INK Canadian Insider spring 2020 presentation (preliminary) Welcome to the INK Canadian Insider Index Spring rebalancing overview. This quarter we will focus on the Index’s G-economy bet. So where does the Index fit in this COVID-19 dominated world? We will answer that by using our G versus D economy framework. The G-economy stands for government led inflation and is a scenario where record government spending and central bank stimulus combines with constrained supply chains helps to generate inflation. In contrast, the D-economy stands for a debt-saddled deflationary economy hampered by record global debt and constrained consumer spending due in part to CoviD19 uncertainty. In our framework we have those two economies competing for dominance and that has important implications for the asset mix decision. If you believe the D economy is going to dominate you want to have exposure to defensive investments such as bonds or maybe bond proxies such as software stocks along with cash and probably some gold. If you believe the G-economy is eventually going to win out, then equities and gold, silver and other stores of value are probably the places to be. Essentially, we entered a D-economy via a deflationary shock associated with the Covid-19 lockdowns which helped lead to the early spring collapse in the oil price. But, will the environment change towards the G-economy? Let’s take a look at the case for the G-economy. The line is the 10-year history of 10-year inflation expectations in the US as measured by Treasury bond breakeven yields. On the chart we have plotted some key dates that we believe likely had in impact on the inflation outlook. First in 2011, we had the Tea Party driven Budget Control Act (BCA) which resulted in almost a Trillion dollars in planned pending cuts over 10 years. It effectively put the breaks on additional fiscal stimulus which helped alleviate inflation fears despite low interest rates and QE. Fast forward to 2017 with the BCA still in place Fed set out to normalize its balance sheet which sent a signal to markets don’t expect the Fed to always be there to control long term bond rates. Inflation was moving up after the election of Donald Trump but appears to have been overwhelmed by Fed tightening. In 2019, Trump succeed in getting a new budget deal that over rode the BCA and promised new a Trillion in new spending over the next 10 years. However, that would turn out to be small change compared to what happened in 2020 when in reaction to Covid-19 he signed the cares act worth $2 trillion in new spending with another potential $3 trillion on the way in new initiatives that he have yet to be approved. Meanwhile, Fed normalization is gone and replaced with a pledge for unlimited buying. That is helping the bond market right now, but that normalization risk may come back worry bond investors down the road. Those worries could intensify if all the new 2020 stimulus overwhelms deflationary trends. And there is a lot of stimulus with the Treasury set to borrow $2.6 trillion in the second quarter of 2020. That equates to near half of the US Gross Domestic Income recorded in the same quarter a year earlier. Meanwhile, US business loans have grown 26.3% year-over-year as of April, a rate not seen since 1952. The g-economy is being supported by the government. In fact, some US unemployed workers were better off on government assistance then they were at their jobs. Meanwhile, some supply chains are constrained, including transportation services. It is early days but there some signs of pricing pressure with India bringing in price controls for airline tickets. We will have to see if that type of situation plays out elsewhere. At this point, the jury is out whether the D-economy will prevail or if the G-economy will emerge. Neither scenario can be ruled out, so there is a strong case for investor portfolios to have exposure to both D-economy and G-economy sensitive assets. The INK Canadian Insider Index is geared to inflation, the hallmark of the G-economy. The index has a 0.72 correlation with 10-year breakevens which can be seen in the chart which shows the 1-year index return in red and the 12-month change in breakevens in blue. The correlation is higher the S&P/TSX Composite which has 0.67 correlation with the blue line. This correlation can be viewed in the context of index relative performance against the S&P/TSX composite. When the Index was launched live in 2014, it was during the relatively high inflation period when the Fed was close to meeting its inflation target. During this period 10-year breakevens peaked on May 15, 2018. Between the November 14, 2014 index launch and the peak in May, the index in blue outperformed the S&P/TSX Composite by almost 20%. Next came the falling inflation period from May 15, 2018 to the present. During the period the Index gave up about 27% against the Index. So, why do insider stocks seem to have more sensitivity to the inflation outlook? One factor is likely their readiness to bet on a turnaround in the resource sector when others have finally given up. In addition, they are also prone to buying in stocks where they have a strong conviction on pricing power resilience compared to the consensus. We not only see that in consumer stocks such as Empire which owns grocery stores across the country, but also in the financials such as prime mortgage lender first financial. That leads us to how insiders are positioned now. On a sector basis Financials is still number one, but it is followed by both economy sensitive basic materials and then the consumer sectors. Gains in basic materials were found primarily gold stocks at the expense of financials which lost a variety of names including some REITS. When we view the allocation based on whether stocks are more sensitive to a G-economy or D-economy, G- economy wins hands down with 62% of the names tilted to G in green. 24% may work in both and 14% are tilted to D. This reinforces our view that the index is a way to be positioned or hedged for increasing inflation risk. The next two slides list the 31 G-economy, while the next slide lists the 7 D-economy stocks and the subsequent slide lists the 12 stocks that we believe could work in both. The both group is dominated by gold miners. In terms of traditional characteristics, we would not classify the INK Canadian Insider Index as having a bias at this point to either growth or value with metrics like Price to Book or P/B on the chart coming in a 2.2 which is higher than the broad TSX market at 1.5. However, some metrics like Price to Sales or P/S is cheaper at 1.5 versus. 3.0. In our view a key takeaway is to assess investment opportunities and risks beyond the traditional growth and value framework. Investors could also benefit from assessing the likelihood of a G-economy type environment dominated by increasing inflation. Under that scenario, the INK Canadian Insider Index could provide a hedge, or possibly even leverage to an inflationary world. As convictions grow towards inflation, investors could increase exposure to the index. Finally, a reminder that the Index is used the Horizons Cdn Insider Index ETF and that little foot note after the F discloses that INK is eligible to receive a fee from Horizons ETFs for indexing services. The ETF which goes by symbol HII on the TSX is a two-time Fundata Canada award winner. All the best navigating these tricky times. Please read our disclaimer and disclosure and most of all thank you for your time and please visit index.inkresearch.com for more information and index resources.