ANALYST WEEKLY

Taking the investment pulse

20 DECEMBER.2021

Summary Bitcoin stays under pressure. AVAX focus

Bitcoin (BTC) stuck under $50,000 but we are
Focus: Year end health check up seeing more dispersion in performance and
growth from those exposed to smart contracts,
Timely PMI activity indicators show India, US, and
gaming, and NFT’s as infrastructure develops.
much of Europe leading growth momentum, and
Avalanche (AVAX) bucked weakness, with positive
resilient to rising omicron fears. Whilst China and
reviews of its scalability and security. See Page 3
Germany are laggards. We also see tantalising
signs that inflation fears are peaking. This would
Commodities firm. EU energy crisis continues
allow Central Banks to go slow in hiking interest
Commodity prices held firm in a volatile week of
rates, and help equities. We see another year of
omicron fears and Central Bank cross-currents.
positive returns, though not as strong as 2021.
European gas prices surged 30% to new all-time-
Earnings forecasts are too low, and valuations to
highs on cold weather and Russia supply fears,
stay high. We focus on cheaper and faster
even as US prices fell, highlighting the localised
growing cyclical sectors and markets. See Page 4
nature of the natural gas market. See Page 3
This is our last Analyst Weekly of 2021. We are
back on January 10th. Happy holidays to all! The week ahead: winding down the year
1) A shortened trading week with Thursday US
Rotation from Tech follows hawkish Fed bond market holiday, and Friday’s equity holiday.
2) Data highlight is the US PCE inflation report
Volatile week. The anticipated hawkish Fed pivot
(Thu), Fed’s favoured measure, to accelerate to
no worse than feared, providing some relief. But
5.5%. 3) Earnings week focus on sportswear giant
also catalysing a sharp move away from tech and
NKE, semiconductor MU, cruise line CCL,
towards more defensive sectors, like healthcare
consumer food GIS, meme-stock BB. See Page 3
and real estate. UK was the surprise, becoming
first major central bank to hike rates. December
Our key views: …and now to 2022
PMI’s showed first omicron slowdown impacts..
See our latest presentation HERE. See Page 2 2021 was very positive for crypto, commodities,
real estate, and equities. We see a good 2022. 1)
Some relief from the Fed global vaccine rollout and economic re-opening
The Fed turned more hawkish, doubling tapering to continue, 2) still large support from low
pace, and pencilling in three rate hikes next year. interest rates and fiscal spending. We focus on
Was expected, in face of the strong economy and cyclical assets that benefit from decent growth:
7% inflation, and markets reacted with initial like commodities, crypto, and value. See Page 5
relief. Interest rate rises for end of this upcycle Top Index Performance
seen at only 2.5%, less than historic. See Page 2
1 Week 1 Month YTD
Changes to your favourite sector
Visa (V), Mastercard (MA), Paypal (PYPL), could DJ30 -1.68% -0.66% 15.55%
change sectors in proposed 2022 reorganisation.
SPX500 -1.94% -1.65% 23.02%
Would boost the size of the financials (XLF) and
industrials (XLI) sectors and make IT both smaller NASDAQ -2.95% -5.53% 17.70%
and its stock-concentration worse. See Page 2
UK100 -0.30% 0.64% 12.53%

High-for-longer oil prices GER30 -0.59% -3.98% 13.21%

Oil (OIL) saw quadruple headwinds of omicron
JPN225 0.38% -4.03% 4.01%
demand fears, stronger USD, US oil sales, and
increased OPEC+ production. These set to ease, HKG50 -3.35% -7.41% -14.83%
allowing high-for-longer oil and XLE. See Page 2 1
*Data accurate as of 20/12//2021
Market Views
Rotation from Tech follows hawkish Fed
• Volatile pre-Christmas week for markets. The
much-anticipated hawkish Fed pivot no worse
than feared, providing initial relief. But also a
big rotation away from tech. The largest sector
is seen as sensitive to higher interest rates.
Defensive sectors, like healthcare and real
estate, rose strongly. UK was the surprise,
becoming first major central bank to hike rates.
December PMI’ showed first omicron slowdown
impacts. See our latest presentation HERE.
Some relief from the Fed
• The Fed turned more hawkish, doubling the
pace of its bond tapering, and pencilling in
three rate hikes next year. This was expected, in
face of the strong economy and 7% inflation,
and markets reacted with relief. Interest rate
expectations for end of this upcycle are 2.5%.
This would make it a lower and slower increase
than the average 3% move over 15 months.
• The Fed threaded-the-needle. By accelerating
its monetary tightening pace to combat
inflation. Without destabilizing highly valued
markets worried on economic growth. This is
an unprecedented move, with the Fed balance
sheet a record $8.7 trillion and rates at zero.
Changes to your favourite sector
• Some of the largest tech stocks, like Visa (V),
Mastercard (MA), and Paypal (PYPL) could
change sectors in a proposed 2022
reorganisation. This could significantly boost
the size of the financials (XLF) and industrials
(XLI) sectors and make tech (XLK) both smaller
and stock-concentration worse (see chart).
US sector weights (%) and top-10 stock sector concentration (%)
35%
• It also highlights the difficulty in classifying
many industries, from payments to renewables
and cannabis, within traditional sectors. This
has continued to drive the big surge in thematic
investing we have seen this year.
High-for-longer oil prices
• Oil (OIL) prices survived a quadruple headwind
of omicron-demand fears, a stronger USD, US
strategic reserve sales, and increased OPEC+
production. We see these headwinds all easing,
in the future allowing high-for-longer oil prices.
• GDP growth is to be twice long-term levels next
year. Supply rising slowly, given ESG concerns.
Oil (XLE) will do well even if prices only stay
here, with strong cash flows and dividends.
• Oil prices are not as high as they look. Adjusted
for inflation they are the same as 50-years ago.
The oil sector is now only 3.5% of the S&P 500.
‘Quadruple witching’ bigger than ever
▪ Friday was one of the highest volume days of
year with the ‘quadruple witching’ futures and
options (F&O) expiry. This see’s volumes five
times average and it has become even bigger as
retail-driven options activity has surged.
▪ The volume of global derivatives has risen 39%
this year led by a 47% increase in equity indices
and 43% in individual equity derivatives.
▪ The third Friday of March, June, September, and
December see’s stock index futures and options,
and individual stock futures and options, all
expiring together. This drives a lot of portfolio
rebalancing, contract rollovers and expirations.
100%
Sector concentration - top 10

30% 90%
30% 88%
80% 80%
Sector weighting %

25% 73% 75%

70%
63% 61% 62%60%
20% 49%
49% 50%
15% 13% 13% 36% 41% 40%
11% 10%
10% 8% 30%
5% 20%
5% 3% 3% 2% 2%
10%
0% 0%
IT CD HC FN CO ID CS RE EN MT UT

Sector weight in US Index (%) - LHS Top 10 stocks % of total - RHS

Source: Refinitiv. IT=Technology, CD=Consumer discretionary, HC=Healthcare, FN=Financials, CO=Communications, ID=Industrials,

CS=Consumer Staples, RE=Real Estate, EN=Energy, MT=Materials, UT=Utilities 2
Market Views
Bitcoin pressure remains. AVAX focus
• It was a lacklustre week for the asset class, with
bitcoin (BTC) stuck below $50,000. We are
seeing an increasing dispersion in growth and
asset performance, with those exposed to
smart contracts, gaming and NFTs (non fungible
tokens) leading as asset class infrastructure
accelerates. Also seeing evidence of increased
market development and availability of hedging
tools reducing fears of dramatic drawdowns.
• Layer one blockchain and top-10 market cap.
coin Avalanche (AVAX) bucked the crypto price
downtrend following a Bank of America report
praising both its scalability and security.
The week ahead: Winding down the year
1. It’s a shortened week with US markets closed
on Friday, December 24th (as Christmas falls on
a Saturday this year). US bond markets will
also close early on Thursday.
2. The data highlight in a light week is the Fed’s
favoured PCE inflation report (Thur) that is
seeing rising to 5.5% for November, vindicating
the Fed’s more hawkish policy stance, set to
raise interest rates three times next year.
3. Light earnings week focus on sportswear giant
Nike (NKE), semiconductor Micron (MU),
largest cruise line Carnival (CCL), ‘Big G’
consumer food General Mills (GIS), and
prominent meme-stock Blackberry (BB).

Commodities firm. Europe’s energy crisis
• Commodity prices were resilient to cross-
currents of a firm US dollar (that makes USD
denominated commodities more expensive for
many to buy), and some relief that the Fed’s
hawkish pivot was not more aggressive (that
would threaten commodity demand). We
remain positive the outlook, with a ‘sweet spot’
of better commodity demand and tight supply.
• UK and European natural gas prices spiked 30%
last week and set new all-time-highs. European
natural gas storage levels are well below
average. This makes gas markets very sensitive
to colder weather and geopolitical tensions.
Russia is Europe’s largest gas supplier and
tensions over Ukraine and delays to new Nord
Stream 2 pipeline approval have been rising.
US Equity Sectors, Themes, Crypto assets
Our key views: and now to 2022
• 2021 was a very positive year across crypto,
commodities, real estate, and equities. We see
a positive 2022, though likely with lower
returns. 1) global vaccine rollout and economic
re-opening to continue, 2) still large support
from low interest rates and fiscal spending.
• Virus fears are dampening the growth outlook,
but economies are increasingly resilient to this.
Similarly, the US Fed turned more hawkish, to
combat inflation. This will be a lower and slower
rate upcycle than historic, and markets resilient.
• We focus on cyclical assets that benefit most
from decent growth: commodities, crypto, small
cap, and value. We are more cautious on fixed
income, defensive equities and China.
Fixed Income, Commodities, Currencies

1 Week 1 Month YTD 1 Week 1 Month YTD

IT -3.29% -3.75% 23.91% Commod* -0.49% -5.76% 23.53%

Healthcare 2.73% 1.41% 16.10% Brent Oil -3.19% -7.36% 40.89%

C Cyclicals -3.78% -7.32% 14.48% Gold Spot 0.87% -2.61% -5.42%

Small Caps -1.71% -8.02% 10.08% DXY USD 0.60% 0.67% 7.50%

Value -0.58% -0.25% 20.68% EUR/USD -0.70% -0.37% -8.00%

Bitcoin -3.68% -19.98% 61.79% US 10Yr Yld -7.83% -14.16% 48.82%

Ethereum -4.00% -4.74% 415.47% VIX Vol. 15.41% 20.44% -5.19%

Source: Refinitiv Source: Refinitiv. * Broad based Bloomberg commodity index

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Focus of Week: Taking the investment pulse

Taking the global GDP growth pulse ahead of 2022. India, US, and Europe lead

Latest purchasing manager index (PMI) data provides a timely heath check for the global economy (see
chart). Growth is naturally easing back from the huge recession-rebound this year and with omicron fears
now rising. But no major economy is below the PMI level of 50 that indicates a recession risk. India is
seeing the strongest growth, followed by much of Europe as well as the US. By contrast Germany is
suffering form surging covid cases and its huge auto sector hobbled by semiconductor shortages. UK
numbers are falling fast as it remains the centre of the omicron outbreak. China is hurt by the impact of a
zero-tolerance covid on the consumer, and a very large and indebted property sector. Global growth is
forecast at around 4.5% next year, and we see upside to consensus earnings growth rates only around 7%.

Tantalising signs that inflation fears may be peaking, and Central Banks to go slow, helping equities

Latest PMIs also provide a tantalising glimpse of peaking inflation. Price pressures are seen easing slightly
from November peaks, as supply chains adjust. This is consistent with our proprietary index which shows
lower freight rates and semiconductor prices, though from very high levels. But even with global inflation
to ease from this year’s level near 5%, central banks are beginning to respond. The UK surprised by starting
to hike interest rates last week, the first of the biggest central banks. The Fed is now targeting three hikes
next year. These tightening cycles are lower and slower than historically, and still able to support equity
valuations well-above long-term levels. Whilst some, in Europe and Japan, will not hike next year at all.

What are the purchasing manager indices?

The indices are available for over 40 countries and industries globally, produced monthly, and derived
from business condition surveys of senior company executives. The questions provide insight into the
outlook for GDP, inflation, exports, inventories, and employment, among other indicators. They are seen as
an important and timely leading indicator. The index represents the degree of change from the prior
month. A level over 50 indicates expansion, whilst a level below 50 contraction.

Bringing it together. Another year of positive – though likely lower - returns

Still-strong GDP growth will drive upward revisions to overly conservative consensus earnings growth. A
gradual central bank tightening will allow valuations to stay high. We see around a 10% global equity return
next year, significantly lower than this year, but a near unprecedented fourth straight year of strong
returns. Risks can be managed by focusing on stronger growing sectors, like consumer discretionary and
industrials, or cheaper segments like financials, energy, and Europe. Multi-year themes such as
renewables, electric vehicle, and crypto, remain attractive. We also see room for a modest China equity
turn around, as growth and regulatory pressures ease, and are at least well priced-in now.
Health check: composite purchasing manager indices (Latest)

62
59
60 'Break-even’ growth 50 level
57 58
58
56
56 55 55
54 53
52 52
52 51
50
50
48
46
44
GE CN JP BZ UK WRLD AU FR US IT IN

Source: HIS Markit, ISM. GE=Germany. CN=China. JP=Japan. BZ=Brazil. UK=United kingdom. AU=Australia. 4
FR=France. US=United States. IT=Italy. IN=India
Key Views
The eToro Market Strategy View

Positive scenario of 1) accelerating global vaccine rollout and economic re-opening, and 2) large economic policy
support of low interest rates and fiscal expansion. Main risks of 1) gradual but well-telegraphed Fed monetary
Global Overview
policy tightening, and 2) new virus waves, but each to have lower impacts. Focus on reflation and cyclical assets:
equities, commodities, crypto, small cap, value. Relative caution fixed income, USD, defensive equities and China.

Traffic lights* Equity Market Outlook

World's largest equity market (55% of total) seeing GDP growth 2x average , and driving earnings upside 'surprise',
and a rare fourth consecutive year of 10%+ equity market returns. Valuations at 22x P/E are 30% above historic
United States
levels but supported by still low bond yields and strong earnings growth outlook. See further cyclicals and value
catch-up, after a decade of underperformance, whilst tech supported by its structural growth outlook.

Equity markets helped by 1) a greater weight of cyclical sectors, and lack of tech, 2) 25% cheaper valuations vs US,
3) decade of under performance made under-owned by global investors. Helped by a dovish ECB to hold rates ‘low-
Europe & UK
for-longer’, and multi-year €750bn 'Next Generation' fiscal support. A weaker EUR helps many companies, with
50%+ company revenues from overseas. ‘4 th wave’ virus resurgence may provide additional buying opportunities.

China, Korea, Taiwan dominate EM, with 60% weight, and is more tech-centric than US. China equities hurt by tech
Emerging Markets (EM) regulation crackdown, property sector debt, and slower GDP growth. But this is increasingly well-priced. LatAm
and Eastern Europe have more upside to global growth recovery, a weaker USD, and higher commodities.

Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth
Other International (JP,
rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates
AUS, CN)
accelerating, but structural headwinds of low GDP growth, an ageing population, and world's highest debt.

Traffic lights* Equity Sector & Themes Outlook

The broad 'tech' sector of IT, communications, and parts of consumer discretionary (Amazon, Tesla), dominates US
Tech and Chinese markets. Expect a more subdued performance after dramatic recovery rally. But are structural stories
with good growth, high profitability, fortress balance sheets that justify high valuations, and should continue to rise.

Healthcare, consumer staples, utilities, and real estate sectors traditionally offer more defensive cash flows, less
Defensives exposed to changes in economic growth. This has also made them more sensitive to rising bond yields. We expect
them to relatively underperform in a more cyclicals focused environment with earnings strong and yields rising.

We expect cyclicals - consumer discretionary (autos, apparel, restaurants), industrials, energy, materials, to lead
Cyclicals performance. They are most sensitive to the sharp economic recovery, reopening and higher bond yields, with
more sensitive businesses, depressed earnings, cheaper valuations, and have been out-of-favour for many years.

Financials will benefit from the GDP growth recovery, with higher loan demand and lower defaults. Similarly, they
Financials benefit from higher bond yields outlook, charging more for loans than they pay for deposits. Sector has cheapest
P/E valuation of any, and regulators recently giving flexibility to pay large 8-10% dividend and buyback yields.

We favour small cap vs large, on more GDP growth exposure, earnings upside, and domestic focus. Similarly, value
Themes over growth on GDP recovery, lower valuations, under-ownership after decade under-performance. Dividends and
buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return.

Traffic lights* Other Assets

USD well-supported for now by rising Fed interest rate outlook and 'safer-haven' bid on virus fourth wave virus.
Currencies This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong
USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters.

US 10-year bond yields to rise modestly as inflation above 2% average Fed target, 'real' inflation-adjusted yields
Fixed Income negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other
market bond yields, and structural headwinds of all-time high debt, poor demographics, and low producitivity.

Cross-currents of rising global growth conern on virus fourth wave, and stronger USD. But remain in 'sweet spot' of
Commodities above-average GDP growth, 'green' industry demand, years of supply under-investment. Industrial metals and
battery materials well positioned. Oil helped by slow return of OPEC+ supply. Gold hurt by likely rising bond yields.

Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns
Crypto and low correlations with other assets. Altcoins have outperformed as see broader interest and use cases. Clear
supply rules a benefit as inflation rises. Volatility remains very high, with the 15th -50% pullback of the last decade.

Source: eToro

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Analyst Team

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