Investment Insights January 2021 Key Themes For 2021

Investment InsightsJanuary 2021Key Themes for 2021AuthorBiden takes helm in the US amid crisisJonathan W. Hubbard, CFAManaging Director,Investment Solutions GroupLike Barack Obama, Joe Biden will be sworn into office amid a national crisis. However, the Biden administrationwill face what appears to be an exceptionally narrow congressional majority, which could make it difficult for thenew team to enact a sweeping policy agenda. As a result, Biden may need to fall back on executive authorityto implement many of his policy priorities. However, as President Donald Trump experienced during his term,such actions often face legal pitfalls. Dozens of Trump executive orders and regulations were blocked by federaljudges, who often issued nationwide preliminary injunctions, which set off lengthy legal battles. And Biden willface a more rightward-leaning federal judiciary, given the extraordinary number of judges confirmed during theTrump presidency.Economically significant rules are regulations issued by executive branch agencies that have an annualeconomic impact of 100 million or more or adversely affect in a material way the economy, a sector of theeconomy, productivity, competition, jobs, the environment, public health or safety or state, local or tribalgovernments or communities.The combination of a Democratic administration and a Congress only tenuously controlled by the Democratsis seen as a reasonably market-friendly one. The sweeping tax hikes Biden campaigned on have little chance ofpassage during the 117th Congress, while his trade policy is expected to be less confrontational than Trump's.A tougher regulatory environment is likely, including stepped-up antitrust enforcement. Upgrading thecountry's aging infrastructure could garner some Republican support, especially if unemployment remainselevated in the postpandemic period. Biden may also garner Republican support for his on-shoring agenda,which is intended to fortify US supply chains.Number of significant rulesExhibit 1: Regulatory burden likely to rise under Biden400Significant final rules published by presidential year3503002502001501005001994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Source: US Office of Information and Regulatory Affairs as of July 9, 2020.FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY.

Key Themes for 2021Investment InsightsInvestment implications for 2021 Policy uncertainty lessened Focus on US potential for modestly higher taxes, greater regulationThe pandemic as an accelerant in the workplaceOur best estimate isthat 25% to 30% ofthe workforce will beworking from homemultiple days a weekby the end of 2021.A crisis can act not only as a catalyst for change but also as an accelerant of trends that were already underway. It will be some time before all the shifts brought about by the pandemic are known, but there are a fewworkplace trends that have clearly accelerated: the adoption of virtual technology, flexible work locations andthe evolution of customer engagements. Kate Lister,President of GlobalWorkplace Analytics The year 2020 compelled companies to abruptly perform the largest work-from-home experiment inmodern history. Companies and individuals had no choice but to adapt. Fortunately, the adoption oftechnologies that allow for virtual work was already on the rise. Cloud computing, artificial intelligence andvideo conferencing have minimized the need for many workers in one workplace.Leveraging the aforementioned technologies, remote work arrangements have worked out better thanmany anticipated. The prospect of shedding expensive office space and reducing commutes and the abilityto offer a better work-life balance is appealing to both employers and employees. While many companieswill return to the office, greater flexibility in work locations may be here to stay and could bring aboutmanagerial, compensation and demographic shifts.The in-person meeting has been a staple of corporate America for decades. While some engagements willalways require a face-to-face meeting, the frequency and manner of meetings will likely change given theimproved quality and reliability of video conferencing and other communication technologies, allowing forproductive remote meetings. In addition to the time and money saved by reduced travel, companies canreduce their carbon footprint through the use of technology.Investment implications for 2021 Increased investment in WFH technologies Longer road back for airlines, hotels and restaurants as business travel declines Greater flexibility in locating corporate headquartersThe on-shoring of business operationsAfter several decades of increasing globalization, the trend now appears to be reversing. Even before thepandemic caused many countries to close their borders, several factors were contributing to an about face,including increasing trade friction, concerns about labor mobility, the vulnerability of supply chains andthe greater focus on trading partners' behavior regarding human rights and environmental issues. Even aseconomies and borders reopen, we may be entering a period in which globalization pauses.FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY.2 of 5

Key Themes for 2021Investment InsightsExhibit 2: Global trade was further impaired by the pandemic Global Trade Global Industrial Production201510YoY 201020122014201620182020Source: FactSet and CPB. Quarterly data from 31 March 1992 through 30 September 2020. Shaded areas are US recessions.Dashed lines are averages from 1992-2007. Industrial production is a measure of the volume growth in manufacturing,mining and utilities.Investment implications for 2021 Shift from just-in-time to just-in-case supply chains Potential inflationary pressures in some industries Opportunities for smaller-cap US companies competing with ChinaMonetary and fiscal policy coordinationThe boundary between fiscal and monetary policy has been blurring for the better part of a decade, and thepostpandemic experience has nearly erased the dividing line. Developed market central bankers have clearlysignaled to their finance ministry counterparts that with their policy tools near exhaustion they are willing tocoordinate policies in order to create favorable financing conditions for additional fiscal stimulus. Indeed, USFederal Reserve Board Chair Jerome Powell and European Central Bank President Christine Lagarde haveboth publicly called on policymakers to spend more to counter economic weakness amid a resurgence in thecoronavirus. In essence the bankers are saying, "If you issue bonds, we'll buy them." In the United States, theappointment of former Fed Chair Janet Yellen as US treasury secretary further suggests the greater coordinationof monetary and fiscal policy.Investment implications for 2021 Potential for inflationary pressures Dovish outlookFOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY.3 of 5

Key Themes for 2021Investment InsightsCompanies seek to deploy cashAround the globe, companies suspended buyback programs and dividend payouts in the wake of thecoronavirus crisis in order to shore up their balance sheets and plug holes in their revenue streams. While thesetwo important vehicles for shareholder enhancement receded for most of 2020, the trend started to reverse latein the year as the economic and market outlook became less dire, vaccines were deployed and US regulatorsallowed banks to resume dividend payments.Exhibit 3: Stock buybacks and dividends paused in 2020Buybacks (LHS) Dividends (RHS)S&P 500USD 420062008201020122014201620182020USD Billions 0Source: Haver Analytics. Quarterly data from 31 March 1998 to 30 September 2020.Leading the way in reversing the dividends downtrend were China and Hong Kong, where payments wereup 3% and 10%, respectively, as these economies were among the first to be impacted and then benefit fromimproving trends. British banks can also resume paying some dividends since the Bank of England said theyappeared well capitalized and resilient, while the ECB has asked for dividend restraint. Buybacks tend to follow aprocyclical pattern, with increased repurchases in up markets and decreased purchases in down markets whiledividend payouts tend to be more stable over time.Companies raised records amount of cash in 2020 through both stock and bond issuance, and many have nowfound themselves with more capital than needed. They need to decide whether retiring debt that was issued atfavorable rates recently is more desirable than deploying capital to expand their corporate footprints. This mayencourage management to deploy cash through mergers and acquisition activity in 2021 and beyond.Investment implications for 2021 Potentially greater investor interest in dividend payers like energy and banks Industry consolidation potentially brought about by increased M&A activityFOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY.4 of 5