Investment Views March/April 2016

Investment Views
March/April
May/June 2015
2016
Contents
Foreword
Current market assessment
1. Focus
Top issue of the month
Economic outlook
4
5
6
7
9
2. Asset classes
Money market and currencies
Bonds
Equities
Alternative investments
10
10
14
18
22
3. Investment management
26
4. Appendix
30
31
32
34
Glossary
Important legal information
VP Bank Group
Investment Views
March/April 2016
Foreword
Crude oil’s stranglehold
Dear Reader
This wasn’t what investors expected at all. What started as jitters about a supposed slowdown of the Chinese
economy quickly developed into the biggest market correction since the financial crisis. Equity markets were
at the centre of the storm, but corporate bonds and even the US dollar also took a beating.
There has been much head-scratching about the reasons why this happened. But instant answers are not
necessarily the right ones. As we explain in the “Economic
outlook” section, we regard the widespread gloom-mongering
about the global economic situation as wildly excessive. Even
so, such opinions can be dangerous. If they gain credence,
consumers and companies become less willing to spend.
So what lies behind the correction? A major factor is the
oil price. The plummeting price of crude oil (down by
70% in two years) has the potential to create negative
feedback effects. In our equity market assessment we
analyse these dangers in detail. Looking ahead, however,
we believe that the oil price will stabilise and recover,
as we explain in the “Alternative investments” section.
The recent market correction also offers opportunities.
For example, after the widening of credit spreads we now
regard an investment in high yield bonds as attractive again.
We also see opportunities in the European banking sector,
where collapsing share prices have driven valuation ratios
to extremely low levels similar to those experienced during
the financial and debt crises. But investors must be selective
here. Some of these low valuations could be deceptive, as
many banks will have to resort to tough restructuring measures
in order to strengthen their capital base. You can read more
about this in “Top issue of the month”.
Hendrik Breitenstein
Head of Group Investment,
Product & Market Management
Bernd Hartmann
Head of Group
Investment Research
Current market assessment
The tables below summarise VP Bank‘s trend assessments for all asset classes in our investment universe. The arrows reflect
the forecasts of our investment strategists for the coming three to six months.
Money market and currencies (pages 10–13)
Currencies Rate as of 18/02/2016
EUR vs. USD
1.109
January 2016
À
Bonds: total return (pages 14–17)
March 2016
¼ New
EUR vs. CHF
1.103
¼
À
New
USD vs. CHF
0.995
¼
À
New
GBP vs. CHF
1.429
À
À
USD vs. JPY
113.86
À
À
AUD vs. USD
0.715
À
À
USD vs. SGD
1.404
¼
À
USD vs. RUB
75.445
¼
Key interest rates
Switzerland
–0.75%
Europe (EMU)
USA
High yield bonds
High yield
January 2016
¼
March 2016
New
À
Emerging market bonds
Hard currency bonds
À
À
Local currency bonds
À
¼
New
New
Equities (pages 18–21)
Switzerland
¼
À
¼
Europe
À
À
North America
¼
À New
¼
¼
Pacifi c
¼
À
0.05%
¼
¼
Emerging markets
À
À
0.50%
À
À
New
New
Commodities
À
À
Crude oil
À
À
Investment grade government bonds
Switzerland
À
À
Gold
À
À
Europe
À
À
Real estate shares
¼
À
New
USA
À
À
Private equity
¼
À
New
Convertible bonds
¼
À
New
Hedge funds
¼
¼
Investment grade corporate bonds
Switzerland
½
À
New
Europe
½
À
New
USA
½
À
New
Legal notes on page 32
5 | March/April 2016 | Current market assessment
Alternative investments (pages 22–25)
Bond yields (pages 14–17)
1. Focus
Top issue of the month | Jens Zimmermann
Déjà vu in Europe’s banking sector
Bank shares in retreat
The European banking sector is being buffeted by three
main factors at present.
First, profitability is being compromised by negative
interest rates in Europe and a flattened yield curve. The
negative interest rates imposed by the ECB, SNB and
Sweden’s Riksbank cannot easily be passed on to customers and will therefore undermine bank profits. Moreover,
as inflation expectations recede, the gap between shortand long-term interest rates contracts, and this will cut
into banks’ profit margins. In the past, earnings growth
in the banking industry has tracked the steepness of the
yield curve fairly closely, albeit with a lag. The yield curve
in Europe is now flatter than in 2011/12. Against this
background, expected earnings growth for the European
banking index has already fallen to 1.5%, but that is still
slightly higher than the 2011/12 rate.
Second, there are worries that the low oil price will lead
to bankruptcies among oil companies, resulting in losses
on banks’ loan portfolios. While US banks certainly have
a major credit exposure to American shale oil producers,
European banks made a full disclosure in their fourthquarter reports.
Third, several big European banks (Deutsche Bank, Credit
Suisse, Unicredit) are undergoing radical restructuring.
Their plans will involve large-scale write-offs that have a
direct negative impact on capital ratios. This comes at
the worst possible time – just when the profit outlook is
sagging. In this environment, the erosion of capital ratios
cannot be countered by strong profit growth. Investors fear
Legal notes on page 32
that these banks will therefore have to come to the market
for new injections of equity capital to get their capital ratios
back to the required levels.
Investor sentiment regarding the European banking sector
is now so shaky that comparisons are being drawn with
the run-up to the 2008/09 financial crisis. In this febrile
atmosphere, the share prices of some banks have been hit
by liquidity worries. There were rumours, for example, that
Deutsche Bank was going to duck payment of an attractive
6% coupon on a contingent convertible bond (“CoCo”),
because the bond might have to be converted into new
shares to strengthen the bank’s capital base. Deutsche
Bank shares slumped by 12% before CEO John Cryan
circulated an internal email (intended, of course, for the
eyes of external investors) insisting that the bank’s capital
base was rock solid.
Valuation ratios at crisis levels
Valuation levels in the European banking sector reflect the
fact that investors are comparing the current uncertainty
with the financial crisis of 2008/09 and the European debt
debacle of 2011/12. After its headlong retreat at the start
of the year, the European banking index is now trading at
a price-to-book ratio of 0.6, with almost three-quarters of
shares in the index showing a ratio of less than 1.0. This is
the same level as was seen during the European debt crisis
and only slightly above the 0.5 figure posted by the index
during the global financial crisis of 2008/09.
Despite uncertainties about write-off requirements in
individual banks, we believe that comparisons with the
two great crises are misplaced. European banks have
strengthened their capital base since then and moved out
of riskier lines of business. Reduced risk, however, tends to
mean lower profitability. A stricter regulatory environment
has been an important factor in preventing European banks
from returning to pre-crisis levels of profitability (return on
equity).
7 | March/April 2016 | Focus | Top issue of the month
European banking shares have fared much worse than
the overall market in recent weeks. A tougher operating
environment is making life difficult for Europe’s banking
industry, but not all banks are equally affected. Valuation
ratios have now reached extremely low levels. These can
provide attractive opportunities for investors who adopt
a carefully selective approach.
8 | March/April 2016 | Focus | Top issue of the month
Liquidity worries unjustified
The European Central Bank’s regular refinancing operations
are still being conducted on the basis of “full allocation”.
In other words, commercial banks can borrow as much
as they want from the ECB. As long as a bank possesses
enough high-quality bonds to serve as collateral, a liquidity
crunch is virtually ruled out. This is a crucial difference
compared with past financial crises and should defuse
market anxieties about possible bankruptcies in the
banking sector.
Although the negative reaction of European banking shares
has gone too far, there will still be relative winners and
losers. Not all banks will be equally able to rise to the
challenges facing them. Share selection should not simply
focus on shares with the lowest valuation levels, because
depressed valuations often merely reflect below-average
profitability.
Conclusion
Despite their low valuation ratios we continue to advise
against buying shares of companies that are still in the
process of major restructuring (Deutsche Bank, Credit
Suisse, UniCredit). These companies are lagging behind
competitors that have taken advantage of recent more
prosperous years to make the necessary adjustments.
Now that the earnings outlook has deteriorated, the
laggards could be forced to ask the market for additional
equity capital to correct an erosion of their capital base
due to write-offs necessitated by restructuring.
Price-to-book ratio in relation to return on equity
1.0
0.9
UBS
ING
0.8
0.7
RBS
0.6
CS
0.5
0.4
0.1
4.0%
BNP
SocGen
HSBC
Barclays
Standard Ch.
UniCredit
0.3
0.2
BBVA
Santander
Deutsche Bank
6.0%
8.0%
10.0%
Return on equity 2017
UBS, by contrast, has already largely completed its restructuring process. This is reflected in the fact that UBS now
boasts a higher return on equity than any other major European bank. The downside of this “best in class” profitability
is a high price-to-book ratio (relative to other European
banks) of 0.9. Even so, UBS is still one of our top picks
in the European banking sector.
BNP Paribas shares are now at an attractive valuation level
after their recent retreat. A price-to-book ratio of 0.5 looks
cheap when set against an expected return on equity of
8.5% (almost enough to cover estimated equity costs).
On this basis a ratio closer to 1.0 would be justified. BNP
Paribas is therefore also one of our European banking
favourites.
Who’s afraid of recession?
“Who’s afraid of the big bad wolf?” sing the little pigs in
Walt Disney’s cartoon. Then the wolf comes and tries to
blow their houses down with a huff and a puff. This spells
disaster for the two pigs that built their houses of sticks
and straw. But the third pig used bricks, and his house
stays standing.
The wolf now causing shudders on the world’s financial
markets is the allegedly looming danger of recession. So
we need to ask how solidly the world economy is built.
Is it straw or brick? A sober look at the data gives a clear
answer: a broad economic downturn is not in prospect.
The wolf of recession is going to be kept at bay. This
comforting assessment is borne out by the situation in the
world’s two heavyweight economies, the USA and China.
USA: respectable growth
Anxiety about a global downturn is now sweeping the
financial markets. But however hard one looks, there is
no tangible evidence to support this fear. The markets
are acting as if the USA were on the brink of recession,
whereas the data suggest just the opposite. The Federal
Reserve Bank of Atlanta’s “GDPNow“ forecasting model
provides a real time estimate of GDP based on currently
available monthly macroeconomic indicators. The reading
for 2016 Q1 is a quarter-on-quarter growth rate of 0.62%.
That is a very respectable outcome and certainly does not
hint at recession. The calculations of the Reserve Bank
of New York, which put the probability of a US recession
during the coming twelve months at a miniscule 4.5%,
point in the same direction. We remain confident that
the US economy will achieve a growth rate of around
2.4% this year.
China: slowdown, but no collapse
Recent market turmoil and recession jitters were sparked
by events in China. The Chinese purchasing managers’
index for the manufacturing sector has been in the contraction zone since August 2015. In other words, manufacturing
Legal notes on page 32
companies in China
are having a rough time.
This is underscored by the
figures for industrial production, which show that output
growth, though still positive, is decelerating. But this is by no means an exclusively Chinese
phenomenon. Lacklustre manufacturing performance is a
worldwide problem. The slack global picture is exemplified
by JP Morgan’s global purchasing managers’ index, which
is hovering at only just over 50 points. Thus the sluggishness of the Chinese manufacturing sector cannot be
regarded as exceptionally negative in the international
context. Manufacturing weakness has its roots in the
historically weak trend of world trade.
In this situation China’s services sector, accounting for 51%
of GDP, has a crucial role to play. This part of the economy
is doing relatively well. The gradual liberalisation of the
financial services industry is propelling expansion in the
banking sector, and jobs and growth are also being
generated by education and healthcare. Despite market
pessimism, important economic indicators for the services
sector have recently shown an improvement. Against
this background, a significant slowdown of growth in the
Chinese economy is unlikely. The government’s growth
target of 6.5% for 2016 therefore looks realistic, especially
in view of the support being provided by higher public
spending and lower interest rates.
Conclusion
Despite the present discomfort on the financial markets,
it would be wrong to conclude that a global economic crisis
is in the offing. Individual commodity producing countries
like Brazil and Russia have been driven into recession by
collapsing oil prices, but these are special cases. What
matters is that the world’s economic heavyweights are still
on course. So who’s afraid of the big bad recession? Not us!
9 | March/April 2016 | Focus | Economic outlook
Economic outlook | Dr Thomas Gitzel
Highlights
• Fears of a global economic downturn
are sweeping the financial markets.
• But these fears are not supported by
the current data.
• Present calculations indicate that US
economic growth could even accelerate
in the first quarter.
2. Asset classes
Money market and
currencies
Money market and currencies
Market overview
EUR/CHF and EUR/USD: exchange rates since February 2014
USD/CHF: exchange rate since February 2014
1.30
1.40
1.25
1.35
1.30
1.20
1.05
1.00
1.25
1.15
1.20
1.10
0.95
1.15
1.05
1.10
1.00
0.90
1.05
1.00
0.95
0.85
F M A M J J A S O N D J F M A M J J A S O N D J F
F M A M J J A S O N D J F M A M J J A S O N D J F
EUR/USD (r-h scale)
USD/CHF
GBP/CHF and GBP/USD: exchange rates since February 2014
USD/JPY and USD/AUD: exchange rates since February 2014
1.75
1.60
129
1.50
1.45
1.40
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00
0.95
0.90
123
1.55
1.70
1.50
1.65
1.45
1.60
105
1.40
1.55
99
1.35
1.50
1.30
1.45
1.25
1.40
117
111
93
87
81
75
F M A M J J A S O N D J F M A M J J A S O N D J F
GBP/CHF
F M A M J J A S O N D J F M A M J J A S O N D J F
GBP/USD (r-h scale)
USD/JPY
Key interest rates in Switzerland, eurozone, USA: since February 2006
Key interest rates in UK and Japan: since February 2006
6%
7%
5%
6%
4%
USD/AUD (r-h scale)
5%
3%
4%
2%
3%
1%
2%
0%
1%
–1%
0%
–2%
06
07
08
USA
Legal notes on page 32
09
10
11
Eurozone
12
13
14
15
Switzerland
16
06
07
UK
08
09
10
Japan
11
12
13
14
15
16
11 | March/April 2016 | Asset classes | Money market and currencies
EUR/CHF
Money market and currencies | Dr Thomas Gitzel
12 | March/April 2016 | Asset classes | Money market and currencies
Market outlook
Euro higher against the dollar
After two months of sideways drift, the euro climbed
sharply against the US dollar at the start of February
EUR/USD was just below 1.14. This was not due to a
specific strengthening of the euro but reflected a general
weakening of the greenback. Turbulence on the financial
markets has stoked fears of a US recession. The markets are
focussing on the negatives and ignoring the positives. The
US economy created 151,000 new jobs in January, which
was below the consensus forecast of 190,000 but enough
to push the unemployment rate down to 4.9%. However,
many market participants reacted to the weaker-thanexpected job creation figure while overlooking the fall
in unemployment. In recent weeks this selective concentration on bad news has caused the money markets (i.e.
interest rate futures) to price out any further interest rate
hikes by the Fed for the rest of this year and to price in
an increase of merely 25 basis points (100 basis points =
1%) for 2017. The US dollar has reacted to the change
in market expectations by retreating on a broad front –
not just against the euro.
As the accompanying chart shows, the movement of the
EUR/USD exchange rate closely follows the differential
on interest rate futures. The futures markets are currently
predicting that the interest rate for three-month dollars
will be 0.77% in a year’s time (compared with 0.62% at
present), while the rate for three-month euros will be
–0.34% (currently –0.17 %). A long-term comparison shows
that the expected interest rate gap of –1% between the
eurozone and the USA is in line with the current exchange
rate of USD 1.12 per euro. On this basis the present
exchange rate represents fair value.
Adjustment of EUR/USD forecast
Our forecast of a higher euro against the US dollar was
based on our assessment that the markets’ expectations
regarding the US economy and Fed policy were overoptimistic. We judged that these expectations would be
trimmed, forcing the dollar down. This has now happened,
EUR/USD and interest rate gap on money market futures
0.4%
1.4
0.2%
1.35
0%
1.3
–0.2%
–0.4%
1.25
–0.6%
1.2
–0.8%
1.15
–1%
1.1
–1.2%
–1.4%
1.05
–1.6%
2012
1
2013
2014
2015
Interest rate difference between USD and EUR money market futures
EUR/USD exchange rate (r-h scale)
Looking ahead, our EUR/USD forecast therefore needs
to be adapted to the new situation.
Macroeconomic conditions have not deteriorated as
much as the money markets now appear to believe. The
US economy is still on a moderate recovery track. Retail
sales rose more strongly than expected in January, and
there are indications of healthy GDP growth in the first
quarter. Inflation, meanwhile, is set to move back above
1% in the months ahead. In this environment the Fed will
have the opportunity to raise its key rate at least twice
during the course of this year. The money markets will
then have to re-adjust their expectations, setting the scene
for resumed dollar strength against the euro in the weeks
ahead. On this basis we have revised our forecast and
now predict a rate of between USD 1.08 and 1.15 per
euro for the next three to six months. Further ahead,
however, purchasing power parity will be a key factor.
A fair rate in line with purchasing power parity would
be around 1.25. In the medium term the euro will steer
back towards that level.
Movement in EUR/CHF rate
The euro has recently jumped above CHF 1.10. Whatever
the reasons for the sudden weakening of the Swiss
Highlights
• US interest rate futures are not pricing
in any further rate hikes this year.
• We believe this assessment is mistaken
and therefore expect the US dollar to
strengthen in the months ahead as the
money market repositions itself.
• This year will see a further moderate
weakening of the Swiss franc.
Conclusion
We expect the US money market to price in interest rate
hikes again during the coming months, and that should
enable the US dollar to strengthen against the euro.
Legal notes on page 32
Meanwhile, the
weaker trend of
the Swiss franc is likely
to continue, resulting in
further moderate depreciation against the euro.
Key interest rates
Switzerland
Europe (EMU)
USA
March 2016
¼
¼
À
Upside/downside ranges indicated by our 3–6 month interest
rate forecasts:
½> +50 basis points À+25 basis points
¼No change
–25 basis points
¾< –50 basis points
13 | March/April 2016 | Asset classes | Money market and currencies
currency since mid-January, this movement is fundamentally welcome. In terms of purchasing power parity, the
franc is still too expensive at its present level, although its
overvaluation has been somewhat reduced by the recent
depreciation.
The strong franc has handicapped the Swiss economy,
resulting in relatively weak GDP growth of 0.8% in 2015.
This weak economic performance is now taking its toll
on the currency. Meanwhile, the eurozone economy has
achieved a significant rate of expansion for the first time
in three years. Provisional estimates put eurozone GDP
growth for 2015 at 1.5%, and the signs are that this year‘s
rate will be of a similar order of magnitude. Thus the growth
gap is widening in the eurozone’s favour, further justifying
the recent movement of the EUR/CHF rate. The forex
markets cannot fail to take note of the fact that the Swiss
economy is being hampered by the high franc. As a result,
the franc has been showing an underlying weaker trend
since last summer. It now looks as if the Swiss National
Bank has decided to give the franc’s moderate depreciation
an extra push. Commercial bank sight deposits with the
SNB have grown by CHF 5.5 billion since the start of the
year, and that probably represents the amount by which
the SNB has intervened in the market.
We believe that the euro’s move above 1.10 is not a blip.
Currencies that deviate strongly from their fair value
tend to return to purchasing power parity over the long
term. A fair EUR/CHF rate would be in the region of 1.20.
A direct march to that level is theoretically possible but
rather unlikely in practice. Market technicalities suggest
that counter-movements – i.e. short-term CHF appreciation –
are possible, and in the present market environment it is
doubtful that the franc will suddenly lose its safe haven
status. We regard an initial milestone of 1.15 as realistic.
2. Asset classes
Bonds
Bonds
Bond yields – overview
Switzerland: yields since February 2014
Emerging markets (hard currency): yields since February 2014
1.5%
7.0%
1.0%
6.0%
6.5%
5.5%
5.0%
0.5%
4.5%
4.0%
0.0%
3.5%
3.0%
–0.5%
F M A M J J A S O N D J F M A M J J A S O N D J F
CHF government bonds
F M A M J J A S O N D J F M A M J J A S O N D J F
CHF corporate bonds (5 to 10 y.)
EM government bonds (5 to 10 y.)
EM corporate bonds (5 to 10 y.)
Europe: yields since February 2014
Emerging markets (local currency): yields since February 2014
3.0%
6.0%
2.5%
5.5%
2.0%
1.5%
5.0%
1.0%
4.5%
0.5%
0.0%
4.0%
F M A M J J A S O N D J F M A M J J A S O N D J F
F M A M J J A S O N D J F M A M J J A S O N D J F
EUR corporate bonds (5 to 10 y.)
EM government bonds (local currency)
USA: yields since February 2014
High yield: yields since February 2014
4.5%
9.0%
3.5%
8.0%
2.5%
7.0%
1.5%
6.0%
0.5%
5.0%
8.5%
7.5%
6.5%
5.5%
F M A M J J A S O N D J F M A M J J A S O N D J F
USD government bonds (5 to 10 y.)
Legal notes on page 32
USD corporate bonds (5 to 10 y.)
F M A M J J A S O N D J F M A M J J A S O N D J F
Global high yield (5 to 10 y.)
15 | March/April 2016 | Asset classes | Bonds
EUR government bonds (5 to 10 y.)
Bonds | Dr Thomas Gitzel, Bernhard Allgäuer
Market outlook
16 | March/April 2016 | Asset classes | Bonds
Stormy weather
Recent weeks have seen dramatic ups and downs on the
world’s financial markets. All risk-bearing asset classes have
been on the down escalator, whereas “safe haven” assets
(government bonds, gold) have risen steeply. In addition
to China worries and anxiety about the US economy, the
markets have also been spooked by fears of a collapse
of the European banking system. The result was a perfect
storm. Yields on German, Swiss and US government bonds
have slumped to close to their all-time lows.
We stick to our view that the current turmoil on the financial
markets reflects exaggerated fears about the economic
outlook. There are no signs of a looming recession, either
in the USA or in the eurozone. US interest rate futures
are now ruling out any rate hikes by the Fed this year. We
regard this as erroneous and believe that the Fed will have
scope for further interest rate increases before the year is
out (see “Money market and currencies” on pages 12 and
13). If our assessment proves correct, a counter-movement
can be expected, with yields backing up before too long.
Eurozone: special factors
Following the clear signals given by Mario Draghi after
the meeting of the ECB’s monetary policy committee in
January, further measures are on the agenda for the next
meeting in March. Rock-bottom oil prices are continuing
to push inflation expectations downwards. This is a thorn
in the flesh for Frankfurt’s monetary guardians. The ECB
may therefore opt for an expansion of its monthly asset
purchase programme. A further reduction of the deposit
rate is already regarded as virtually certain. The drop of
almost 40 basis points in the yield on 10-year Bunds is
therefore not merely a reaction to developments in the
USA but also reflects expectations about future ECB action.
A comparison with Japan highlights the improbability of
yields on long-term EUR bonds remaining at their present
levels. During years of low Japanese interest rates and asset
purchases by the Bank of Japan, Japanese yields were well
above the levels now prevailing in the eurozone. Moreover,
the rise in oil prices that we expect to see in the second
half of the year will push up inflation rates, further paving
the way for a yield back-up. Swiss government bonds
can be expected to take their cue from the eurozone. The
recent depreciation of the Swiss franc, coupled with higher
oil prices, could give a significant push to Switzerland’s
inflation rate in the medium term. That should cause the
downward yield trend to go into reverse.
Corporate bonds: credit spreads now adequate
We have been warning for over a year now that risk premiums (option-adjusted spreads) on corporate and high yield
bonds were too low. Credit risks (default and migration
risks), spread risks and liquidity risks should not be judged
merely with reference to the present time but should be
assessed in the context of the entire credit cycle. Widening
spreads lead to capital losses or lower returns in comparison with government bonds.
We do not expect a recession (just as we did not expect
one last year), and we therefore forecast only a moderate
rise in defaults – mainly in the commodities sector. Last
year our chief worry was the migration risk, i.e. the risk
of deteriorating credit ratings. High corporate leverage is
a problem here. In recent years companies have increased
their debt capital in relation to their equity capital, and that
generally means increased risk. At the same time profit
margins in many companies are under pressure, with the
result that earnings performance has been unsatisfactory.
Highlights
• We expect the downward yield trend
to be reversed in the months ahead.
• Credit spreads on corporate and high
yield bonds have been widening for over
a year and are now at appropriate levels.
• High yield bonds offer the most upside
potential.
Yield comparison: government and corporate bonds
2.2%
4.0%
2.1%
3.8%
2.0%
3.6%
1.9%
1.8%
3.4%
1.7%
3.2%
1.6%
3.0%
1.5%
2.8%
2.6%
Apr 2015
Jul 2015
Oct 2015
Jan 2016
USD Treasuries, 5-10 years
USD corporates, 5-10 years (r-h scale)
Although virtually unreported in the media, credit spreads
widened continuously last year. In our investment management operations we offloaded all positions in high yield
bonds at an early stage. Since then the high yield sector
has lost 10% of its value.
In our forward assessment for 2016 we predicted that
spreads would continue to widen, albeit at a more moderate pace. However, the collapse of commodity prices
speeded up this process, with the result that our yearend target was already reached in February. We expect
commodity prices to strengthen over the coming weeks
and months (see page 24), and that should result in
narrower spreads for borrowers in the energy and mining
sectors. We have therefore adjusted our assessment and
predict no further widening – current spreads provide
adequate compensation for risk.
Preference for high yield bonds
Even so, corporate bonds remain unattractive, because
the risk-free yield component (i.e. the government bond
yield to which the spread is added) looks set to rise. Rising
yields carry the threat of capital losses, especially on long
maturities. For risk-tolerant investors we therefore prefer
a supplementary position in high yield bonds. These are
Legal notes on page 32
Conclusion
We expect rising yields on government bonds in all
currency segments. Spreads on corporate and high yield
bonds have been widening for over a year and are now
at appropriate levels. We expect spreads to narrow as
commodity prices recover. Nevertheless, corporate bonds
remain unattractive. Much greater potential is offered by
high yield bonds, whose spread of 8% is enough to cancel
out expected capital losses due to rising yields in the
government securities market.
Benchmark
March 2016
Gov. bonds Switzerland2
À
Gov. bonds Europe (EUR)2
À
Gov. bonds USA 2
À
Inv. grade corp. bonds Switzerland2
À
Inv. grade corp. bonds Europe (EUR)2
À
Inv. grade corp. bonds USA 2
À
High yield bonds3
À
Emerging market bonds (hard currency)3
À
Emerging market bonds (local currency)3
¼
1
As of 18/02/2016
Yield
3
Total return
2
% YTD1
6.42%
3.34%
3.50%
1.36%
0.06%
–0.84%
–7.75%
1.44%
–15.89%
17 | March/April 2016 | Asset classes | Bonds
1.4%
1.3%
Jan 2015
intrinsically riskier
(lower credit quality
means a higher default
rate, irrespective of the
macroeconomic environment),
but they now offer a spread of around
8% over government issues. They also have shorter
maturities, which means that a yield back-up has less
impact.
2. Asset classes
Equities
Equities
Equity indices – overview
Switzerland: market movement since February 2014 (indexed)
Pacific: market movement since February 2014 (indexed)
125
120
120
115
115
110
110
105
105
100
100
95
95
90
90
85
J F M A M J J A S O N D J F M A M J J A S O N D J
J F M A M J J A S O N D J F M A M J J A S O N D J
MSCI Switzerland TR Index (net) rebased
MSCI Pacific TR Index (net) rebased
Europe: market movement since February 2014 (indexed)
Emerging markets: market movement since February 2014 (indexed)
115
120
115
110
110
105
105
100
100
95
95
90
90
85
85
80
80
75
J F M A M J J A S O N D J F M A M J J A S O N D J
MSCI Europe TR Index (net) rebased
MSCI Emerging Markets TR Index (net) rebased
North America: market movement since February 2014 (indexed)
United Kingdom: market movement since February 2014 (indexed)
125
115
120
110
115
105
110
105
100
100
95
95
90
90
J F M A M J J A S O N D J F M A M J J A S O N D J
MSCI North America TR Index (net) rebased
Legal notes on page 32
J F M A M J J A S O N D J F M A M J J A S O N D J
MSCI UK TR Index (net) rebased
19 | March/April 2016 | Asset classes | Equities
J F M A M J J A S O N D J F M A M J J A S O N D J
Equities | Bernd Hartmann
Market outlook
20 | March/April 2016 | Asset classes | Equities
2016 got off to a dismal start on the equity markets. Not
since 2009 has the first month of trading on the global
equity markets been as bad as this. The discouraging
kick-off is not a good omen for the rest of the year. Of
27 bad Januaries for the Dow Jones Industrial Average
since 1950, 13 heralded a negative performance for the
year as a whole.
The big losers were last year’s favourites: Europe and
Japan. Unusually, the emerging markets suffered less
than bourses in the established economies. The sell-off
in Europe and Asia was so heavy that for a while it qualified
as an out-and-out bear market (defined as a fall of 20% or
more from a peak level). The world’s most important equity
market, Wall Street, also retreated, but US shares had not
been major winners in 2015 and losses at the start of this
year were correspondingly less dramatic. Nevertheless,
fears of a bear market are going the rounds in America too.
New bear market ahead?
The USA has experienced seven bear markets since World
War II. Most of them (five out of seven) occurred against
the backdrop of recession. Economic downturns were
mostly sparked by rocketing commodity prices (in the
1970s and 2008) or excessively sharp hikes in central bank
interest rates (1974 and 1980). Elevated valuation levels
also make share prices vulnerable. In 1962 and 1988,
for example, economic growth was positive, but high
valuations meant that external factors like the Cuba crisis
were enough to cause a sensitive reaction.
Based on past experience, we do not believe that conditions are ripe for a major and protracted retreat on the
equity markets. A US recession is not in the offing, and
there is no likelihood of a runaway surge in commodity
prices. Moreover, interest rate hikes by the Fed look
set to be moderate. Although valuation ratios on the US
market have climbed in recent years, the market cannot
be regarded as dangerously overvalued, especially if
one compares equity values with today’s low bond yields.
US bear markets and recessions
0%
–5%
–10%
–15%
–20%
–25%
–30%
–35%
–40%
–45%
–50%
1956
1964
Drawdown
1972
1980
1988
1996
2004
2012
US recession
Bearmarket
Nervous markets
Looking at the factors that have contributed to bear
markets in the past, there is no good reason to expect
an equity disaster now. But we still need to ask why
the markets are reacting so nervously.
In the short term, equity markets are driven strongly by
sentiment, which often leads to under- or overshooting.
The renowned economist Paul Samuelson once famously
quipped that the stock market had predicted nine of the
past five recessions. In the medium and long term, however, the financial markets behave in accordance with
economic reality.
Nevertheless, we should not underestimate the impact
of the markets’ current decoupling from the fundamentals.
If the divergence continues, there is a danger of negative
feedback that would make gloom-ridden prophecies selffulfilling. Thus the already weak oil price has come under
further heavy pressure as a result of a general increase
in risk aversion. This could push specialised oil producers
and some highly leveraged commodity companies to
the wall. Around 15 small oil companies in the USA have
recently filed for bankruptcy. This sort of weeding-out
process would be supportive of the oil price in the medium
and long term, but in the markets’ present febrile state
Highlights
• After a sobering start to the year, there are
now widespread fears of a bear market.
• The factors that triggered previous bear
markets are absent at present.
• But the danger of negative feedback effects
should not be ignored.
• A stabilisation and recovery of the oil price
is a key factor for the equity markets.
Oil price is key
Amid fears of negative feedback, the equity market has
recently been moving in tandem with the oil price. The
oil price will continue to be a major factor in the market’s
performance for a while yet. A gradual recovery of the
oil price in line with our forecast would therefore have
a positive impact on the equity market outlook. But it
remains to be seen when share prices will start reacting
to the (not particularly downbeat) fundamentals again.
We do not believe that the basic pre-conditions for a
bear market are met. Even so, the recent heavy losses
are unlikely to be followed by a rapid V-shaped recovery
such as happened after big corrections in the past. We
predict stabilisation followed by a gradual improvement.
Regionally, we see the best potential in markets with
attractive valuation levels and strong earnings growth.
Legal notes on page 32
In the present
situation, that means
the eurozone and the
emerging markets.
Benchmark
% YTD1
March 2016
Switzerland
À
Europe
À
North America
À
Pacific (incl. Japan)
À
Emerging markets
À
–8.24%
–10.17%
–6.51%
–9.14%
–21.11%
Upside/downside ranges indicated by our 3–6 month
absolute performance assessments
½> +5%
À+2% to +5%
¼–2% to +2%
–5% to –2%
¾< –5%
1
As of 18/02/2016
21 | March/April 2016 | Asset classes | Equities
the immediate effect would be increased turbulence.
There would also be a danger of loan write-offs in the
banking sector.
The low oil price can put pressure on the equity markets
in other ways too. Sovereign wealth funds of oil-producing
nations could be forced to sell off some of their investments
to cover their government’s budget deficits. Equities are
among the most liquid of these funds’ assets and therefore
the easiest to sell.
The collapse of the oil price at the start of this year
prompted analysts to slash their 2016 earnings forecast
for the global energy sector from +5% last December
to –30% in February. Although the weighting of energy
companies in the overall index has shrunk to around
6% (compared with over 10% five years ago), the impact
on the earnings outlook for the market as a whole is still
considerable. The current expectation is moderate earnings growth of 4.2%. After the stagnation of corporate
earnings in 2015, a continuation of the already protracted
bull market will require share prices to be underpinned
by improving fundamentals.
2. Asset classes
Alternative
investments
Alternative investments
Alternative investments – overview
Commodities: performance since February 2014
Private equity: performance since February 2014 (indexed)
155
115
105
145
95
135
85
75
125
65
115
55
105
45
95
35
85
25
F M A M J J A S O N D J F M A M J
DJ UBS Commodity TR Index (rebased on oil)
J A S O N D J F
F M A M J J A S O N D J F M A M J
WTI crude oil (in USD)
Precious metals: performance since February 2014
LPX 50 TR Index (EUR)
J A S O N D J F
LPX 50 TR Index (USD)
Convertible bonds: performance since February 2014 (indexed)
1,500
115
1,400
110
1,200
105
1,100
100
1,000
95
900
90
800
F M A M J J A S O N D J F M A M J
Gold (USD)
J A S O N D J F
F M A M J J A S O N D J F M A M J
Silver (rebased on gold)
UBS Convertible Index (USD)
Real estate: performance since February 2014 (indexed)
125
J A S O N D J F
UBS Convertible Index (CHF hedged)
Hedge funds: performance since February 2014 (indexed)
135
130
120
125
115
120
115
110
110
105
105
100
100
95
95
90
F M A M J J A S O N D J F M A M J
S&P Global Property TR Index (USD)
Legal notes on page 32
J A S O N D J F
SXI Swiss Real Estate Index (CHF)
F M A M J J A S O N D J F M A M J
HFRX Global HF Index (USD)
J A S O N D J F
Newedge CTA Index
23 | March/April 2016 | Asset classes | Alternative investments
1,300
Alternative investments | Rolf Kuster
Market outlook
24 | March/April 2016 | Asset classes | Alternative investments
Crude oil is subject to the same law as all other types of
asset: over the long term, its price is determined by supply
and demand. Global demand for oil is robust and is now
8% higher than before the financial crisis. Much has been
written about structural change in China and the resultant
slowdown of Chinese economic growth, but so far this has
had hardly any effect on crude oil demand. In the latest
issue of its closely watched monthly Oil Market Report,
the International Energy Agency left its demand forecast
for 2016 unchanged at 95.8 million barrels a day. This puts
the rate of demand growth in the current year roughly in
line with the long-term average.
The reason for the enormous movement in the price
of crude oil during recent months is not a weakening of
demand but the relentless growth of supply. The shale
oil revolution in America, coupled with a steady increase
in Russian oil output, has produced a glut of oil on world
markets over the last two years.
Price war with OPEC
While plunging oil prices are good for consumers, oilexporting nations have been hit hard. The IMF reckons
that Saudi Arabia faces an annual budget deficit amounting
to 10–20% of GDP over the next five years. If that is correct,
the Saudis will have completely exhausted their sovereign
wealth fund by the year 2020. Belt-tightening measures,
such as the recent increase in domestic petrol prices and
possible privatisations, are uncharted territory for the
pampered Saudis and could create political dynamite.
OPEC has been spurning production cutbacks and staking
everything on a successful price war. Low crude prices
are being used as a means of driving upstart transatlantic
producers out of the market. Recent reports of negotiations
between Russia and OPEC about a joint approach show
that necessity can persuade erstwhile rivals to toe the
same line.
Production cuts in the USA
The oil price swoon has already started to take its toll in
the USA. Capital spending in the oil and gas industry is
being reined in drastically, and new projects are being
put on ice or cancelled entirely. Risk premiums on loans
to US energy companies have risen by almost 50% since
December. If the oil price stays at its present level, it is
estimated that as many as 400 companies in the global
energy sector will go to the wall in the coming years. The
US shale oil industry, which until recently was riding the
crest of a wave, needs a barrel price of around USD 62
in order to maintain its production capacity in the longer
term. The contraction of US crude oil output will therefore
continue in the months ahead.
Iran back in the market
On 16 January 2016, the International Atomic Energy
Agency (IAEA) announced that Iran had fulfilled its pledge
to scale back its uranium enrichment programme. Numerous Western economic sanctions against Iran were then
lifted. Tehran immediately reiterated its intention to bolster
its crude oil production by one million barrels a day within
the next six months, thereby bringing Iran’s output back
to pre-crisis levels.
The market reacted to this news with yet another fainting
fit, but many analysts doubt that Iran’s ambitious goal can
be achieved. Without foreign investment, the Iranian oil
industry will hardly be able to raise production that fast,
given the dilapidated state of its infrastructure. Moreover,
various sanctions against Iran remain in effect and are
due to be lifted only gradually in a second phase lasting
several years.
Fundamental price limits
In general, global crude output is ultimately determined
by the marginal cost of production. This golden rule applies
not just to Iran, but also to the USA and Russia. In the long
term, nobody drills for oil if production costs are higher
than the going price on the market.
Oil sands
North American shale
Ultra deep water
Onshore rest of world
Onshore Russia
Deep water
Extra heavy oil
Break-even price (USD/barrel)
120
Offshore shelf
Onshore Middle East
Break-even prices for oil industry sectors
100
80
60
40
20
0
0
10
20
30
40
50
60
70
80
90
100
Crude oil production 2020, Million barrels per day (incl. natural gas liquids)
Average
Source: Rystad Energy
Costs vary, of course, depending on geographical location
and extraction method. Onshore production in the Middle
East is the lowest-cost sector and can be sustained even
at a price below USD 40 per barrel. Traditional extraction
methods outside the Middle East are more expensive,
carrying a break-even price of USD 40–60. At an oil price of
USD 60, about 85% of existing global production capacity
can be operated profitably on a long-term basis. Alternative
extraction methods, such as fracking of US shale oil deposits or extraction from Canadian oil sands, require an even
higher market price. Technological progress is gradually
pushing down production costs, but that cannot happen
overnight. Supply cuts are therefore inevitable, resulting in
upward pressure on the price. On the other hand, a crude
price above USD 60 per barrel would inevitably lead to an
expansion of production in America, which would in turn
substantially limit the further upside price potential.
Legal notes on page 32
The bottom line
Despite the economic
slowdown in China,
demand for crude oil has
not been dented. Today’s low
price will lead to a contraction of supply.
US shale oil producers, in particular, are seeing their
margins evaporate. Cutbacks in capital spending and
widening credit spreads on loans to this sector underscore
the desolate situation of the American oil and gas industry.
Until now, OPEC has not tried to halt the oil price retreat
by cutting production quotas, though rumour has it that
Russia, in cahoots with OPEC, could reverse the recent
massive increase in its production volume. Traditional oil
producing nations are exploiting low prices as a means
of squeezing their unloved American competitors out
of the market.
In the medium term, supply will have to fall in line with
marginal production costs. We are forecasting a price
range of USD 30–45 in the first half of 2016 on the basis
of current excess supply, but a range of USD 40–50 could
realistically establish itself by the end of the year if the
expected production cutbacks in America materialise.
Benchmark
Commodities
Gold
Crude oil
Commercial real estate
Private equity
Convertible bonds
Hedge funds
March 2016
À
À
À
À
À
À
¼
% YTD1
–26.94%
–48.38%
1.80%
–6.82%
–0.08%
–4.98%
–7.66%
Upside/downside ranges indicated by our 3–6 month absolute
performance assessments:
½> +5%
À+2% to +5%
¼–2% to +2%
–5% to –2%
¾< –5%
1
As of 18/02/2016
25 | March/April 2016 | Asset classes | Alternative investments
Highlights
• Demand for crude oil is still robust despite
the economic slowdown in China.
• OPEC is waging a price war in an attempt to
drive upstart competitors out of the market.
• US shale oil producers are seeing their
margins evaporate.
• A crude oil price of USD 40–50 per barrel
is realistic by year end.
3. Investment
management
Investment management | Aurelia Schmitt, Christoph Boner
Investment management portfolios
Strategic and tactical allocation – balanced portfolio based in CHF (% weightings)
Hedge funds
Money market
8
9
Convertibles
3
Commodities
8
14
2
Government bonds
10
Strategic
2
3
41
10
8
40
5
Europe
34
15
Corporate bonds
15
5
6
16
44
Money market
Bonds
Equities
Alternative investments
15
3
3
North America
5
14
6
Pacific
5
9
8
3
Global bands
Tactical
7
6
Emerging markets
18
Switzerland
VP Bank Strategy Funds
Product name
Curr.
ISIN
NAV
date
NAV
Payout
Currency
hedged
YTD
perf. %
VP Bank Strategy Fund Conservative (CHF)
CHF
LI0017957502
16/02/16
1,006.50
no
yes
–3.14%
VP Bank Strategy Fund Conservative (EUR)
EUR
LI0017957528
16/02/16
1,315.99
no
yes
–3.31%
–3.09%
VP Bank Strategy Fund Conservative (USD)
USD
LI0100145379
16/02/16
1,248.80
no
yes
VP Bank Strategy Fund Balanced (CHF)
CHF
LI0014803709
16/02/16
1,429.16
no
yes
–5.46%
VP Bank Strategy Fund Balanced (EUR)
EUR
LI0014803972
16/02/16
889.13
no
yes
–5.57%
VP Bank Strategy Fund Balanced (USD)
USD
LI0014804020
16/02/16
1,335.48
no
yes
–4.90%
For detailed information on our investment management mandates, please contact your personal advisor.
Legal notes on page 32
27 | March/April 2016 | Investment management | Investment management portfolios
Emerging markets
Investment management
28 | March/April 2016 | Investment management | Current investment tactics
Current investment tactics
Current investment tactics
The markets have started the year in turbulent mood.
Volatility has been fuelled by China worries, collapsing
commodity prices and resultant doubts about the global
growth outlook. Declining commodity prices were for
a long time regarded as positive for the world economy,
but this interpretation is now viewed with scepticism.
Attention has shifted to the negative impact on resourcerich countries and commodity-producing companies.
Global growth expectations have been scaled back further
since the start of the year, with anxious eyes being cast
on China in particular. The Chinese authorities have taken
various steps to stabilise the economy, but the country’s
equity markets have suffered major losses, and the yuan
has had a bumpy ride. The rest of the world has felt the
tremors, with further hefty movements on the markets
during February. A headlong sell-off has been avoided,
but we regard the size of the correction as exaggerated.
Various indicators now point to an equity market recovery.
Against this background we have raised our equity allocation from neutral to overweighted. We have also adopted
a more positive assessment of the credit markets. Turmoil
in the commodities sector has led to a further widening of
credit spreads on high yield bonds. Spreads in this sector
now look attractive compared with historical levels – which
was not the case in previous months.
Bonds
We are sticking to an underweighting of government bonds
in investment management portfolios based in CHF and
USD and hold a neutral weighting in EUR portfolios. We
regard inflation-linked securities as an attractive alternative
to standard government bonds in the light of prevailing
moderate inflation expectations. Duration remains below
benchmark in all portfolio profiles. The widening of credit
spreads means that credit risks are now fairly valued.
Even so, corporate bonds remain unattractive in view
of the prospect of a rise in the risk-free yield component
(i.e. higher government bond yields). We are neutrally
weighted in emerging market bonds, where our exposure
is now limited to hard currency issues.
Equities
We have taken advantage of the current turbulence to
raise our equity allocation to overweighted. Alongside
the eurozone and other established economies, we also
regard the emerging markets as attractive. Eurozone
equities benefit from relatively cheap valuation levels,
positive earnings momentum and ongoing support
from the ECB. As long as global economic growth rates
remain positive and the world does not slide into recession,
corporate earnings continue to hold out hope of higher
share prices. Additional support comes from the dividend
yield, which is still high compared with bond yields.
Emerging markets should profit from a stabilisation of
commodity prices. Their outlook remains positive.
Alternative investments and currencies
We are neutrally weighted in commodities, convertible
bonds and hedge funds. We terminated our exposure
to private equity in mid-February. We hold an open EUR
position in CHF-based portfolios. Otherwise, major
currencies are hedged.
Investment management
Return
Our solutions
Money market
Bonds
Equities
Risk
Features
Equity allocation
Investment horizon
Fixed income
Conservative
Balanced
Growth
Equities
0%
10–30%
20–50%
30–70%
80–100%
3 years
5 years
7 years
10 years
15 years
Conservative
Balanced
Growth
Equities
Alternative investments
Expected return
Investment solutions Fixed income
Strategy fund
1 unit
Fund mandate
from CHF 250,000
or equivalent
Classic mandate
from CHF 1 mn
or equivalent
Special mandate
from CHF 2 mn
or equivalent
Portfolio management
enhanced mandate
from CHF 5 mn
or equivalent
Legal notes on page 32
29 | March/April 2016 | Investment management | Our solutions
Liquidity requirement
4. Appendix
Allocation
Strategic Long-term division of an investment portfolio into various asset classes
(money markets, bonds, equities, alternative investments) on the basis of a
defined investment strategy. The strategic allocation is reviewed twice a year
and adjusted if appropriate.
Tactical Modification of the strategic allocation by short-term variations. The
tactical allocation is the portfolio mix implemented at any given time with the aim
of achieving an above-average return.
Benchmark A standard, e.g. a market index or index-based portfolio, against
which the performance of a portfolio is measured.
Bond fund Investment fund investing chiefly in bonds of the currency stated in
the fund‘s name.
Commodity fund Investment fund investing chiefly in tradable commodities and
commodity-linked financial instruments.
Conversion premium Percentage difference between the price of a share
acquired by converting a convertible bond and the price of the same share
bought directly on the stock market.
Conversion price The price at which a convertible bond can be converted
into shares or participation certificates. The conversion price is fixed when the
convertible bond is issued.
Convertible bond fund Investment fund investing chiefly in convertible bonds.
Currency hedging Technique whereby the value of an investment or debt
denominated in a foreign currency is protected against exchange rate movements. Investors and borrowers achieve this by taking positions in the currency
futures market. Hedging excludes the risk of exchange losses but also rules
out the possibility of exchange gains.
Dividend yield A measure of the profitability of an equity investment, calculated
by comparing a company‘s dividend with its current share price. This figure
can be used to make yield comparisons with other types of capital market investment.
Duration A weighted average of the maturity of all income streams (principal
repayment and interest payments) from a bond or bond portfolio. In the case
of coupon payments the duration is shorter than the period to maturity. In the
case of zero coupon bonds duration and maturity are identical.
Equity fund Investment fund investing chiefly in equities of the country or
region stated in the fund‘s name.
Euribor (Euro Interbank Offered Rate) Interest rate at which first-class banks
borrow from each other at short term on the euro interbank market.
Exchange traded commodity (ETC) A secured debt instrument with an unlimited term whose value is coupled to the value of one or more commodities.
Exchange traded fund (ETF) Investment fund whose composition mirrors that
of an index and which can be traded at any time without an issue commission.
Exchange traded notes (ETNs) are debt securities. Although distinct from
investment funds, they have similar characteristics. Like an ETF, they are
traded on an exchange and usually linked to the return on a benchmark index.
Special types of ETN are exchange traded certificates and exchange traded
commodities.
Fiduciary deposit A money market transaction in which a bank places a deposit
with a foreign bank on a client‘s behalf. The deposit has a fixed term, fixed
amount and fixed interest rate, or it may take the form of call money with a
48-hour period of notice. Fiduciary deposits can be made in various currencies.
The deposit is in the name of the client‘s bank but for the account and at the
risk of the client.
Fixed-term deposit Money deposited by a client with a bank for a fixed term and
at a predetermined interest rate. Fixed-term deposits are subject to a minimum
Legal notes on page 32
deposit amount (frequently CHF 100,000) with terms ranging from one to twelve
months.
Fund of funds Investment fund that invests exclusively in other investment
funds.
Hedge fund Investment fund in which the manager can employ various alternative investment techniques such as leverage, short-selling and derivatives.
Investment grade Credit ratings of BBB to AAA, indicating that the securities
are of satisfactory to very good quality.
ISIN International Securities Identification Number.
LIBOR (London Interbank Offered Rate) Interest rate at which first-class banks
borrow from each other at short term on the interbank market in London.
Lombard loan Loan granted against a collateral pledge of securities, bank balances, precious metals or claims under life insurance policies. Lombard loans can
be granted for private or commercial use and can take the form of a fixed loan or
overdraft.
Medium-term note Debt security issued on tap by Swiss and Liechtenstein
banks with a maturity of two to eight years.
Money market fund Investment fund that invests only in assets with a very short
remaining life to maturity or with a very short duration.
NAV (net asset value) Value of a unit of an investment fund, calculated by taking
the market value of the fund on a specified date, deducting the fund‘s liabilities
and dividing the result by the number of units outstanding.
Open end An open end certificate is a certificate that has an unlimited life. The
holder can remain invested as long as he likes.
Price information / indicative prices The prices stated in this publication
are closing prices on the date indicated. They are net prices, i.e. excluding
purchasing costs. The price of an asset when bought on the stock exchange
or other market will usually differ from the price stated in this publication
because of changes in supply and demand. Current prices are available from
your advisor at VP Bank.
Private equity fund Investment fund investing chiefly in equity securities that
are not (yet) listed on an exchange. The liquidity of such funds can be very
limited.
Real estate fund Investment fund that invests on a diversified basis in land
and buildings and sometimes also in equity or debt securities of real estate
companies.
Strategy funds A family of strategic investment funds distinguished by different
risk categories. The portfolio mix of each fund is based on the corresponding
asset allocation of VP Bank.
Third party fund Investment fund issued on behalf of and managed by a third
party.
Volatility The range of fluctuation of an interest rate or asset price (stock, bond,
commodity, investment fund unit, etc.) within a given period. It is a mathematical
expression (annualised standard deviation) of the overall risk on an investment.
For example, to find the standard deviation for changes in the price of an investment fund, one takes the average price of the fund over a given period and then
calculates how far the price has deviated from that average during that period.
The greater the range of fluctuation, the more volatile and therefore more risky
the fund is. Risk can also be expressed as maximum loss.
Yield The effective interest rate on a bond, as calculated by the ISMA (International Securities Market Association) method. This internationally recognised
method is the most commonly used basis for yield calculations. It permits precise
adjustments for fractional periods and multiple coupon payments within a year.
YTD perf. % Year-to-date performance in per cent, i.e. performance from the
start of the current year to the present date.
31 | March/April 2016 | Appendix | Glossary
Glossary
Important legal information (Disclaimer)
32 | March/April 2016 | Appendix | Disclaimer
Principal sources of information / No warranty: This document
was produced by VP Bank Ltd (hereinafter referred to as VP Bank)
using sources that are believed to be reliable. The principal sources
of information for this document were:
• secondary research (financial analyses by specialist brokers/
analysts);
• information published in domestic and foreign media and by
wire services (e.g. Bloomberg, Thomson Financial Datastream,
Reuters, etc.);
• statistics in the public domain.
Although the utmost care has been taken in producing this document, VP Bank does not warrant that its contents are complete,
up-to-date or correct. In particular, the information in this
document may not include all relevant information regarding
financial instruments or their issuers. The opinions expressed
in this document reflect the opinions of VP Bank on the date
stated in the document. It is possible that VP Bank and/or its
subsidiaries have published in the past or will publish in the
future documents that contain information and opinions that
do not accord with those in this document. VP Bank and/or
its subsidiaries are not obliged to provide recipients of this
document with such documents offering
different information or opinions.
Suitability / Not an offer: The information contained in this
document does not constitute a recommendation to buy, hold
or sell the financial instruments described herein, nor does it
constitute advice on legal, financial, accountancy or taxation
matters or any form of personal advice.In particular, the financial
instruments discussed in this document may be unsuitable for an
investor on the basis of his/her investment objective, time horizon,
risk tolerance, risk capability, financial situation or other personal
circumstances or because of sales restrictions applying to a
particular financial instrument. The information provided in
this document is therefore in no way a substitute for individual
advice by a specialist qualified in the matters referred to or a
substitute for perusal of the documents provided by the issuers
and sellers of the financial instruments (e.g. issue prospectuses,
term sheets, full and simplified investment fund prospectuses).
In particular, this document does not constitute an offer, a solicitation to make an offer or a public advertisement inviting participation in transactions involving the financial instruments described
herein or an invitation to enter into any transaction. VP Bank and
its subsidiaries expressly refuse to accept any liability for any
detriment or loss allegedly incurred as a result of the information
contained in this document.
Notes on risk: The price and value of the investments mentioned
in this document and the returns achieved on these investments
may rise or fall. Investments denominated in foreign currencies are
also exposed to exchange rate fluctuations. No assurance can
be given to investors that they will recover the amounts that they
invest. The past performance of an investment is not a reliable
indicator of future performance.
The same remarks apply to performance forecasts. The performance shown does not take account of any commissions and costs
charged when
subscribing to and redeeming units in investment funds. Such
commissions and costs have a detrimental effect on performance.
Any investment mentioned in this document may involve the
following risks (the list of these risks should not be regarded as
exhaustive): issuer (creditworthiness) risk, market risk, credit risk,
liquidity risk, interest rate risk, currency risk, economic risk and
political risk. Investments in emerging markets are speculative and
particularly strongly exposed to such risks.
Proprietary business: To the extent permitted by law, VP Bank
and/or its subsidiaries and/or their employees may participate in
other financial transactions with the issuers of assets mentioned
in this document. They may invest in these issuers or render
services to them, acquire orders from them, hold positions in
their assets or in options on those assets, carry out transactions
in these positions, or have other substantial interests relating to
the issuers of assets mentioned in this document. Such actions
or situations may already have occurred in the past.
Core methods used in financial analysis: VP Bank has adopted
the following core methods in its financial analysis:
• The stock selection list is based on a global, quantitative
screening model. This classifies stocks according to factors that
deliver the highest performance levels over the long term.
• In each currency sector, bond selection considers only bonds
without special clauses (bullet bonds). These tend to be
Eurobonds with investment grade ratings and no special risk
premiums. Attention is also paid to the marketability factor
before allocations are divided into
the sovereign and corporate segments.
• ETF selection is based on quantitative scoring and a qualitative
analysis.
• Investment funds are selected according to the “best in class”
method. Our multi-tiered analytical process includes both
quantitative and qualitative elements.
Investment horizon: Recommendations are based on welldiversified portfolios. The recommended investment horizons
for balanced port folios are five to ten years, and for equity
portfolios generally more than ten years.
Explanatory notes on conflicts of interest: Potential conflicts
of interest are to be clarified by means of the following numbers
appended to the issuer‘s name. VP Bank and/or its Group companies
1. hold more than a 5% equity interest in the issuer;
2. have significant financial interests in relation to the issuer;
3. have within the past twelve months been involved in managing
a consortium that issued the issuer‘s financial instruments by
way of public offering;
4. are a market maker in the issuer‘s financial instruments;
5. have within the past twelve months concluded an agreement
relating to the provision of investment banking services with
issuers subjected to financial analysis (with regard to themselves
or their financial instruments) or received a service or an undertaking to provide a service under such an agreement;
6. have concluded with issuers subjected to financial analysis
(with regard to themselves or their financial instruments) an
agreement relating to the conduct of that financial analysis.
Notes on the distribution of this document: Access to the
information contained or financial instruments (especially
investment funds)
described in this document may be restricted by national law.
Accordingly, the information contained or financial instruments
(especially investment funds) described in this document are not
intended for persons or corporations subject to any jurisdiction
in which access to the information contained or financial instruments (especially investment funds) described in this document
is prohibited or made conditional on official authorisation (whether
on account of the nationality of the persons concerned, their place
of residence or any other reason).
Persons who come into possession of this document or wish to
acquire financial instruments (especially investment funds)
described in this document must therefore acquaint themselves
with local laws and restrictions and abide by them.
The contents of this document are protected by copyright, and
any utilisation other than private use requires the prior authorisation of VP Bank.
British Virgin Islands: This information was distributed by
VP Bank (BVI) Ltd, VP Bank House, 156 Main Street, Road Town,
Tortola VG1110, British Virgin Islands. VP Bank (BVI) Ltd is subject
to authorisation and regulation by the British Virgin Islands Financial Services Commission.
Hong Kong: This information was distributed by VP Wealth
Management (Hong Kong) Ltd, 33/F, Suite 3305, Two Exchange
Square, 8 Connaught Place, Central, Hong Kong. Related financial
products or services are only available to wholesale clients with
liquid assets of over USD 1 million that meet the regulatory criteria
and the Company’s policy to be a client, and who have sufficient
financial experience and understanding to participate in financial
markets in a wholesale jurisdiction. VP Wealth Management
(Hong Kong) Ltd is a licensed corporation under the Securities and
Futures Ordinance (Cap. 571) and is regulated by the Securities
and Futures Commission (SFC).
Singapore: This document is distributed by VP Bank (Singapore)
Ltd, 9 Raffles Place, # 49-01 Republic Plaza, Singapore 048619,
Singapore, which is licensed as a merchant bank by the Monetary
Authority of Singapore.
Liechtenstein: This document has been created and distributed
by VP Bank Ltd, Aeulestrasse 6, 9490 Vaduz, Liechtenstein.
VP Bank Ltd is authorized and regulated by the Financial Services
Authority (FMA) Liechtenstein.
Luxembourg: This information was distributed by VP Bank
(Luxembourg) SA, 26, Avenue de la Liberté, L-1930 Luxembourg,
Luxembourg. VP Bank (Luxembourg) SA is subject to authorisation
and regulation by the Luxembourg Commission de Surveillance
du Secteur Financier (CSSF).
Switzerland: This information was distributed by VP Bank
(Switzerland) Ltd, Bahnhofstrasse 3, 8001 Zurich, Switzerland.
VP Bank (Switzerland) Ltd is subject to authorisation and regulation
by the Swiss Financial Market Supervisory Authority (FINMA).
USA/Canada: This document or copies thereof may not be
delivered to persons who are resident in or citizens of the USA
or Canada.
33 | March/April 2016 | Appendix | Disclaimer
Internal regulations and organisational measures to prevent
conflicts of interest: VP Bank and its Group companies have
implemented a number of internal regulations and organisational
measures to prevent potential conflicts of interest and to identify
any such conflicts that arise.
VP Bank Group
VP Bank Ltd is a bank domiciled in Liechtenstein and is subject to the Financial Market Authority (FMA) Liechtenstein,
Landstrasse 109, PO Box 279, 9490 Vaduz, Liechtenstein, www.fma-li.li
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Hong Kong Representative Office
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VP Fund Solutions (Luxembourg) SA
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T +352 404 770-260 · F +352 404 770-283
[email protected] · www.vpfundsolutions.com
VP Fund Solutions (Liechtenstein) AG
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[email protected] · www.vpfundsolutions.com
Published by
Group Investment Research
VP Bank Ltd
Aeulestrasse 6
9490 Vaduz
T +423 235 61 73
F +423 235 76 21
[email protected]
Editors and contributors
Hendrik Breitenstein, Head of Group Investment, Product & Market Management
Bernd Hartmann, Head of Group Investment Research
Dr Thomas Gitzel, Senior Economist
Rolf Kuster, Investment Strategist
Jens Zimmermann, Senior Equity Analyst
Bernhard Allgäuer, Senior Investment Strategist
Christoph Boner, Head of Investment Management
Aurelia Schmitt, Head of Investment Management Liechtenstein
Norman Quaderer, Junior Investment Strategist
Christina Strutz, Office & Publication Manager
Periodicity
Bimonthly
Publication date
1 March 2016
This publication was finalised on
26 February 2016
Closing prices as at
18 February 2016, unless otherwise stated
Sources for charts and statistics
Bloomberg, Reuters, Thomson Financial Datastream,
unless otherwise stated
Photos
Roland Korner, Triesen
Printed by
BVD Druck+Verlag AG, Schaan
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climate neutral
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