In this presentation we extend our 2018 Q4 Outlook with our views on the global economy and equity markets. We are negative on US equities and see opportunities in Chinese equities.

1. FREE TO SHARE
Financial markets stand at a crossroad
​Equity Outlook
​Wednesday, 24 October 2018

2. Saxo Bank
FREE TO SHARE
What we have been saying this year…
2
Q1 Outlook
…equities can push higher very short-term but that in the second half of Q1 macro data will
begin to disappoint against expectations causing an equity correction above 7 %, something we
have not seen since Brexit
Q2 Outlook
With a recession likely coming with the next two years the outlook does not support an
aggressive stance and overweight position in equities. Portfolios should be more balanced and
tilted towards defensive industries in the portfolio’s equity exposure.
Q3 Outlook
Our view is that equity markets in the second half will begin to negatively discount
2019 … Escalating trade tensions driven by a misguided US government will only add
to the trouble facing financial markets.

3. Saxo Bank
FREE TO SHARE
What are we saying now…?
US equities are unattractive, China is a buy, growth stocks to hurt on rising rates
3
As the most important discount rate is lifted it changes the dynamics making growth
stocks vulnerable and maybe setting the stage for a comeback to value stocks. Tactically
emerging market equities are a buy with Chinese equities in a bear market territory but
the overall equity bull market is coming to an end.
The Four Horsemen
1. Price of money: RISING
2. Price of energy: RISING
3. Quantity of money: FALLING
4. Productivity: FALLING

4. Saxo Bank
FREE TO SHARE
Why 2019 is potentially explosive
Maximum Fed tightening and US fiscal deficit late cycle blowout
4

5. Saxo Bank
FREE TO SHARE
US equities are no longer attractive
Expected 10-year annualised real return is 1.9%
5
-10
-5
0
5
10
15
20
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5
Z-score (nine valuation metrics)
S&P 500
10-year annualised real return in % given valuation starting point (1990-2008)
Source: Bloomberg and Saxo BankSource: Bloomberg and Saxo Bank

6. Saxo Bank
FREE TO SHARE
US aggregate bond market is extremely expensive
Expected 10-year annualised return in 1.7%
6
0
2
4
6
8
10
12
-3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
Z-score (yield-to-worst)
US Aggregate Bond Market
10-year annualised real return in % given valuation starting point (1976-2008)
Source: Bloomberg, Saxo Bank

7. Saxo Bank
FREE TO SHARE
So what can the average investor expect?
7
 The classic 60/40 portfolio is
expected to deliver real return
~1.8% annualised over the next 10
years
 Challenging asset class
environment
 Stock picking environment?
 First real headwind for passive?

8. Saxo Bank
FREE TO SHARE
Chinese equities have not been cheaper the past 10 years
Long-term investors should overweight China
8
-40
-20
0
20
40
60
80
100
120
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Chinese equities valuation premium
CSI 300 / S&P 500 in % on 12-month trailing EV/EBITDA
Source: Bloomberg and Saxo Bank

9. Saxo Bank
FREE TO SHARE
Previous Chinese stimulus has worked
When will the current stimulus feed through to the real economy?
9

10. Saxo Bank
FREE TO SHARE
Massive comeback to value stocks the next 10 years?
Normalised interest rates to drive change
10
-4
-3
-2
-1
0
1
2
3
4
5
6
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Value vs Growth
Difference in 10-year annualised return in %-points
Source: Bloomberg and Saxo Bank
* MSCI World Value Net Total Return USD is used for value and MSCI World Growth Net Total Return USD is used for growth

11. Saxo Bank
FREE TO SHARE
Growth stocks have present value coming from the future
Higher rates mean higher WACC, and more tariffs mean lower g
11

12. Saxo Bank
FREE TO SHARE
Wild randomness
Environment in which a single observation can impact in a disproportionate way
12
0
0.1
0.2
0.3
0.4
0.5
-4 -3 -2 -1 0 1 2 3 4
Normal vs Cauchy distribution
Normal Cauchy
Source: Saxo Bank

13. Saxo Bank
FREE TO SHARE
Wild randomness means that anything can happen
Strategies build on existing data will likely fail
13
-10
-5
0
5
10
15
20
25
3/29/2004 3/29/2006 3/29/2008 3/29/2010 3/29/2012 3/29/2014 3/29/2016 3/29/2018
VIX Futures (active contract rolled)
1-day measured on z-score
Source: Bloomberg and Saxo Bank
Lehman Brothers
bankruptcy (+0.77!)
China's biggest
selloff in 10 years
China grows slower
than estimated
Brexit
US-North Korea
tensions
Sell volatility
implosion
Global growth concerns

14. Saxo Bank
FREE TO SHARE
If markets fit wild randomness what should investors do?
Nassim Taleb has proposed the Barbell Strategy
14
”Divide your wealth in two components. One that
maximizes certainty and one that maximizes uncertainty.”
”85% in risk-free assets (government bonds and inflation-
linked bonds) will act as hard stop-loss
15% in very risk investments (long out-of-the-money
options, VC, small/micro cap stocks, biotech, real estate”
”Portfolio will be uncorrelated to everything and likely gain
when everyone else fails”

15. Saxo Bank
FREE TO SHARE
Example of a maximize uncertainty bet
This is not an investment recommendation
15
 Buy S&P 500 put options
with expiry 2019-12-20
 Strike at 2,200 (19.7%
below today’s price)
 Assume S&P 500 trades
1,800 on expiry
 Profit is (2,200 – 58.60 –
1,800) / 56.80 = 500%

16. Saxo Bank
FREE TO SHARE
Is the market efficient?
No, that requires P=NP; alpha is more abundant than ever
16
Simple strategies are being arbitraged away.
99.5% of all retail investors should buy passive
index trackers or use Barbell Strategy
Read the full analysis here:
https://bit.ly/2OTNYd7

17. Saxo Bank
FREE TO SHARE
Worrying signs of out industrials
Caterpillar shares in free fall
17

18. Saxo Bank
FREE TO SHARE
Electrification of cars and tariffs are hurting carmakers
Tesla 3 is changing the car industry forever – Windows 95 moment
18

19. Saxo Bank
FREE TO SHARE
Automobile index down 17.6% relative to global equities
We remain negative on car industry; Daimler’s latest profit warning confirms this
19

20. Saxo Bank
FREE TO SHARE
Maybe globalisation is an extreme condition…
Massively higher tariffs are not unreasonable to imagine
20

21. Saxo Bank
FREE TO SHARE
Is US-China conflict turning into a new Cold War
The Thucydides Trap replay?
21

22. Saxo Bank
FREE TO SHARE
China does not have that much to offer the US…
22

23. Saxo Bank
FREE TO SHARE
Semiconductors are overextended
Vulnerable in an escalation between US and China; underweight this industry
23
0
5
10
15
20
25
30
35
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
MSCI World Semiconductor Industry Group
12-month trailing EBITDA per share
Source: Bloomberg and Saxo Bank

24. Saxo Bank
FREE TO SHARE
Tighter US rates policy creates headwinds for EM
24

25. Saxo Bank
FREE TO SHARE
Italy is a time bomb waiting to explode
Government has full support behind hard line against EU
25

26. Saxo Bank
FREE TO SHARE
We live in a time of paradoxes
26
 Technology should have boosted productivity: but it’s fallen
 Globalisation should have aligned values: it’s created nationalism and corrupted our morals
 Central banks should be able to create inflation: they can’t without fiscal
 Social media should have made us get close to each other: loneliness on the rise
 Wealth effect should have boosted growth: hard to observe
 Democrazy should have been stronger: biggest headwinds since WWII
 Internet should have increased competition: more industry concentration

27. Saxo Bank
FREE TO SHARE
Housing market shows dangerous signs again
Denmark is a good example
27
0
50
100
150
200
250
300
350
400
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Denmark housing market
Price Index for Sales Residential Property One Family
Personal Disposable Income Index
Source: Bloomberg and Saxo Bank

28. Saxo Bank
FREE TO SHARE
Housing market valuation back to late 2005 levels
28
0
20
40
60
80
100
120
140
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
OECD House Price to Rent
Source: Bloomberg and Saxo Bank

29. Saxo Bank
FREE TO SHARE
Europe’s earnings season is a disaster
Growth has not been consistent for eight years!
29
-15
-10
-5
0
5
10
15
20
25
Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018
STOXX 600
12-month trailing EBITDA y/y growth in %
Source: Bloomberg and Saxo Bank

30. Saxo Bank
FREE TO SHARE
Danish stocks flat for 3.5 years…
…and they are still expensive!
30

31. Saxo Bank
FREE TO SHARE
So what should investors do?
31
 Reduce equity exposure
 Within equities tilt towards value / defensive
 Stay away from industrials, carmakers, semiconductors
 Bond exposure should have short duration
 Potentially add a bit of gold
 Consider Barbell Strategy

32. Saxo Bank
FREE TO SHARE
Page 32
This investment research has not been prepared in accordance with legal requirements designed to promote the independence of investment
research. Further it is not subject to any prohibition on dealing ahead of the dissemination of investment research. Saxo Bank, its affiliates or staff, may
perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any
issuer mentioned herein.
None of the information contained herein constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to
make any investment, or to participate in any particular trading strategy. This material is produced for marketing and/or informational purposes only
and Saxo Bank A/S and its owners, subsidiaries and affiliates whether acting directly or through branch offices (“Saxo Bank”) make no representation or
warranty, and assume no liability, for the accuracy or completeness of the information provided herein. In providing this material Saxo Bank has not
taken into account any particular recipient’s investment objectives, special investment goals, financial situation, and specific needs and demands and
nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Bank assumes no liability for any
recipient sustaining a loss from trading in accordance with a perceived recommendation. All investments entail a risk and may result in both profits and
losses. In particular investments in leveraged products, such as but not limited to foreign exchange, derivatives and commodities can be very
speculative and profits and losses may fluctuate both violently and rapidly. Speculative trading is not suitable for all investors and all recipients should
carefully consider their financial situation and consult financial advisor(s) in order to understand the risks involved and ensure the suitability of their
situation prior to making any investment, divestment or entering into any transaction. Any mentioning herein, if any, of any risk may not be, and should
not be considered to be, neither a comprehensive disclosure or risks nor a comprehensive description such risks.
Any expression of opinion may be personal to the author and may not reflect the opinion of Saxo Bank and all expressions of opinion are subject to
change without notice (neither prior nor subsequent).
Disclaimer
NON-INDEPENDENT INVESTMENT RESEARCH