REVIEW OF US EQUITIES - EXPLAINING THE DOLLAR OPPORTUNITY FUND’S 2022 DECLINE

Background

Developed markets equities, specifically US-based equity securities have outperformed most asset classes
in the past decade, a period of growth where the Federal Reserve (Fed) has kept accommodative interest
rates (relatively low cost of borrowing for both consumers and corporates) in order to recover from the
Global Financial Crisis. The US experienced a strong period of growth made possible thru these 4
attributes:

• World’s Largest Market - The US offers the largest consumer market on earth with a GDP of $20
trillion and 325 million people. Household spending is the highest in the world, accounting for
nearly a third of global household consumption.
• Nexus of Innovation – The US is a recognized leader in research and development (R&D), and
registers more international patents than any other country. Breakthrough discoveries are made
and nurtured at leading universities and incubators across the nation.
• Ease of Doing Business - The US is consistently ranked among the best internationally for its overall
competitiveness and ease of doing business. Backed by a regulatory and judiciary environment
that is particularly conducive to starting and operating a business
• Workforce Talent - The US workforce is diverse, skilled, innovative and mobile – and US attracts
among the most skilled and productive workers in the world thru its migration policies.

As a result, digital transformation took hold both for individuals and for industries (3rd Industrial
Revolution). To appreciate this context, in 1995 only 0.4% of the world’s population had access to the
internet. By 2014, more than half of the world’s population became internet users. Also, major industries
were transformed by the high speed internet that we now enjoy.

However, the past year has not been kind to both equities and fixed income. Let’s review the past year so
you can appreciate the context of why moving forward, US Equities are still an important consideration
for any equity portfolio.

2022 Review

One cannot stress enough the

critical role inflation played in the
year that was. However, inflation
already showed its threatening
head months before 2022.

Let’s step back to 04 February

2021, the day Larry Summers
published an op-ed in the
Washington Post. He once served
as treasury secretary under Bill
Clinton and as National Economic
Source: Statista, Bureau of Labor Statistics
Council director under Barack Obama, He basically argued that the $1.9T stimulus package of Biden
increases the risk of runaway inflation. Other economists echoed the caution raised by Summers, but the
world was too busy dealing with the raging COVID-19 pandemic that any inflation that had already
breached the Fed inflation target of 2% in 2021 was dismissed as transitory. In other words, when the
world reopens and supply chains are restored, the inflation will revert to the target range set by the Fed.

Inflation is the effect when money losses its purchasing power. It is a critical economic indicator of price
stability, one of the two mandates entrusted to the Fed. (The other being maximizing employment) In
order to promote price stability, the Fed uses monetary policy (interest rate policies). The Fed raises
interest rates so that holders of cash will be incentivized to spend money later rather than now in
exchange for some return which we call interest. The effect is that demand weakens and then prices come
down. Interest rates also impact those seeking to borrow cash. Whether its consumers or companies,
higher interest rates lead to higher cost of loan repayments which lead to a decline in borrowing. Thus
the intended activities downstream also decline. (Activities such as expansion, hiring, home and vehicle
purchasing, retail consumption are predicted to decline, leading to economic decline.)

By January 2022, the Fed began laying the groundwork to raise rates to tackle the fastest inflation in a
generation. Adding to global inflationary pressures was Russia’s invasion of Ukraine in late February. This
act of war branched to other headlines from sanctions levied on Russia and its oligarchs to specific risks
posed by Russia such as restricting natural gas flows to Europe and the potential destruction of nuclear
power infrastructure in Ukraine.

As inflation peaked and was followed by jumbo rate hikes by the Fed, US recession fears took hold by June
of last year. Aside from the obvious issues on food and energy prices, other problems mushroomed in the
finance and crypto space. October of last year was bannered by the make-or-break capital raise and new
strategic plan of Credit Suisse in a bid to shore up its balance sheet and investor confidence. It was then
that Saudi National Bank raised its stake to 9.9% ownership of Credit Suisse. (The statements of Saudi
National Bank Chairman that it will no longer infuse additional capital to the embattled lender eventually
jumpstarted the downfall of Credit Suisse). In crypto markets, the fall of FTX wherein a selloff of its native
cryptocurrency FTT by rival Binance resulted in solvency issues.

Overall, 2022 was riddled with bad news for investments layered one after the other. The result is that
the year was the worst for both equities and fixed income since the 1800s.

Annual Total Return of the S&P500 and US 10Yr Treasury

Source: Deutsche Bank

When customers with US equity exposures feel anguish or remorse, it is because they have experienced
firsthand, one of the most challenging years any investor has faced. The Dollar Opportunity Fund is not
immune to the headwinds that caused the declines of 2022, where decades-high inflation
disproportionately impacted high growth sectors such as information technology and consumer
discretionary. These are the top sector exposure of the Dollar Opportunity Fund strategy and are believed
to have strong growth potential. These are the companies that took a beating in 2022. Only a few sectors
were spared such as the energy sector as their profits increased due to the increase in oil prices due to
the Russia-Ukraine war.

But there is a silver lining because in InLife, we provide protection alongside the access to global assets
such as US equities and we espouse a long-term investment horizon. Thus, let’s discuss why US equities
are still an important consideration in any equity portfolio.

US Economy Outlook

o US growth expected to moderate in 2023

o US corporate and consumer balance sheets remain healthy
o Recession remains a risk; earnings expectations are adjusting
o Risks remain focused on Fed timing, inflation and geopolitics

• Inflation reached 4-decade highs but has showed signs of moderation yet still far from the 2% inflation target
of the Federal Reserve (Fed)
• Growth is pressured as Fed tightening causes a shift in interest rate regime (near-zero interest rates of the
past 15 years that was accommodative to consumer spending and corporate borrowing and expansion is no
longer the case)
• Geopolitical risks still persist even 12 months after Ukraine War started
• Probability of severe recession remains low if S&P500 earnings projections and low unemployment of 3-4%
persist
• However, earnings growth may slow from 2022 positions and gross GDP numbers may moderate from peaks
seen during the pandemic
• Declining property values and slow credit growth and downgraded earnings projections may show signs that
the Fed rate hikes is taking hold
• Widespread tech layoffs do not constitute lower tech spending, rather a small re-adjustment compared to
the massive hiring done by the sector
• Outside technology, there is no sweeping trend of layoffs, rather a tightening of hiring resulting to current
tightness in the US labor market

Digital Transformation

o Continued growth in digital spending anticipated to enhance productivity and profitability

o US offers highest concentration of companies oriented to digital transformation
o Already a key component of US GDP, the digital economy offers bright prospects for continued growth

• Software, tech equipment and R&D investments account for more than 50% of total non-residential capital
expenditure.
• Analysts project 2.4% increase in global IT spending in 2023 and 5.4% growth in the US alone
• Global spending in cyber security is projected to increase by 13% in 2023
• US remains the global tech company leader with more than twice as many public tech firms than China,
according to Bloomberg’s Innovation Index
• US has the highest concentration of tech public companies (as a percentage of total public companies)
 • Trend of increasing productivity with the application of technology benefits multiple US industries as well
• Digital economy has grown to be 3rd largest sector as a contributor to US GDP only behind Real Estate and
Manufacturing

US Equity Valuations

o Near term concerns about inflation and rising rates contribute to volatility
o Valuations relative to rest of world reflect higher profitability and quality metrics
o Key US equity market exposures benefit from long-term digital transformation trends

• The forward 12-month P/E ratio for the S&P 500 is 17.1. This P/E ratio is below the 5-year average (18.5)
and below the 10-year average (17.3).
• Higher Forward P/E multiples for US reflect the exposure to sectors such as technology, communication
services, healthcare and consumer discretionary – sectors that are benefiting from high quality companies
that have strong growth prospects
• The target fund’s active managers fundamental analysis leads them to continually seek to take advantage
of the temporary price dislocations created by unsettled markets.

Dollar Opportunity Fund

Fund Objective: Seeks long-term capital growth by investing in a managed portfolio of equity securities of US
companies across a wide range of sectors believed to possess strong growth potential.
Risk Profile: Highly Aggressive
Insurance Plans: Dollar-denominated Single-Pay Plans

o Talented target fund management team with experience across different economic and market cycles
o Securities selection not for the near-term but 1 year and beyond
o Sector allocation benefits from long-term secular trends (trends such as digital transformation, advances in
healthcare, treatment and medicines, strong household consumption, green revolution)
o Fund is overweight in sectors that have low gearing (they borrow less, thus during rising interest rate
environment, these sectors are not impacted from a financing perspective)

Target Fund Sector Allocation as of 28 February 2023

Target Fund Top Holdings as of 28 February 2023 (≈38% of AUM)
Mastercard Inc Second largest payment network in the world ($6.0T in payment volume in 2021)
Microsoft Corp Second largest company by market capitalization, market share leader of PC
operating systems
Apple Inc World’s largest company by market capitalization, one of the most valuable brands
in the world
Amazon.com Inc Diversified tech and consumer discretionary company with market leadership of US
e-commerce at 37.8%
UnitedHealth Group Inc 13th largest company by market capitalization and top insurer in the US based on
premiums
Alphabet Inc 5th largest company by market capitalization and leader in search (85%)
ServiceNow Inc Cloud computing leader in B2B space
Visa Inc World’s largest payment network ($10.9T in payment volume in 2021)
SBA Communications Corp Infrastructure centered on communication technology
MSCI Inc Global provider of portfolio analysis tools and market indices

As of 22 March 2023, the target fund does not have any exposure to Silicone Valley Bank, Signature Bank and First
Republic Bank.

The Target Fund – Franklin Templeton US Opportunities Fund

The InLife Dollar Opportunity Fund invests in a locally domiciled dollar-denominated feeder fund. The local feeder
fund invests into the Franklin Templeton US Opportunities Fund (ISIN: LU0195948665), our target fund.

About Our Target Fund Manager

Franklin Templeton with more than 7 decades of experience has grown to become the sixth largest independent
asset management company in the world. The firm pioneered many firsts in the history of finance. In 1973, the
headquarters moved from New York to California to take part in the growth of a new budding industry – personal
computing. Franklin Templeton also led in emerging markets investing under the leadership of Dr. Mark Mobius,
who during his time in Templeton, actively managed funds totaling over $50 billion in assets. Franklin Templeton is
now led by Jenny Johnson, following in the footsteps of company founder and her grandfather, Rupert H. Johnson,
Sr.

Today, Franklin Templeton has more than $1.4T in assets under management (AUM). It has more than 1,300
investment professionals, and over 9,000 employees spread across offices in 32 countries.

The Franklin Templeton US Opportunities Fund is managed by Grant Bowers (managed the fund since 2007, click
here for bio) and Sarah Araghi, CFA (managed the fund since 2016, click here for bio).

STAY CALM, STAY PROTECTED

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