first major support near 2470
 Neutral again above 3120
23
FIXED INCOME & CREDIT
GOVIES
 Treasury issuance will approach all time highs to fund the +$2trn deficits induced by the Coronavirus
epidemic over 1-2 years.
 The Fed’s commitment to unlimited US Treasury purchases is the primary reason UST yields remain
so low.
 Given the sluggish growth perspectives and uncertainties about the sanitary crisis, we expect the 0.90-
1.00% range to cap 10y-UST yield yields for a while.
 In our previous report, we said “As a ”macro” hedge against escalation of Italian political risk or other
global concerns, we keep our short 5y French vs German govies (acquired in Aug. ’18, when short-
term spreads were trading close to their historic lows around 15 bps)”. The current 5y spread stands at
35bps. We decide to keep the position for the next few weeks and see how things evolve on the
Coronavirus and economic growth fronts. We also go 2Y Germany (at -57bps) as a risk-off hedge
 According to our positioning rules, we’ve moved from Neutral to OW Treasuries as the 10-year
yield broke below 1,35 (on Feb 26)
 The 10y yield is currently testing the resistance area around 0.75.
24
GOVIES
 Remain OW 10-year USTs below 0.9 and target a move back to the 0.4-0.3 range
 Move to Neutral between 0.90 and 1.00
 Move to UW above 1.00
 What about the curve? We’ve remain Neutral on the 2-10 curve till the 2-10 slope broke above
+30bp. We jumped then into steepeners. Our positioning is supported by the fact that: (i) The front end
should stay relatively pinned by Fed policy (ii) we expect the curve to find material support near the
35bp breakout area
25
INFLATION-LINKED
 TIPS ETFs have reported more than $500Mn of weekly outflows on average over Mar. ‘20
 Despite the rebound, the seasonally-adjusted 5-year breakevens stands around 90 bps. Breakevens
still seem to price a severe and persistent softening
 In the US, we expect the virus will have run its course by the end of Q2. But the hit to labor markets,
net worth, personal spending and consumer sentiment is likely to be longlasting (weighing on inflation)
 Nevertheless, at these levels, we consider TIPS as cheap and we prefer to keep our OW stance
on 10y US Breakevens (@ 1.23). We remain Neutral HICP Inflation
 We keep our LT view on the coming inflation: : It is intriguing to see inflation so low, given the
tremendous amounts of money that have been injected into the system since the GFC. We start
thinking that it is simply because we’ve been pouring the money into intangible goods and
paper assets. Inflation would make its long awaited come-back the day we loose faith in intangible
things (after another deep financial crisis, for instance) and start moving wealth back into tangible /
physical goods.
26
CORPORATE CREDIT
 In our previous report, we said: “we are cautious on credit at current prices and expect the spread
widening to resume (both in IG and HY) in the coming months because of the uncertainty around
economic growth and the shift we are expecting to a higher vol. We continue to believe that the
credit cycle has peaked in Feb. ‘18. Credit fundamentals are deteriorating (higher debt as a share of
the economy, higher leverage, lower coverage…). At a given point in time, a mountain of BBB-rated
debt will start getting downgraded into the junk category.”
 With the Coronavirus pandemic, credit markets (like most carry strategies) sharply re-priced
the deteriorated macro outlook. After the absurd ‘search for yield‘ of 2019, the move was abrupt,
driven by higher-volatility, sinking oil prices and lower growth perspectives.
 But the Fed’s announcements that they would buy corporate bonds changed the picture, providing
some signs of stability in HG credit, but also in HY. The Fed is now playing the role of a lender of
last resort to non-financial corporations!
 Leverage metrics are expected to skyrocket for many corporates, as EBITDA declines sharply. Near
term risks remain for wider spreads.
 But given Fed’s support, we expect IG spreads to stabilize around current levels, with a possible but
limited scope to revisit the March wides. Said anot.her way, IG spreads have likely peaked in March
27
CORPORATE CREDIT
 By contrast, growth risks should weigh more on HY than IG. Furthermore, higher defaults and lower
recoveries will likely be more damaging to HY than downgrades (Fallen Angels) will be to IG  HY
spreads have still some room widen from here..
 We remain UW on credit overall.

 Within the credit asset class,
 We remain OW on US vs EUR HY and IG
 We reiterate our up-in-quality stance, across sectors and ratings. We reiterate our preference for
IG over HY, in EUR as in USD
 We maintain our preference for liquidity.
28
EM DEBT
 Our UW stance on EM external and local debt has payed off. EM markets were finally caught up to
the selling pressure.
 Our central view remains unchanged: EM assets will continue paying for dollars withdrawal from the
system, induced by increasing deficits in DMs. EM equities/corporate bonds have been liquidated to fill
the void, and EM sovereigns stand next in line. Liquidation of EM sovereigns bonds will be the final
and most violent leg of the EM crisis.
 The crisis is not over for EM countries. Countries most vulnerable to capital outflows, or with large
external debt will remain under pressure (like their FX).
 We remain UW on EM corporates and sovereign bonds.
 Bottom line : OW Govies, Neutral US vs Eurozone Govies, UW credit overall, UW Eurozone vs US

in IG credit, UW Eurozone vs US in HY credit, OW 10y-TIPS breakevens, Neutral EUR HICP Inflation,
UW High Yield vs High Grade in USD and EUR, UW on EM sovereigns / coporates
 We remain deeply concerned by the liquidity issue in credit markets. HY and EM debt ETFs mask
an inherent liquidity mismatch that is not adequately understood by all investors. This is the Achilles’
heel of the credit market at this point of the cycle.
29
US Govies – A Tech. View
 According to our positioning

rules, we’ve moved from
Neutral to OW Treasuries
as the 10-year yield broke
below 1,35 (on Feb 26)
 The 10y yield is currently
testing the resistance area
around 0.75.
 We expect the 0.90-1.00%
range to cap yields for a
while.
 Our positioning rules are
adjusted as follows:
 Remain OW 10-year
USTs below 0.9 and
target a move back to
0.4-0.3
 Move to Neutral
between 0.90 and 1.00
 Move to UW above
1.00
30
US Govies – A Very long-Term View
 The LT picture of 10-year UST yield remain disturbing.

 The global trend seem to head to the zero threshold. How does that fit with a bullish equity market?
31
US TIPS – A Blow to Our Nov. View…
 In Nov. ‘19, we were constructive on US breakevens. we decided to go OW on 10y breakevens (as less
sensitive to energy prices and short-term fluctuations in the economy)
 With the last rebound, 10-year breakevens are now nearly 70bp off their local lows but still 40bps below
Nov. levels.
 As expected, shorter-term Breakevens (those we avoided) were hit harder. At 90 bps, seasonally-
adjusted 5-year breakevens, for instance, still seem to price a severe and persistent softening
 At these levels, we consider TIPS as cheap and we prefer to keep our OW stance on 10y US
Breakevens.
Source: Yharts.com
32
US Credit IG – Is it About Liquidity?
 The chart shows the 5d-MA

of median Amihud illiquidity
score in the US IG market.
 For each CUSIP, this score
is calculated as the average
of absolute change in price
across sequential non-retail
trades (normalized by trade
size)
 After reaching levels last
seen during the GFC, the
Amihud illiquidity measure
has been declining since the
Fed’s announcement on Mar
23rd. It’s still at high levels,
nevertheless. But it should
tighten from here , since
direct purchases of
corporate bonds by the
Fed seem underway
33
US Credit – IG Basis During The Crisis
 CDX.IG index basis reached its

record high during the sell-off, but
has normalized to some extent
since then
 A persistent negative basis
(meaning that index arbitrage
activity is reluctant to buy single
bonds + protection) should be
interpreted as a warning signal
on current market rebound
sustainability
34
US Credit HY – Inflows are Back?
 According to Lipper data,

high yield funds saw their
largest inflow on record,
beginning April.
 Although HY isn't eligible
for Fed buying, the Fed
commitment has renewed
confidence in HY, pushing
spreads below the
threshold of 1000 bps
35
Credit Relative-Value – EUR vs USD IG
 We have been advocating an OW

stance on the USD vs EUR credit,
given persisting macro, political, and
technical headwinds in Europe.
 The ECB’s announcement of a €750
billion Pandemic Emergency
Purchase Program (PEPP) has
suddenly changed the picture.
 But the Fed seems now following the
ECB by providing an insurance net for
IG credit.
 We keep our OW US vs EUR view.
36
Credit RV – IG/HY Decompression
 On a beta-adjusted basis, we saw little

differentiation in performance between IG
and HY markets, except during the sell-
off where decompression has
materialized more in synthetic than in
cash market.
 Nevertheless, we reiterate our up-in-
quality stance, across sectors and
ratings. Growth risks should weigh more
on HY than IG. Furthermore, higher
defaults and lower recoveries will likely be
more damaging to HY than downgrades
(Fallen Angels) will be to IG
 IG spreads have likely peaked in March.
HY spreads have still some room widen
from here..
 We reiterate our preference for IG over
HY, in EUR as in USD
37
Credit RV – US IG vs Equity
 In our previous report, we said:

“On a relative basis, we also
UW credit vs equities: Credit
carries a short vol positioning
which we hate at current levels.”
 Our view paid off!
 USD IG spreads have widen

much more than implied by US
equity returns, as volatility
spiked and most funds outflows
were concentrated into
corporate bonds
 We prefer to move Neutral
credit vs equities from here.
38
EXCHANGE RATES
 In our previous Report, we said: “Global demand for U.S. dollars has been on the rise and will likely
continue to rise, providing another supporting force for the currency. We still think that the US dollar
has some room to go up over the short to medium-term. Over longer horizon, we expect the
expanding US budget deficit to put pressure on the dollar.”
 In our view, US Dollar is unlikely to weaken substantially against almost any cross (except
perhaps JPY and CHF) until global markets stabilize
 Dollar appreciation reflects the unique role the currency plays in the global economy and financial
system, specially during market turmoil, rather than a view on the US economy and its ability to get out
of the COVID-19 crisis.
39
EXCHANGE RATES
 EUR-USD:
 We believe that EUR-USD is vulnerable to a bear market and EUR equity outflows .
 The break below 1.07 in EUR/USD (March 20) didn’t meet significant follow-up and ended in a strong
up-reversal from 1.0635, which even managed to reach 1.11  this probably means that we’ve
seen a sustainable low at 1.0635… We need to get above 1.1060 to confirm.
 Since our last Report, and according to our positioning rules, we’ve been UW in EUR-USD as long
as the pair stayed below 1.1080, Neutral between 1,1080 and 1,1165, and to OW above. But given
the large swings we’ve seen specially in March, this strategy was disastrous (Gamma negative)!
We stuck to a Neutral stance since Mar 17th.
 EURUSD pair is currently trying to reach the thresholds limit of 1.0966, moving inside a triangle. We
can wait for the confirmed breakout of one of the boundaries and initiate a position according to the
direction of the breakout
 We adjust our positioning rules as follows:

 Remain Neutral within the mentioned triangle
 Move to OW on a clean breakout
 Move to UW on break down
40
EXCHANGE RATES
 USD-JPY:
 In our previous report: “we maintain a constructive view on the Yen in the medium-term,
particularly given our base case that the US-China trade conflict is likely to persist through next
year’s US election.”
 According to our positioning rules, we’ve tried since Dec. ‘19 to be OW above 109.2 and UW below.
But given the large swings we’ve seen around the threshold (specially in March), this strategy was
hardly sustainable. We decided to stick to a Neutral view on Mar 17th (like on the EUR)
 The pair seems to have broken to the downside the ascending channel started in Sep. ’19.
 From here, we move to UW USD-JPY and adjust our positioning rules as follows:
 Remain UW below 108.20
 Move to Neutral above 108.20 and below the ascending channel
 Go OW as soon as the ascending channel is reintegrated.
41
US Dollar – Where From Here?
 For JP Morgan, nearly 70% of

countries they cover have
experienced substantial growth
downgrades, a spike
reminiscent of 2008
 Historically, such a situation
has been favorable to US
Dollar.
 We believe that the Dollar is
unlikely to weaken substantially
against almost any cross
(except JPY and CHF) until we
get out of this mess!
42
EUR-USD
 The break below 1.07 in EUR/USD (March 20) didn’t meet significant follow-up and ended in a strong up-
reversal from 1.0635, which even managed to reach 1.11  this probably means that we’ve seen a
sustainable low at 1.0635… We need to get above 1.1060 to confirm.
 EURUSD pair is currently trying to reach the thresholds limit of 1.0966, moving inside a triangle. We can
wait for the confirmed breakout of one of the boundaries and initiate a position according to the direction of
the breakout
https://www.tradingview.com/chart/EURUSD/q205MAns-EURUSD-H4-Trending-Idea-6-Sept/
FinLight Research | www.finlightresearch.com 43

USD-JPY
 According to our positioning rules, we’ve tried since Dec. ‘19 to be OW above 109.2 and UW below. But
given the large swings we’ve seen around the threshold (specially in March), this strategy was hardly
sustainable. We decided to stick to a Neutral view on Mar 17th (like on the EUR)
 The pair seems to have broken to the downside the ascending channel started in Sep. ’19.
 From here, we move to UW USD-JPY and adjust our positioning rules as follows:
 Remain UW below 108.20
 Move to Neutral above 108.20 and below the ascending channel
 Go OW as soon as the ascending channel is reintegrated.
44
COMMODITY
 Here is our previous view on commodities: “We maintain our neutral view on the asset class
as a whole (because of all macro / policy uncertainties and China macro), with a preference
for precious metals and agris […] Over the medium term, we still think that the secular
bear market in commodities hasn’t reached an end yet. Another wave of dollar
strengthening and/or headwinds in China would make the bear trend resurface again.”
 The broad-based S&P GSCI ended March down by 29.4%. This is the largest monthly drop in
over 29-year history. The move was mainly driven by the S&P GSCI Petroleum (-49.6%).
Apart from Gold, all metals have been hit hard.
 At the moment, it remains not clear whether the lows of March are sustainable. The rebound
has been too modest to eliminate the risk of a final sell-off.
 Commodity is suffering a collapse in demand, specially in energy and industrial metals.
The usual scenario from hear is: (i) a drop in prices until they breach cost supports. (ii) move
around cash costs until supply adjusts to balance the market.
 We move to UW the commodity class over the next 3 months.
45
COMMODITY
 Bottom Line :
Energy:
 In our Nov.’19 Report, we said: “Our medium-term bias remains to lower lows with the $30 area as
a target.”. Our target is reached!
 The crude oil price drop was impressive: -60% in a few weeks. This sharp move was driven by demand
destruction and Saudi Arabia / Russia declared war to gain market shares.
 On Thursday, OPEC+ agreed to the largest oil production cuts in history, but oil prices dropped again
towards the $20-25 area (on WTI). The market has decided that a 10 million bpd cut was
insufficient to balance the demand deficit.
 Many analyzes show that the demand destruction (due to travel restrictions, containment
measures…) is closer to 20-25 mbd than 10 mbd
 Furthermore, these cuts are clearly not enough to prevent massive stockbuilds in April and May, Our
near-term WTI $20/bbl target could be breached to the downside.
 The only way to combat the demand destruction is by letting prices go low enough to force shut-
ins (in Russia, US, Canada…).
46
COMMODITY
 Bottom Line :
Energy:
 According to our positioning rules, we’ve remained UW as long as the spot stayed below 58.5. Actually,
we’ve moved to OW on Dec 12, before switching back to UW a month later. From here (WTI=23), we
turn Neutral.
 Our tactical rules are adjusted as follows:
 Remain Neutral as long as we stay in the ST triangle drawn by the recent lows (around $20) and
the trendline through the highs of Feb and Mar. (yellow line, page 53).
 Move to OW in the $18-20 range
 Move also to OW if the downtrend is breached to the upside.
47
COMMODITY
Base Metals:
 Metals by far outperformed energy but did not escape the high volatility context. The demand shock
caused by COVD-19 and the shutdown of whole industries was the main reason behind.
 We expect base metals prices to remain under immense pressure over Q2. We see more downside
near term, and expect prices to fall to cost support over the next 3 months
 A sharp rebound may occur in H2 (more probably in Q4-2020 and H1-2021), once demand disruption
caused by COVID-19 containment measures fades and stimulus-fueled demand is back
 As such, we remain UW the complex, for now
Agriculture:
 Agricultural commodities have shown some resilience during the last sell-off despite the reduced feed
demand (because of the COVID-19 and restaurants closure) and lower input costs.
 While we see prices remaining low for the rest of the year, we choose to remain OW on Agris as a
whole
48
COMMODITY
Precious Metals:
 Gold has outperformed other commos since the beginning of the sell-off, highlighting its safe-haven status.
 Its performance during the sell-off was, however, disappointing, probably because of the dollar
strengthening and the gold liquidity (making it an attractive asset to liquidate to get cash).
 The fall in oil prices is probably another reason for the drop in gold during the market turmoil: Sinking oil
prices brings Russia’s CB (like some other CBs) purchases to a halt and could possibly trigger some
selling
 The long term trend remains clearly up. We need to go all the way back to critical support at 1267 (or
primary uptrend from Aug ’18) before the uptrend is put into question.
 We remain bullish precious metals (specially Gold) over the long-term, no matter what happens (on
US dollar, China, growth…)! We believe Gold will be the best investment for the next decade.
 Silver was hit even more than gold, falling 12.5% in a single day. Silver rebound was also impressive. This
is the proof that Silver investment purchases are more speculative than defensive. We keep away from
Silver, at this stage.
49
COMMODITY
Precious Metals:
 Following our positioning rules, we’ve moved to OW on Gold after prices broke above 1525 (on Jan.
3rd). We’ve moved back to Neutral for a few days (during the sell-off) and again to OW a week later.
 We choose to switch to Neutral from here (Gold = 1713) and wait for a clearer picture
 Stay Neutral between 1580 and 1720
 Move to OW above 1720 targeting 1800
 Move UW after a clean break below 1580
50
Energy – Crude Oil Fundamentals
 COVID-19 implied isolation policies are

clearly weighing on crude oil demand
expectations.
 Global oil demand may be hit by an
average of 15mbd over Q2
 Despite OPEC+ commitment to cut

production by 10mbd, we maintain our
view of another sell-off to below
$20/bbl on WTI in the near-term.

51
Energy – Crude Oil
 Over the short-term, we see a potential head and shoulders pattern forming… We still see a high risk of at
least retracing back to 20inverted
 According to our positioning rules, we’ve remained UW as far as the spot stayed below 58.5. Actually,
we’ve moved to OW on Dec 12, before switching back to UW a month later. From here (WTI=23), we turn
Neutral.
52
Precious Metals – Gold
 On Gold also, we see a potential inverted head and shoulders pattern forming… We still see a high risk of
a retracement to 1580
 We are currently on a major resistance (around 1700), combined with a rising edge. A failure to produce a
decisive breakout would confirm our view.
53
Cryptos – Bitcoin
 Two weeks ago, Bitcoin has formed a death cross. It continues to navigate within a descending channel.
We are currently at the top of the channel, with the 50-dMA playing the role of an additional resistance
 As you know, every 210,000 blocks (approximately 4 years), the reward per block on Bitcoin is halved. The
next halvening is expected around May 11. Historically, halvenings were followed by a “dump period”
 The 3000-3500 area is in sight from here. That would be a suitable level to buy Bitsoin for the LT.
54
ALTERNATIVE STRATEGIES
 In our previous report, we said: “The current environment remains favorable for risk
diversifiers (low beta strategies). We reiterate our OW stance on L/S Equity Market Neutral,
L/S Credit, Volatility RV and Global Macro strategies.“
 Our neutral positioning on CTAs was, however, a bad bet.
 The HFRI Fund Weighted Composite Index declined -5.9% in March as the coronavirus
pandemic drove sharp losses in equities and commodities, and a global risk-off posture
across fixed income and currencies.
 Macro hedge funds gained in March (+2.1% MoM) as the coronavirus pandemic drove an
equity crash, sharp arbitrage spread widening and a abrupt change in growth perspectives.
 The move was driven by quantitative, trend-following Macro CTA strategies (+2.9% MoM)
and Discretionary Commodity and Currency Macro strategies (+3.1% and 2.9% respectively)
 Fixed income Relative Value Arbitrage strategies posted mixed gains in March. Only Volatility
strategies did well with 4.5% MoM.
 Event-Driven strategies post record monthly declines (-12.4%) on arbitrage spread widening.
On the opposite extreme, Equity MN strategies declined by just -2.3% over the month.
 Macro and trend-following strategies are likely to continue to lead from here, as the
COVID-19 pandemic continue to progress.
55
10/04/2020 08/11/2019 06/09/2019 14/06/2019 19/04/2019
View View View View View
Bottom Line: Apr'20 Nov'19 Sep'19 Jun'19 Apr'19
Global Asset Allocation Equity

S&P 500
UW
OW
UW
OW
OW
OW
N
OW
OW
OW
Euro Stoxx 50 UW UW UW UW UW
 We started our previous Report with: “VIX has fallen back NIKKEI 225 OW OW N N N
to complacent levels. A severe vol breakout is looming MSCI Emerging Markets UW UW UW UW UW
around the corner […] We OW cash as a hedge […] Fixed Income OW N N N N
Amid concerns about current markets, we believe that T-Note 10Y N N N N N
tail risk and long volatility strategies may be Bund 10Y N N N N N
particularly worthy of consideration today” US TIPS OW OW N N N
 The Coronavirus pandemic has put pressure on risky

Euro HICP
Credit
N
UW
N
UW
N
UW
N
UW
N
UW
assets as they have started to price deeper recession risks
Inv. Grade OW OW OW OW OW
 Current extreme situation seems to point to a double digit US High Grade OW OW OW OW OW
decline in GDP, almost everywhere, in Q2-2020. Goldman EUR High Grade UW UW UW UW UW
Sachs now predicts a 24% decline in US GDP in next High Yield UW UW UW UW UW
quarter. That will make it the steepest one quarter drop on US High Yield OW N N N N
record by far. EUR High Yield N UW UW UW UW
 Risky assets have rebounded sharply from their lows,

EM Sovereigns
Forex
UW
N/A
OW
N/A
OW
N/A
OW
N/A
OW
N/A
thanks to CBs policy activism. But markets seem to be
EUR-USD N UW N N N
trading on sentiment alone, because no one has a clue
USD-JPY UW OW N UW N
what the fundamentals are today.
Commodity UW N N N N
 We believe that the economic case for being bullish is still Energy N UW UW UW N
pretty thin, at this stage. Another leg down is our central Base Metals UW UW UW UW UW
scenario. Precious Metals N UW UW OW N
 We are OW cash in the near term as we expect more

Agri
Alternatives
OW
OW
OW
OW
OW
OW
OW
OW
OW
OW
downside in risky assets and diversification is increasingly
Return Enhancers UW UW UW UW UW
difficult. We also like Yen and Gold to protect portfolios.
Risk Diversifiers OW OW OW OW OW
 We summarize our views as follows 
56
Disclaimer
This writing is for informational purposes only and does not constitute an
offer to sell, a solicitation to buy, or a recommendation regarding any
securities transaction, or as an offer to provide advisory or other services
by FinLight Research in any jurisdiction in which such offer, solicitation,
purchase or sale would be unlawful under the securities laws of such
jurisdiction. The information contained in this writing should not be
construed as financial or investment advice on any subject matter.
FinLight Research expressly disclaims all liability in respect to actions
taken based on any or all of the information on this writing.
57
About Us…
 FinLight Research is a research-centric company focused on Asset Allocation from a top-down

perspective, on Portfolio Construction, and all related quantitative aspects and risk management issues.
 Our expertise expands along 3 axes:
 Asset Allocation with risk control and/or risk budgeting techniques
 Allocation to alternative investments : Hedge funds, rule-based strategies (momentum, value,

carry, volatility), real assets (real estate, infrastructure, farmland, timberland and natural resources).
Private equity and venture capital should be the next step…
 Allocation with a factorial approach built on the understanding (profiling) of the risk/return drivers of
the different asset classes
 FinLight Research is an innovation-oriented company. We target to fill the gap between the
academic research and the investment community, especially on real assets and alternatives. We survey
on a continuous basis the academic literature for interesting published and working papers related to
quantitative investing, non-linear profiling, asset allocation, real assets...
58
Our Standard Offer
Provide assistance Offer a turnkey 3-

Provide assistance Provide tailor-
with alternative step factor-based
with asset made quantitative
investments process in GAA
allocation and analysis of your
(including real with factor
related risk control portfolios in terms
assets) in terms of selection, risk
and/or risk of asset allocation,
profiling, and budgeting and
budgeting risk profiling and
integration in a dynamic portfolio
techniques risk contribution
GAA protection
• Global Asset Allocation • Alternative Investments • Factor-based GAA Process • Risk Profiling
(GAA)
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Apr. 10th, 20120

The First Bounce Is Never The Recovery

Global Asset Allocation Equity

 The Coronavirus pandemic has put pressure on risky

 Risky assets have rebounded sharply from their lows,

 We are OW cash in the near term as we expect more

 At its current rate of

 In its he April preliminary,

 IHS Markit's services sector PMI for Italy is simply impressive!

 We remain Neutral on Japan vs. US stocks and UW Europe vs US,

 SocGen’s Andrew Lapthorne

 Globally, instead of Year 1

 Look at how many powerful bear-market

 With the VIX still at an

 Another sign of a fragile

 In our previous report of Nov. ‘19,

 The chart shows the average of

 The picture looks a little bit

 From our previous

 Value was poised for relative

 A final washout drop is

 We remain UW on credit overall.

 Bottom line : OW Govies, Neutral US vs Eurozone Govies, UW credit overall, UW Eurozone vs US

 According to our positioning

 The LT picture of 10-year UST yield remain disturbing.

 The chart shows the 5d-MA

 CDX.IG index basis reached its

 According to Lipper data,

 We have been advocating an OW

 On a beta-adjusted basis, we saw little

 In our previous report, we said:

 USD IG spreads have widen

 We adjust our positioning rules as follows:

 For JP Morgan, nearly 70% of

FinLight Research | www.finlightresearch.com 43

 We move to UW the commodity class over the next 3 months.

 COVID-19 implied isolation policies are

 Despite OPEC+ commitment to cut

Global Asset Allocation Equity

 The Coronavirus pandemic has put pressure on risky

 Risky assets have rebounded sharply from their lows,

 We are OW cash in the near term as we expect more

 FinLight Research is a research-centric company focused on Asset Allocation from a top-down

 Our expertise expands along 3 axes:

 Asset Allocation with risk control and/or risk budgeting techniques

 Allocation to alternative investments : Hedge funds, rule-based strategies (momentum, value,

Provide assistance Offer a turnkey 3-

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