Aaran: 00:04 Hello from Variant Perception and welcome to a slightly

different video where Tian and myself are self-isolating and

where we're videoing in. Today we're going to be discussing
essentially our latest research. I suppose thinking about what
we've written over the past few weeks, it might be helpful to
frame this on a timeline. We've put out some shorter term
ideas, this being harmonic oscillation, thinking about the virus
trajectory and then comparing that to some of our longer term
research, long term buy signals, capital returns. So I wonder if
you could just start off talking about the shorter term ideas
we’re looking at?

Tian: 00:47 Yeah, sure. Essentially we're trying to think about what's the
path to get to a medium term, buyable bottom. In particular
some of the things we highlighted is one idea, harmonic
oscillation, essentially want to see the daily full 5% up and down
moves become one to 2% moves, right?

Tian: 01:05 Once these daily moves start to dampen and become a lot
smaller, it will be a sign that the system is starting to normalize
a bit. At least responding more normally. Usually there's
obviously a retest of those as well. That's kind of one thing that
we're focused on. The second is, we put out our thematic
report, Recessions and Shocks, this week. We were essentially
looking at truly novel historical exogenous shocks that would be
comparable to today. Obviously a lot of people been talking
about the risks around the economy. The fact that the virus
causes a lockdown, probably doesn't qualify as a standard kind
of recession driven endogenously by the business cycle.

Aaran: 01:49 Yeah.

Tian: 01:50 The comparable examples we've come up with historically are
things like 9/11. The Russia default in 98. Also, the original Gulf

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 War in 1990 and things like Pearl Harbor. These things that just
come out of the blue.

Tian: 02:03 The main lesson from some of the historical examples is that
some of the economic impact tends to be quite long lasting,
even for single day events like 9/11. So for example, in the
leisure, hospitality sector, employment growth doesn't come
back until 12 to 18 months later. That's kind of these prolonged
impacted me from single day events but the kind of better
analogy is probably things like those wars, where the markets
because they don't know, It's hard for markets to try to front-
run these kind of truly novel things. The market just keeps
selling off after the Pearl Harbor attacks, after the Iraq invaded
Kuwait. There's only until there's clear evidence that the war is
starting to turn. Then the markets starts to bottom. So you
know, we've talked about, after the Coral Sea, right afterwards
where the Japanese Navy starts to at least appear a lot less
dominant.

Tian: 02:50 That's when the market starts to bottom in the U.S. in the 1990s
again, January 91 Operation Desert Storm. The U.S. goes in with
ally forces and then the market starts rallying sustainably. What
that means for today is really the virus trajectory. It seems to be
the key. So we're going to either see the virus trajectory really
start to flatten out and start to look like the China data for
people to have some confidence. I think you know that the
worst of this is over, that the shock is kind of...we've seen most
of the shock. I would say that's the short path we would need to
see to reach a point where we think there's a buyable bottom.
Now in terms of what level is, it's obviously very hard to see, but
typically that markets average are down 35-40%.

Tian: 03:34 I think something in that range, right? That would be all these,
that would probably be what you would expect. So that will put
us probably somewhere around 2000 plus or minus, on the S&P
right. Those are some levels but obviously it’s very hard to know
in real time where we are.

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Aaran: 03:48 Yeah, sure.

Tian: 03:49 I think something else that might be helpful to discuss and
maybe you can get into a bit here is, how should we think about
the kind of medium term outlook, once we get to that bottom,
hat are the sectors to invest in, how should we think about it
going forward?

Aaran: 04:02 Yeah. So as you say, we need to sort of reach this point of peak
fear before we start thinking about aggressively deploying
capital. Our starting point is that buy signal. So one of the longer
term signals that we look at is our 18 month RSI signal.

Aaran: 04:21 I suppose by design this is trying to flag long-term oversold

conditions. When the RSI score is middling, it doesn't really tell
us anything. Once it passes a certain threshold, we use 30, that
typically indicates the sector is very much facing long-term
oversold conditions. It's a good starting point to flag some of
these potential outperformers. This actually overlaps quite
nicely with some of our more longer term pieces like capital
cycle analysis. The main points of this is really is to flag
companies and sectors that have seen capital leave that sector.
You've got to this point where returns have been super high,
you've had all these new entrants come into the sector trying to
enjoy some of these excess returns. That naturally pushes down
the outlook going forward.

Aaran: 05:22 So, that actually ties in quite nicely to some of our buy signals
because it relates to this idea that more capital today leads to
less returns going forward. Right now we're seeing this
asymmetry form in certain areas. So obviously energy has been
pummelled recently. Pre-virus, pre-price, we had seen energy
companies tighten their belts through 2019. These guys were
already cutting capex, shutting down rigs. These two sort of
bearish oil shocks should really start to accelerate that process.
We think that we're on a new path of peak pessimism in the
energy sector. Once we get to that turning point. Once there's a

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 shakeout of the industry that should allow the survivors to
really benefit from higher excess returns in the future.

Aaran: 06:23 Now talking about some of the actual measures that have been
deployed, right? Some fiscal and monetary stimulus and the
combination of low oil prices, that should be highly beneficial
for the manufacturing sector, for housing and autos, which are
rate sensitive. We think these areas are most poised for that
asymmetric recovery.

Aaran: 06:46 We can also look at select EM equity markets. So, the guys that
are a more reliant on oil imports, the markets that are perhaps
more small and more concentrated, where a liquidity boost
might provide an asymmetric upside. These are sort of the kind
of areas that we're looking at. It is a buying opportunity in the
sense that these guys had been beat up so much recently.
We're recommending clients to sort of stagger in rather than
deploying capital outright right now. It's a buying opportunity
but we're not quite there for the once in a decade buying
opportunity right now. In terms of thinking about some of the
factors that might actually delay this buying opportunity, the
once in a lifetime kind of opportunity, what are some of the
unthinkable things that perhaps people aren't really factoring in
right now?

Tian: 07:49 So, I guess one of the main things to think about now is the risk
that the exchanges get closed, if the exchanges actually closed
until the virus gets under control. That will probably be a
situation where if the portfolio was well positioned going into it,
that you would expect the things to get worse before it gets
better. That by the time the exchange is open, things might
already be better, right. It could be offside. I mean historically
exchange closures actually open when the market's gapping
down.

Aaran: 08:18 Yeah.

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Tian: 08:18 We saw after world war one. Obviously it kind of depends on
how long it's closed for and things like that. Normally you would
think it’s one of the last things they want to do. I think the risk
has not really felt that high, but basically in the past week, we're
starting to see kind of both monetary and fiscal policy feels like
they're lost, they've done everything they can.

Tian: 08:41 They've lost control, right? I think there's now a sense of
government, at least in terms of the stimulus side. It's not going
to lose control of the situation. The response in terms of trying
to tackle the virus, has not been that aggressive in the U.S. Or
UK. To say what China and some of the Asian countries did
originally. There's also the risk that they might lose control of
the virus situation and the path may not work out like China. If
you've got a situation where there's a sense of authorities
panicking, right? The saying goes... markets stop panicking
when authority start panicking. Usually, it's good when
authorities start panicking. Well, if they're panicking, but then
the policy is not having the impact. Then they're losing control,
that's potentially when they think about closing the exchange.

Aaran: 09:24 Right.

Tian: 09:27 It's hard to obviously put a number on it, but I think this starting
to show more real risks than even a week ago, right.

Aaran: 09:36 Thank you very much, Tian.

Tian: 09:37 Thank you.

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