Welcome to our exchange of Goldman Sachs Markets Update for February twenty Eightth. Each week we leaders across the firm to get a could take on the numbers there watching the markets objects you in today. My guess is really welcome. Our thanks for having me like on the markets are Akerana virus, of course, but before we the analysis and just give us a quick intrude, explain what you do here. All right so I started my career in research covering technology stocks and our San Francisco office. For the past, eight years been part of an incredible DAS called the markets coverage group we sit within they can more investment management division and we cover a family office private clients who are active in the markets and have highly sophisticated trading needs. Ok, interesting, so it's been an eventful. weaken the markets ITALY's. What's the one big number you're, looking at the big number focus on right now is ten percent. That's how the Essen P has plunged in the one week sentence at an all time, high on February nineteenth. This is

happened as investors digest news flow around increasing corona virus infections outside of China mode recently in the: U S where over eight thousand people in California are currently being monitored for the infection. So a double digit decline like what we ve just experienced is technically classified as a market correction, which is something we haven't had since late twenty eighteen. This is also the fastest slide to a correction from a peak sent two thousand eight, the valise, If the seller has really up ended. This stability markets have recently enjoyed to put that in content, last Monday was the worst day for the Essen p in over two years and Tuesday. Marks the largest volume trading day of the year across all major. U S, exchanges! So this is it rapidly evolving situation, and first I would just like to say that our sympathies go out to all those affected by the outbreak. far what we know was there been over eighty thousand total reported infections, with fatality rate of slightly more than three percent now this virus

It has been in the news since early January, but the reason why it is picking up traction in the market now is over the weekend we got incremental news around transmissions increasing outside in China, most notably in ITALY and South Korea, China, what constitutes the majority of the infections, but the spread of the contagion elsewhere has raised a lot of alarm around potential global outbreak. So how do clients our clients think about the risks to the market of seized from mine for them after this week to the clients that we're speaking to her focused on three areas of potential risk. The first is slowing growth in China to right now, most of it infections are in China, which represents seventeen percent of global GDP. That's a big number and that's six times bigger than it was during the Sars outbreak of two thousand three, which makes it very a challenging to use that epidemic as a comparison benchmark the second.

Of risk. That we're focused on is disruption to the supply chains of: U S, corporates sales into China. For U S. Companies are actually quite limited at around two percent of total Essen P revenue exposure, but There are a lot of supply hubs in China that could impact how companies manage their businesses as an ample apple has already negatively pre announced for the coming quarter, highlighting that they have seen impact to their supply chain in China and another example. Thirty, seven percent of GNP management teams on the last quarterly earning season highlighted Corona, Iris or mentioned it on their earnings calls, and I would expect that to be the big buzz word again next quarter and the third free of risk that we're very focused on especially this week is contagion to other countries which could obviously further curtail things like travel and business activity to right now. We know that infections have been confirmed in over thirty countries- South Korea

ITALY and Japan have the largest number of reported infections outside of China, and at this point it starting to feel more than just headline risk. On Tuesday, the centre for These controls said we are asking the american public to prepare for the expectation that this might be bad. So What did you see? The bottom line is at the moment, with corona buyers bottom line. It's been a volatile, weaken markets and, unfortunately, visibility has not improved in recent history. Pull backs in the US and P have been short lived, so clients. sharpening their pencils on opportunities, especially in high quality, as an p companies with evaluation support, but their findings, challenging for a couple of reasons. So well the headlines of a ten percent drop is dramatic in historic cool context. It's not that abnormal, which makes it hard to conclude that we are oversold right now on average in any calendar year, the Essen People's back twelve percent, so we are comfortably within that banned at a ten percent, pull back

and we still know very little about the specifics of the virus. Fatality rate reproduction rate, transmission rate, and these factors are what will guide when workers can actually returned to normal levels of activity and restart the growth engine and then, lastly, it's still very difficult, but guard rails around longer term risks on the horizon, such as an suing waves of infections or what would happen if another country fails to quickly contain an outbreak so basically to, monitor how these risks materialise. Our clients are less focused on near term China, economic data such z, manufacturing numbers do out by the time this podcast airs, Pour numbers This point are expected. Our clients are more focused on monitoring the rate of change of daily reported infections on a country by country basis to assess the overall control of this epidemic. Okay. So, aside from what has already been a drop in the markets. What's another number, that's moved a lot. That's got your eye.

One thousand six hundred dollars an ounce, that's gold broke through that price over the last week, and this is an asset. That's been on a steady uptrend over the last year and garnered a lot of attention. We're seeing elevated trading volumes and positioning and our clients who are gravitating to gold are communicating a few reasons. One is flight to safety and risk. two risks around corona virus as we discuss, but also to the possibility of a market unfriendly outcome in the election this year. Another reason is the scarcity of safe haven assets in the market right now, given how low sovereign rates are globally, the ten? U S, Treasury yield hit a record low this week and there is roughly fourteen times of negative, yielding Dat globally, and the last reason is expectations in the market, a very easy and accommodate of monetary policy going forward so goals a safe haven, one when there are no other safe havens aside from commodities. What's a number that tells you something interesting about the relative value of one ass, a class verses another, I would say they yield gap, which is that

four percent currently so this is a metric that represents the spread between the Essen P earnings yield and the ten year. U S, Treasury yield, which is also known as the risk free rate and its One way investors can assess whether the equity market is over or underpriced relative to bonds, a higher yield gap, but suggests to us that stocks may be attractive relative to bonds, the wise this relevant now, while the ball market is about to celebrate its eleventh anniversary on March. Ninth, at this advanced stage, Our clients continue to express trepidation about late cycle risks and our thinking through whether they should be shifting exposures to less risky asset classes. However, he'll gap has moved higher to over four percent, which is well above its five year average of around three point: five percent. So this sick ass to us that equities remain relatively attractively valued despite appearing expense,

on some other evaluation metrics such as the p ratio, the yield gap has one and this week in particular, because, as I mentioned the ten year. U S, Treasury yield just dropped to a record low about sixty five basis points below where it came in to twenty twenty and in such a low rate environment, what we are hearing from clients is how challenging it is to get returns and the public market outside of equities and there's a fun acronym that capture the resulting capitulation into stocks, which is Tina. There is no alternative. With that said, while the yield gap is currently wide of historical. There is some vulnerability to it. Compressing as earnings revisions to the Essen p come down already Goldman Research Analyse have downgraded Essen, P earnings estimates for the current year, digesting some of the corona virus concerns that we ve talked about. So what's a number that you think you, but for the future so much

thinking about two different numbers, one for the short term, one for the long term, short term. I'm thinking about the VIC's above thirty I've. This index measures the market expectations of volatility for the Essen P over the next month. It shot one year high this week about double its one. Your average the curve also when inverted, which tells us that investors expect the market to be more volatile in the short term than over the long term, reflecting the a degree of uncertainty around corona virus and we ve seen clients taking advantage of this version by selling short dated optional Eddie. It's also worth noting that VIC's future is out to the October or November time frame our trading more expensive than shore. Her dated options, which also referred, the higher market moves anticipated around the election and we ve clients look to manage that risk around their equities by layering on

hedges out too, that timeframe inhabit over the longer term, the longer term. A number I'm thinking about for the future is a FED funds ray the? U S. Bed, trade is at one point seven: five percent. As a result, you're the FED cut rate three times and twenty nineteen and we expected the FED to be on hold this year. But now the market as pricing, into cuts by the end of this calendar year and that places the fat and a scenario where they either deliver against those expectations. Giving them less room to move during the night downturn or telegraph, a more hawkish message to the market which could salt and more market volatility. More philosophically, the room left to cut is very narrow, although there is clearly a precedent being set in other regions of the world to dip into negative territory and given, where rates are globally the efficacy of monetary policy as a lever in the next recession whenever

happens, is a concern in question for me deftly uncharted territory so outside the office. What's a number that you ve had on your mind, all the number it's too that's the number of marathons that I have remaining to complete a goal that may younger sister and I set to run one on each continent done five. So far, so what's left We have a strictly, I end and Arctic, her soul. scheduled those yeah. I'm not scheduled those hoping to do Australia this year and Antarctica. That's the one I'm lease excited for now: push that went off for a while her eye. What's the most memorable marathon, you ve done so far. Definitely the Vietnam Mountain Marathon, which we ran last September. It was in the northern region and it was tat. It was true, two hundred metres of elevation, but through really interesting terrain and the mountains. We were running past rice patties.

water, Buffalo all kinds of interesting things to see very cool, so impressive, an interesting way to see the world before we close, I have a fun fact with one more number: thirty six, which The number of lines in the poem Aaron wrote in December summarizing twenty nineteen market performance and rights markets, rap email to all our private wealth clients every week and for the end of the year she took it up a notch imposed a very impressive rhyming poem both destroy behind that. So the eye behind the weekly rap, was to come up with a location about markets for our clients that was fun and engaging to read. We all know that market commentary can sometimes sound very dry, but who says that portfolios can also be poetic, so I'm a big and of ponds and word play. So at the end of twenty nineteen, we decided to compose our end of year summary in rhyming verse, we're hoping

The same thing for twenty twenty. As long as the big investment themes this year are reasonable words, good disease and creativity and finance next time. We'll do the hope, Comcast in verse. Thanks for joining me today are thanks for having me that's all for this week's markets update on exchanges at Goldman Sachs, and in case you missed it check out our other episode this week from fish out of water, two we change maker wish on legislature of global markets, vision thanks and have a great. And healthy. We get all price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from any Goldman Sachs Entity to the list. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast and any law.

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