Investment Views
May/June 2016
2015
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
May/June 2016
Foreword
Low interest rates here to stay
Dear Reader
Investors need strong nerves at present. Sentiment has been on a roller coaster in recent months, exposing the
markets to extreme stresses and strains. An anxiety attack at the start of the year sent equities, the oil market
and high yield bonds into headlong retreat. But this was followed, apparently out of the blue, by a vigorous
rally. This time – for once – blame for the markets’ gyrations does not lie chiefly with the central banks. Even so,
monetary actions are still causing headaches for investors. Central
banks have resorted to increasingly unconventional measures
since the financial market crisis, and more and more of them are
now taking the highly unorthodox step of imposing negative
interest rates.
When creditors suddenly have to pay to lend money instead
of receiving interest, this has far-reaching repercussions.
The central banks’ actions do not merely affect short-term
money market investments. The reverberations are felt
throughout large parts of the real economy and financial
system.
Low and negative interest rates will not be a short-lived
phenomenon. The main burden falls on investors, who have
to decide how to respond. There is no sure and simple way of
escaping the low interest trap, but various courses of action
are possible. In “Top issue of the month” we offer a provisional
assessment. Who are the winners and who are the losers?
What are the challenges for investors, and what measures
can they take?
Hendrik Breitenstein
Head of Group Active
Advisory & Consulting
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 22/04/2016
EUR vs. USD
1.126
EUR vs. CHF
March 2016
¼
1.099
¼
USD vs. CHF
0.976
GBP vs. CHF
1.408
USD vs. JPY
Bonds: total return (pages 14–17)
May 2016
 New
À
New
¼
À
New
À
À
High yield bonds
High yield
March 2016
May 2016
À
À
Emerging market bonds
Hard currency bonds
À
À
Local currency bonds
¼
¼
111.32
À
À
AUD vs. USD
0.775
À
¼
USD vs. SGD
1.350
À
À
Switzerland
À
¼
New
USD vs. RUB
65.775
¼
¼
Europe
À
¼
New
North America
À
¼
New
New
Key interest rates
Switzerland
New
Equities (pages 18–21)
–0.75%
¼
¼
Pacifi c
À
¼
Europe (EMU)
0.00%
¼
¼
Emerging markets
À
À
USA
0.50%
À
À
Commodities
À
À
Crude oil
À
À
Investment grade government bonds
Switzerland
À
À
Gold
À
À
Europe
À
À
Real estate shares
À
¼
New
USA
À
À
Private equity
À
¼
New
Convertible bonds
À
¼
New
Hedge funds
¼
¼
Investment grade corporate bonds
Switzerland
À
À
Europe
À
À
USA
À
À
Legal notes on page 32
5 | May/June 2016 | Current market assessment
Alternative investments (pages 22–25)
Bond yields (pages 14–17)
1. Focus
Top issue of the month | Bernd Hartmann
Life below zero: coping with low and negative yields
Monetary policy has become increasingly unconventional
in recent years, and more and more central banks are now
resorting to the most unorthodox measure of all: negative
interest rates. The negative interest rate club currently
includes the eurozone and Japan as well as Switzerland,
Denmark and Sweden. Sub-zero rates are by no means
confined to central bank transactions. Lenders are being
hit by negative yields in large segments of the money and
bond markets. Around 80% of all government and quasigovernment bonds in the Swiss franc sector are now trading with a negative yield to maturity. In the euro sector the
figure is just under 50%.
Who are the losers?
The most obvious losers are savers and conservative
investors. Real interest rates on money market investments
and in large parts of the bond markets are now in minus
territory. Barring a deflation scenario, the purchasing power
of money invested in these vehicles gradually diminishes.
Who are the winners?
Central banks have various reasons for imposing negative
interest rates. In small countries the motivation is often the
need to combat a runaway appreciation of the currency.
In the eurozone, however, the primary aim is to rev up
the economy. By charging banks for parking their surplus
liquidity, the European Central Bank hopes to encourage
them to grant more credit and thereby provide economic
stimulus. It is too early to say whether this will be successful. In countries that already have lengthy experience of
negative interest rates, lending has mostly contracted when
rates were pushed below zero. Whether the economy will
be on the winning side in a sub-zero interest rate environment is therefore questionable.
The situation is clearer with regard to public finances. As
long as inflation outpaces low or negative borrowing costs,
public debt will gradually decline in real terms (other things
being equal). In the past, various countries have been able
to whittle down their public debt burden thanks to a protracted period of sub-zero real interest rates.
The clearest winners, however, are holders of assets that
confer direct ownership rights, e.g. equities and real estate.
But not all such assets profit equally. Precious metals, for
example, have shed a large part of their gains in recent
years.
0%
Legal notes on page 32
Investment world in an era of negative real yields
Yield
Emerging market equities
Private equity
Real estate
Developed market equities
High yield bonds
Emerging market bonds
Mid-grade corporate bonds
High-grade corporate bonds
Government bonds (risk-free)
Money market
Cash
Certain loss in
absence of deflation
Risk
As the low interest environment drags on, pension funds
also become losers. Initially they benefit, because falling
interest rates generate capital gains on their bond portfolios. Now, however, they are feeling the pinch. In Switzerland, where negative rates are highest, the direct charge
on cash deposits amounts to only a few basis points. What
causes the real damage is the fact that maturing bond holdings cannot be reinvested. This is reinforcing the pressure
for a reform of investment-based pension systems.
The losers club is a mixed bunch. Banks are hit directly by
shrinking interest earnings. For employees the impact is
indirect. Downward pressure on interest rates lowers the
cost of capital, making machinery increasingly attractive
compared with human resources.
7 | May/June 2016 | Focus | Top issue of the month
Real yield > 0%
Nominal yield < 0%
8 | May/June 2016 | Focus | Top issue of the month
What action can be taken?
One point needs to be emphasised: there is no patent
remedy for avoiding the negative effects of low and subzero interest rates. But that does not mean that investors
are helpless. Until a few years ago money market rates were
enough to preserve purchasing power. Asset preservation
and security went hand in hand. This comfortable situation
is now a thing of the past. Investors have to decide whether
to keep their money as secure and accessible as possible
at the price of an insidious loss of value, or to expose themselves to greater risks in the hope of preserving or even
enhancing the purchasing power of their assets over the
long term.
There are many possible measures that can be taken. The
choice will depend primarily on individual circumstances.
Basically there are three approaches: incur greater risk on
a controlled basis, exploit flexibility or minimise losses.
Controlled risk-taking
Many investors will opt for increased risk. But greater risk
does not automatically lead to success. Risks should not
be incurred unless they offer a sound prospect of a corresponding return.
Meagre interest payments are boosting the popularity of
dividend-bearing equity investments, especially among
income-oriented investors. But it is also possible to participate in the equity market without full exposure to the
equity risk. Structured products known as “deep barrier
reverse convertibles”, for example, pay a fixed regular
coupon instead of providing participation in capital gains.
They are de facto immune to small and medium corrections
on the equity market and do not incur losses on the same
scale as a straightforward equity investment except in the
case of an extreme share price decline, e.g. over 40%.
Exploiting flexibility
Instead of reinvesting capital in Swiss bonds, investors can
buy foreign currency bonds. This, of course, involves a currency risk, which can be hedged at a cost. For international
investors who are equally happy in either of two currencies,
“double currency units” are an interesting possibility. These
“DOCUs”, as they are known, involve an option premium
payable to the depositor, which generates a relatively attractive return.
Minimising losses
There are also strategies suitable for risk-shunning investors. In the cash market, for example, money market funds
offer better interest rates than the negative rates imposed
by central banks. A further advantage compared with
a bank deposit is that the fund’s assets are spread over
various borrowers and business sectors. Credit ratings are
usually at least as good as those of a bank deposit. However, given the low interest rates being offered, investors
should carefully familiarise themselves with the fund’s fee
structure.
Conclusion
We are probably all affected by sub-zero yields in one way
or another. Low and negative interest rates are not a temporary aberration. They will be with us for years to come and
constitute a critical challenge for investors. There is no patent remedy for dealing with them, but various responses
are possible. In all cases, investors must be careful to
choose courses of action that match their personal risk tolerance. It is also important to achieve broad diversification.
Not every risk offers the prospect of a higher yield.
Economic outlook | Dr Thomas Gitzel
Brexit: will Brits file for divorce?
Brexit: UK interests on the line
Brexit would hit Britain hard. High levels of foreign direct
investment make the UK economy especially vulnerable
to reduced capital inflows, which could well occur in the
climate of uncertainty that Brexit would create. Moreover,
untrammelled access to EU markets has been a major
incentive for multinational companies to locate their European headquarters in London. Several prominent firms are
already threatening to pull out of the UK if Brexit happens.
A major worry on the macroeconomic front is Britain’s
relatively high current account deficit, which stood at 5.2%
of GDP in 2015. This creates dependence on foreign portfolio investment. If less portfolio investment comes in from
Europe, the result would be a significant depreciation of
the pound and consequently higher inflation. That, in turn,
would eat into consumers’ purchasing power and reduce
domestic demand. It should also be noted that the UK
would initially be excluded from the free trade agreements
that the EU has made with other countries and economic
areas. New agreements would have to be hammered out
in negotiations involving many countries, and that would
be a time- and cost-intensive process.
Not a complete break
Brexit would expose the UK to new challenges. Close
trade links with Europe (50% of British exports go to the
EU) would force the UK to make bilateral arrangements
Legal notes on page 32
with the European
Union, as Switzerland
and Norway have done.
But Britain would be a supplicant in these negotiations, putting
the EU in a position to dictate terms.
David Cameron is painfully aware of this and has made
the economic risks the central plank of his anti-Brexit campaign. Britain’s industrialists are also loudly proclaiming the
need to stay in the EU. The “Project Fear” being mounted
by Cameron and the business community could bear fruit
in the coming weeks and engineer a swing in public
opinion.
Pound sterling: sink or swim?
An urgent question is how the financial markets would
react. The relationship between Britain and the rest of
Europe has never been a love affair – more like a marriage
of convenience. The UK’s net payments to the EU are
reduced by the rebate negotiated by Margaret Thatcher
and amount to just under EUR 5 billion a year, which is
not particularly lavish. In normal circumstances, a UK
withdrawal could therefore be coped with. But the refugee
crisis has plunged the EU into one of the greatest convulsions since its foundation. Brexit would pour oil on the
flames, probably resulting in a sharp depreciation of the
euro against the US dollar. Given the macroeconomic
dangers, the devaluation risk for the pound would be
even greater. This is not our baseline scenario, however.
On balance we expect Britain to stay in the EU, and that
would argue for a substantial appreciation of the pound.
9 | May/June 2016 | Focus | Economic outlook
On 23 June 2016 the people of Britain will vote on whether
or not to stay in the European Union. Will it be “Brexit” or
“Bremain”? A number of opinion polls indicate that support
for Brexit has grown, despite the substantial concessions
that Britain achieved in pre-referendum horse-trading with
the EU. But poll results should be taken with a pinch of salt.
Online surveys are regarded as less reliable than telephone
polls, which show a clear lead for the Bremain camp. Even
so, the result is up in the air. Uncertainty about the outcome
will continue until polling day.
Highlights
• There are growing fears of a possible Brexit
as the referendum on Britain’s membership
of the EU draws closer.
• Opinion polls should be treated with
caution.
• We expect Britain to remain in the EU,
and that would signal a higher pound.
2. Asset classes
Money market and
currencies
Money market and currencies
Market overview
EUR/CHF and EUR/USD: exchange rates since April 2014
USD/CHF: exchange rate since April 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
A M J J A S O N D J F M A M J J A S O N D J F M A
A M J J A S O N D J F M A M J J A S O N D J F M A
EUR/USD (r-h scale)
USD/CHF
GBP/CHF and GBP/USD: exchange rates since April 2014
USD/JPY and USD/AUD: exchange rates since April 2014
1.60
1.75
1.55
1.70
130
1.50
1.45
125
1.40
1.65
1.50
1.60
1.45
1.55
1.40
1.50
1.35
1.35
120
1.30
115
1.25
1.20
110
1.15
1.45
1.30
1.40
1.25
1.35
1.05
1.00
100
A M J J A S O N D J F M A M J J A S O N D J F M A
A M J J A S O N D J F M A M J J A S O N D J F M A
GBP/CHF
1.10
105
GBP/USD (r-h scale)
USD/JPY
Key interest rates in Switzerland, eurozone, USA: since April 2006
Key interest rates in UK and Japan: since April 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 | May/June 2016 | Asset classes | Money market and currencies
EUR/CHF
Money market and currencies | Dr Thomas Gitzel
12 | May/June 2016 | Asset classes | Money market and currencies
Market outlook
China: in calmer waters
The situation in China has become relatively calm after
the turbulence on the financial markets in January and
February. The markets have woken up to the fact that the
Chinese economy is not heading for a major slowdown. In
mid-March the National People’s Congress passed China’s
13th five-year plan, which foresees annual growth of 6.5%
or more until 2020. The plan reiterates the aim of doubling
per capita income and GDP by 2020 from a 2010 base.
Emphasis is placed on research and innovation, which
will provide important new drivers of growth. The services
sector is slated to grow, while measures will be taken to
tackle industrial overcapacity. The government is promising
further large-scale infrastructure investments together
with green initiatives designed to protect the environment.
Growth will be supported by capital spending and tax
breaks. Above all, the expansionary monetary policy being
pursued by the People’s Bank of China will provide crucial
support for the 6.5% growth target. In the past the expansion of M1 money supply has been a good leading indicator
of future GDP growth.
China: M1 money supply and GDP growth
16%
45%
15%
40%
14%
35%
13%
30%
12%
25%
11%
20%
10%
15%
9%
8%
10%
7%
5%
6%
0%
GDP growth, % yoy
M1 expansion, % yoy (r-h scale)
Critical look at expanding money supply
A word of caution is needed here. The theoretical justifi cation for regarding money supply as a leading indicator
of economic growth is not unequivocal. M1 money supply
consists of cash and sight deposits. If these assets increase,
individuals and companies have more to spend, which
can be seen as indicating higher personal consumption,
increased investment and consequently faster economic
growth. This interpretation supports the close link between
M1 money supply and GDP growth. But other factors might
also be in play. Higher cash holdings and sight deposits
could be motivated by insecurity resulting in heightened
aversion to risk. That would argue against stronger growth.
Moreover, recent interest rate cuts by the Chinese central
bank make long-term investments less attractive compared
with short-term money, which could explain the increase in
sight deposits. Theoretically, therefore, a substantial expansion of M1 money supply does not necessarily point to a
correspondingly high economic growth rate. Nevertheless,
there is a wealth of evidence from many economies that
money supply does indeed provide a good indication of
future growth trends. Empirically, the connection therefore
seems to be confirmed. On this basis we believe that
China’s growth rate will at least be stabilised.
China’s exchange rate policy
In its efforts to keep the economy on a healthy growth
trajectory, the Chinese government could conceivably
resort to a major devaluation of the yuan. In fact, though,
it is doing just the opposite. The authorities are intervening
energetically on the foreign exchange markets to buoy
up the currency and prevent a steep depreciation. This is
reflected in the country’s shrinking international reserves,
which have diminished by almost USD 800 billion since
mid-2014. Balance of payments data published by the State
Administration of Foreign Exchange (“SAFE”) highlight the
nature of the problem. Figures show that China has experienced a continuous net outflow of capital since mid-2014.
Highlights
• We do not expect a dramatic deceleration
of Chinese economic growth.
• Exchange rate policy presents China with
a difficult balancing act, but the authorities
will take measures to prevent a steep
depreciation of the yuan.
• A gradual weakening of the exchange rate
is the likeliest scenario.
China: balance of payments
250
200
150
100
50
0
–50
–100
–150
–200
2007
2011
2015
Conclusion
The Chinese
economy will remain
on course. A dramatic
slowdown is not on the cards.
But exchange rate policy presents
Beijing with a delicate balancing act.
A major depreciation of the yuan will be avoided for fear
of triggering a dangerous downward spiral. We expect a
gradual depreciation over the coming quarters, with the
USD/CNY rate possibly moving to around 6.80.
Given the limitations on foreign transfers by private individuals, these capital exports must have been largely carried
out by companies worried about the prospect of devaluation. Many Chinese firms are stashing their export revenues
in US dollar accounts or using them to repay dollar liabilities
instead of converting them into yuan via the Chinese
central bank.
The government, however, is vehemently resisting market
pressures and doing all it can to keep the currency stable.
A serious weakening of the yuan could prompt Chinese
firms to take money out of the inflated real estate market
and convert it into dollars. A resultant weakening of property prices could have a destabilising effect on the entire
Chinese economy. A free-floating yuan is therefore not on
the agenda for the time being. We expect a gradual depreciation interspersed with periods of exchange rate stability.
Moreover, Beijing is quietly reversing some previous moves
to liberalise the rules on capital movements. During the
recent market turmoil, restrictions were imposed on some
foreign banks’ ability to shift funds from the Chinese capital
market to the largely liberalised Hong Kong market.
Legal notes on page 32
Key interest rates
Switzerland
Europe (EMU)
USA
May 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 | May/June 2016 | Asset classes | Money market and currencies
Current account balance in USD bn
Financial account in USD bn: capital exports (net)
Change in currency reserves in USD bn
2. Asset classes
Bonds
Bonds
Bond yields – overview
Switzerland: yields since April 2014
Emerging markets (hard currency): yields since April 2014
1.5%
7.0%
6.5%
1.0%
6.0%
5.5%
0.5%
5.0%
4.5%
0.0%
4.0%
–0.5%
3.5%
A M J
J A S O N D J F M A M J
CHF government bonds
A M J
J A S O N D J F M A
CHF corporate bonds (5 to 10 y.)
J A S O N D J F M A M J
EM government bonds (5 to 10 y.)
J A S O N D J F MA
EM corporate bonds (5 to 10 y.)
Europe: yields since April 2014
Emerging markets (local currency): yields since April 2014
2.5%
6.0%
2.0%
5.5%
1.5%
5.0%
1.0%
4.5%
0.5%
4.0%
A M J
J A S O N D J F M A M J
EUR government bonds (5 to 10 y.)
A M J
J A S O N D J F MA
EUR corporate bonds (5 to 10 y.)
USA: yields since April 2014
J A S O N D J F M A M J
J A S O N D J F MA
EM government bonds (local currency)
High yield: yields since April 2014
9.5%
4.5%
9.0%
8.5%
3.5%
8.0%
7.5%
2.5%
7.0%
6.5%
1.5%
6.0%
5.5%
5.0%
0.5%
A M J
J A S O N D J F M A M J
USD government bonds (5 to 10 y.)
Legal notes on page 32
J A S O N D J F MA
USD corporate bonds (5 to 10 y.)
A M J
J A S O N D J F M A M J
Global high yield (5 to 10 y.)
J A S O N D J F MA
15 | May/June 2016 | Asset classes | Bonds
0.0%
Bonds | Dr Thomas Gitzel, Bernhard Allgäuer
Market outlook
16 | May/June 2016 | Asset classes | Bonds
Recent US macro data have been encouraging, but the Fed
is deliberately playing down the good news. This creates a
confused picture. Last year, when the numbers were not
as good, the Fed made optimistic noises and raised its key
interest rate. Washington’s current cautious stance has
boosted the bond markets. US Treasuries are now trading
only slightly below their all-time high.
Solid US economy…
The US economy is performing well. Figures for new jobs
show that US firms are still upbeat and are expanding
their workforces. Nonfarm payrolls climbed by 215,000 in
March, with most of the increase occurring in the services
sector. US manufacturers are still reluctant to hire, but an
improvement is in sight here. Manufacturing companies
have been through an exceptionally rough patch in recent
quarters, and this is reflected in a year-on-year decline
in industrial output – the first such contraction since the
financial market crisis of 2008 and 2009. The strong US
dollar has put a brake on exports, while the low oil price
has undermined capital spending in the energy sector. But
major leading indicators now suggest that manufacturers
have become more optimistic again. There is good reason
to hope that ailing industrial production will recuperate in
the months ahead, providing the economy with a second
(albeit less dynamic) motor alongside the services sector.
…but pessimistic Fed
The Fed now seems to be consciously playing down
the economy’s solid performance. Fed Chair Janet Yellen
misses no opportunity to expatiate upon the economic
risks. This is a reaction to the unhappy experience of last
December’s rate hike. At that time monetary tightening
was economically unnecessary, but Janet Yellen had talked
so much about the improving economy and an imminent
rate hike that policy had to be tightened to avoid a serious
loss of face. Now the Fed is backpedalling verbally, but
once again the timing is wrong. Economic conditions are
better than at the time of the first rate hike, yet the Fed is
sounding gloomier. This breeds confusion, to the detriment
of the Fed’s credibility. We believe that the robust economy
will make a rate hike in June virtually inescapable.
Government bond markets in need of correction
The pussyfooting posture adopted by Janet Yellen has led
to a change of sentiment on the financial markets. The US
money market now believes that Yellen will not pluck up
courage to raise the fed funds rate until 2017. We, however,
expect the next hike to come in June 2016. That means
that the fixed income markets are heading for a correction.
As the current yield on 10-year Treasuries (around 1.8%)
anticipates a postponement of the next rate hike until 2017,
any tightening this year would tend to push yields higher.
Given that the US Treasuries market also sets the tone for
European government bonds, we would expect to see a
weaker trend in the Swiss bond market too. Another factor
also has to be considered: The oil price (Brent crude) has
climbed by 60% since January. This will have an impact on
inflation. If inflation rates accelerate in the coming months,
that too would create potential for higher bond yields.
ECB takes historic step
At its meeting in March the European Central Bank (ECB)
not only lowered interest rates but also expanded its asset
purchase programme from EUR 60 billion to EUR 80 billion
a month. In doing so it added corporate bonds to the
classes of securities eligible for purchase. The criteria for
corporate bond eligibility were defined as follows:
• Euro-denominated
• Investment grade rating
• Company domiciled in eurozone
• Securities issued by banks are excluded.
The first purchases are scheduled for June.
Market structure
Bonds with a total value of around EUR 821 billion meet the
ECB’s initial criteria. The volume of top-quality corporate
bonds is small. Most corporate bonds are classed by the
Which corporate bonds will the ECB buy?
In April, however, additional detailed requirements were
published. The ECB’s purchase programme covers issuers
based in the eurozone, but the ultimate parent company
can be outside the eurozone. If the field is limited to large
(and therefore more liquid) issues of over EUR 500 million,
the eligible volume comes down to EUR 354 billion. The
ECB permits itself to buy up to 70% of any one issue.
The total asset purchase programme scheduled until next
March amounts to EUR 960 billion. Current holdings are
as follows:
• Public sector purchase programme (PSPP):
EUR 689 billion
• Covered bond purchase programme (CBPP3):
EUR 169 billion
• Asset backed securities purchase programme (ABSPP):
EUR 19 billion
Conclusion
Although the corporate bond market is large, the ECB
might not be able to find enough securities on the market
and would therefore soon have to relax its purchase criteria. As the secondary market is not liquid, more reliance
Legal notes on page 32
will be placed on
the primary market. In
this environment, credit
spreads will not widen and
therefore remain attractive.
Benchmark
May 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 22/04/2016
Yield
3
Total return
2
% YTD1
3.34%
2.59%
2.73%
1.23%
2.77%
4.95%
6.27%
7.11%
12.80%
17 | May/June 2016 | Asset classes | Bonds
rating agencies as BBB or lower. A special feature of
the corporate bond market concerns issuers’ country
of origin. For tax reasons German companies frequently
issue bonds through special-purpose companies established in the Netherlands, which have been set up for the
sole purpose of handling the parent company’s financing.
A country comparison therefore puts the Netherlands in
second place (EUR 220 billion) after France (EUR 270
billion), with Germany down in third place (EUR 95 billion).
But if borrowing volume is ranked on the basis of the parent
company’s domicile, France is still in first place (EUR 260
billion), followed by Germany in second place (EUR 195
billion) and Italy third (EUR 95 billion). Moreover, some
bonds are issued outside the eurozone, bringing the total
volume down to EUR 745 billion.
Highlights
• Recent economic data from the USA have
been upbeat, but Fed Chair Janet Yellen
prefers to talk up the risks.
• The Fed wants to dampen expectations
of higher interest rates. Even so, there is
still potential for yields to rise.
• The ECB has expanded its asset purchase
programme to include corporate bonds.
But it is questionable whether enough
eligible bonds will be available.
2. Asset classes
Equities
Equities
Equity indices – overview
Switzerland: market movement since April 2014 (indexed)
Pacific: market movement since April 2014 (indexed)
120
120
115
115
110
110
105
105
100
100
95
95
90
90
85
A M J
J A S O N D J F M A M J
J A S O N D J F MA
A M J
MSCI Switzerland TR Index (net) rebased
J A S O N D J F M A M J
J A S O N D J F MA
MSCI Pacific TR Index (net) rebased
Europe: market movement since April 2014 (indexed)
110
Emerging markets: market movement since April 2014 (indexed)
115
110
105
105
100
100
95
95
90
90
85
85
80
80
75
70
75
J A S O N D J F M A M J
J A S O N D J F MA
A M J
MSCI Europe TR Index (net) rebased
J A S O N D J F M A M J
J A S O N D J F MA
MSCI Emerging Markets TR Index (net) rebased
North America: market movement since April 2014 (indexed)
United Kingdom: market movement since April 2014 (indexed)
120
115
115
110
110
105
105
100
100
95
95
90
85
90
A M J
J A S O N D J F M A M J
J A S O N D J F MA
MSCI North America TR Index (net) rebased
Legal notes on page 32
A M J
J A S O N D J F M A M J
MSCI UK TR Index (net) rebased
J A S O N D J F MA
19 | May/June 2016 | Asset classes | Equities
A M J
Equities | Rolf Kuster
Market outlook
20 | May/June 2016 | Asset classes | Equities
Equity markets still prey to uncertainty
It has been an awkward year so far on the equity markets.
The first quarter was characterised by a diffuse mood of
foreboding among many investors. Whatever its underlying
causes, the anxiety syndrome was able to feed on a succession of perceived problems. First it was fear of a looming
slowdown in the Chinese economy. Then came worries
about deflationary trends in the eurozone, followed by
jitters about the alleged threat of a US recession. The
current nail-biting factor is uncertainty about a possible
British exit from the EU. As the multi-year bull market has
resulted in increasingly lofty valuation levels, investors
have become more sensitive to risk and are easily spooked.
The upshot is heightened volatility.
In the present environment a cautious investment stance
seems appropriate. The increased volume of M&A (mergers and acquisitions) and initial public offerings, combined
with ambitious valuation levels in many cases, highlights
the fact that the equity market cycle is at an advanced
stage. Amid all the talk of possible interest rate hikes,
imminent ballots and other geopolitical risks, the biggest
downside factor generally gets forgotten: corporate earnings performance is extremely weak and has been so for
a long time.
Earnings versus valuation
Valuation and earnings are regarded as the two main
drivers of long-term equity market performance. Valuation
ratios are calculated by taking the current equity price and
relating it to an accounting figure such as earnings (price/
earnings ratio). The resultant ratio, considered either in
absolute terms or in comparison with historical levels,
gives a guide as to whether the market is expensive or
cheap. By also factoring in other variables such as interest
rates, it is possible to draw conclusions about equities’
relative attractiveness, e.g. compared with bonds. Earnings
trends are mostly steadier and easier to forecast in the
short term than changes in valuation levels. While valuation
levels generally fluctuate around a mean, corporate
earnings often show a positive trend. Put simply, higher
equity prices can be sustained in the long term only on
the basis of higher earnings. This is the nub of the present
problem.
Chary analysts
Corporate earnings were already sluggish last year. The key
MSCI World index registered an earnings decline of around
2%. The contraction was sharpest in emerging markets,
especially in Latin America. This year, too, analysts’ initial
euphoria has largely evaporated. The consensus estimate
at the start of the year foresaw earnings growth of around
7% per share. In the first three and a half months of 2016
this forecast has been ratcheted down to a paltry 2.3%.
2016 earnings growth expectations in the major regions
12%
10%
8%
6%
4%
2%
0%
MSCI World
6 months ago
1 month ago
USA
Europe
Emerging markets
3 months ago
Current forecast
Analysts are now forecasting 2016 earnings growth of only
1.5% in the USA and 1.9% in Europe (including Switzerland
and the UK). It is normal for estimates to be revised downwards after the start of the calendar year, but the revisions
are rarely as dramatic as this. The feeble overall earnings
performance is attributable primarily to the energy and
commodities sector. Low commodity prices and the continuing weakness of the oil market have depressed margins
Highlights
• The recovering oil price has not yet
given a boost to corporate earnings.
• The current reporting season in the USA
is the weakest since the financial crisis.
• Positive earnings revisions on the basis
of rising oil prices would be a buy signal
for equities.
and sent earnings in these sectors plummeting. Analysts
expect earnings in the global energy sector to fall by a
further 40% in 2016.
A glance at first-quarter company reports highlights the
scale of the problem. US quarterly earnings for 2016 Q1 are
about 9% down on the year-ago figure. This is the steepest
fall since the outbreak of the financial crisis. Although the
chief blame for the decline in earnings expectations lies
with the energy sector, other sectors are also in difficulty.
Banks, for example, are having to set aside more money as
provisions for future bad loans.
move in this
direction over the
coming months. Equity
holdings should be regionally
diversified. The eurozone and
emerging markets are still offering
earnings growth rates in excess of 5%. The combination
of comparatively attractive valuations and positive
(and sustained) earnings growth is an argument for
these regions. We currently view the USA, the UK and
Switzerland with particular caution.
Seeking an optimal positioning
With earnings growth in decline and valuation ratios
at heightened levels, it is appropriate to treat the equity
markets with a degree of caution at present, at least in
terms of the fundamentals. Geopolitical risks, for example
the current discussion about a possible British exit from
the EU, can easily lead to increased volatility in these
circumstances. It the weeks ahead it will therefore be
advisable to stay near the sidelines. But as soon as crude
oil inventories decline and the oil price rises, the earnings
outlook should improve. That would provide better fundamental support for the market. We expect to see a gradual
Legal notes on page 32
Benchmark
% YTD1
May 2016
Switzerland
¼
Europe
¼
North America
¼
Pacific (incl. Japan)
¼
Emerging markets
À
–5.05%
0.69%
3.18%
1.74%
7.96%
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 22/04/2016
21 | May/June 2016 | Asset classes | Equities
Crucial oil price
Whether the vicious spiral of negative earnings revisions
and falling earnings growth can be broken depends crucially on the price of crude oil. For many analysts, an oil
price of around USD 40 is still too low to justify a sustained
upward revision of earnings estimates. The price probably
needs to reach USD 45–50 before estimates can start to
rise again. Positive earnings revisions improve the fundamental picture and ease the strain on valuations. Investors
are therefore advised to monitor movements in earnings
estimates very carefully. Positive signals on the earnings
side can be reasonably interpreted as signals for further
market gains.
2. Asset classes
Alternative
investments
Alternative investments
Alternative investments – overview
Commodities: performance since April 2014
Private equity: performance since April 2014 (indexed)
140
120
110
130
100
90
120
80
110
70
100
60
50
90
40
80
30
70
20
A M J
J A S O N D J F M A M J
J A S O N D J F MA
Bloomberg Commodity Index (rebased on oil)
A M J
WTI crude oil (USD)
Precious metals: performance since April 2014
J A S O N D J F M A M J
LPX Major Market TR Index (EUR)
J A S O N D J F MA
LPX Major Market TR Index (USD)
Convertible bonds: performance since April 2014 (indexed)
1,400
110
1,300
105
1,200
100
1,100
95
90
900
800
85
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 MA
A M J
Silver (rebased on gold)
J A S O N D J F M A M J
UBS Convertible Index (USD)
Real estate: performance since April 2014 (indexed)
J A S O N D J F MA
UBS Convertible Index (CHF hedged)
Hedge funds: performance since April 2014 (indexed)
135
125
130
120
125
115
120
115
110
110
105
105
100
100
95
95
90
90
85
A M J
J A S O N D J F M A M J
FTSE EPRA/NAREIT TR Index (USD)
Legal notes on page 32
J A S O N D J F MA
SXI Swiss Real Estate Index (CHF)
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 MA
Newedge CTA Index
23 | May/June 2016 | Asset classes | Alternative investments
1,000
Alternative investments | Bernhard Allgäuer, Norman Quaderer
24 | May/June 2016 | Asset classes | Alternative investments
Market outlook
Adapting portfolios to negative interest rates
The trend towards negative bond yields (see “Top issue
of the month”) is increasingly driving investors to search
for alternatives. The Swiss market is spearheading this
development. Since the start of 2015 even 10-year Swiss
government bonds have been yielding less than zero.
Portfolios need to be adapted to the new situation, and
what happens in Switzerland could become a blueprint
for international portfolios in the future.
A distinction has to be drawn between institutional and
private portfolios. Swiss occupational pension schemes,
for example, are obliged to ensure that the funds under
their management generate income at or above a legally
fixed minimum rate, which currently stands at 1.25% per
annum. This can no longer be achieved by investing in
government bonds, as used to be the case.
Possible solutions to this dilemma are as follows:
• Holding larger positions in riskier asset classes offering
a higher return.
• Switching to riskier segments within a given asset class,
e.g. by including high yield or emerging market bonds
in the fixed income allocation.
• Making bigger and more frequent tactical portfolio
adjustments.
• Adding new asset classes (notably “alternative investments”) to achieve diversification.
In practice investors often adopt a combination of solutions
rather than plumping for just one approach. It should be
remembered that institutional investors are subject to
legal restrictions on their investment activities. Solutions
adopted in the institutional sector are generally implemented by private investors with a time lag.
Increased role for real estate investments
A strong trend among Swiss institutional investors in recent
years has been investment in real estate. This has been
a factor behind the rise in Swiss property prices (with a
resultant increase in risk). Even now, exchange traded real
estate funds still deliver a handsome yield of 5.08%. Added
to that, higher property prices have generated capital
gains of 7.5% p.a. on real estate funds since the start of
2014, while shares in real estate companies have done
even better, climbing by 15.2% p.a. But real estate price
performance varies greatly from canton to canton and even
from one municipality to another. There are also big differences depending on the type of property (apartments,
single-family houses, office space, retail properties). A
distinctive feature compared with other types on investment is the proportion of debt finance employed (leverage),
which is particularly high in the case of real estate companies.
In reaction to heightened risks, there is now a growing
trend towards investing in the global real estate market
via exchange traded real estate investment trusts (REITs).
In contrast to Swiss real estate funds, where leverage
is normally between 10% and 20%, REITs are mostly leveraged at 70% to 80%. In this context attention must be
paid to the currency risk, which as far as possible should
be hedged.
Real estate is an example of an asset class with heightened
risk that can generate a positive return over the long term.
Other alternative investments that serve the same purpose
include convertible bonds, CTAs (trend-following commodity trading advisors) and smart beta funds, all of which
are increasingly being used in investment portfolios. Commodity investments, on the other hand, are included in
portfolios principally for the sake of diversification.
Commodities: platinum as a tactical diversifier
Platinum is a widely used raw material employed in the
manufacture of high-performance batteries, catalytic
converters and jewellery. It is also increasingly being
used in medicine and dentistry. 80% of European demand
for platinum is for catalytic converters in the automobile
industry, whereas sales for jewellery-making are especially
strong in China.
The price of platinum has recovered strongly since its
January low and has now reached a plateau. The recovery
Highlights
• Negative interest rates are encouraging
new approaches to asset allocation.
• Real estate provides a strategic means
of generating a positive yield on the basis
of higher risk.
• Platinum, by contrast, is an example of
an asset offering a tactical investment
opportunity.
was driven by a stronger gold price and an appreciation
of the South African rand. There has also been a rise in
demand since the start of the year, driven chiefly by China.
Total demand in March was 71% higher than a year before,
boosted by a significant recovery in the jewellery sector. At
the same time, low prices in January encouraged industrial
users to build up their inventories.
The important
automobile market still
boasts a positive outlook,
with increased demand for
catalytic converters in Europe
and India. Jewellery demand likewise
continues to climb (24% growth reported).
Platinum: demand and supply at a glance
Conclusion
Unlike gold, platinum is an industrial metal and can
therefore benefit from healthy economic activity. The
fundamentals remain robust and indicate further upside
potential. We expect a gentle rise in the platinum price
over the weeks ahead.
300
2,000
250
1,500
1,750
1,250
1,000
200
750
500
150
2011
2012
2013
Platinum total demand (tons)
Platinum price, USD/oz. (r-h scale)
2014
2015
Platinum total supply (tons)
Total supply has also rebounded, with South African mines
stepping up production. Output in 2015 amounted to over
125,000 kilos, compared with 94,000 kilos in 2014 – an
increase of around 33%. We therefore expect the present
imbalance between supply and demand to be whittled
down. Even so, platinum producers still face enormous
challenges. Major mines have seen their cash reserves
evaporate, which rules out large-scale capital spending
projects. South Africa is also facing a new round of wage
negotiations, which are generally bad news for mine owners. But what is bad for the mines is generally good for the
platinum price.
The fundamentals have improved slightly since the start
of the year. True, above-ground stocks have not really
diminished and investor demand is in retreat, but there are
positive signals regarding other components of demand.
Legal notes on page 32
Benchmark
Commodities
Gold
Crude oil
Commercial real estate
Private equity
Convertible bonds
Hedge funds
May 2016
À
À
À
¼
¼
¼
¼
% YTD1
7.02%
8.62%
17.29%
4.11%
–1.03%
0.96%
–1.28%
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 22/04/2016
25 | May/June 2016 | Asset classes | Alternative investments
2010
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 bonds
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
19/04/16
1,037.14
no
yes
VP Bank Strategy Fund Conservative (EUR)
EUR
LI0017957528
19/04/16
1,369.53
no
yes
0.63%
VP Bank Strategy Fund Conservative (USD)
USD
LI0100145379
19/04/16
1,301.45
no
yes
1.00%
VP Bank Strategy Fund Balanced (CHF)
CHF
LI0014803709
19/04/16
1,492.63
no
yes
–1.26%
VP Bank Strategy Fund Balanced (EUR)
EUR
LI0014803972
19/04/16
936.68
no
yes
–0.52%
VP Bank Strategy Fund Balanced (USD)
USD
LI0014804020
19/04/16
1,417.79
no
yes
0.96%
For detailed information on our investment management mandates, please contact your personal advisor.
Legal notes on page 32
–0.19%
27 | May/June 2016 | Investment management | Investment management portfolios
Emerging markets
Investment management
28 | May/June 2016 | Investment management | Current investment tactics
Current investment tactics
Current investment tactics
In February we raised our equity allocation from neutral
to overweight. Equity markets and commodity prices have
since recovered significantly, helped by expansionary monetary policies. The recovering oil price has fuelled a strong
advance on equity markets in some emerging economies,
while credit spreads in the bond sector have narrowed
significantly. Our positioning produced handsome capital
gains, notably in the emerging markets. The Fed’s waitand-see attitude and the resultant mild depreciation of
the US dollar against the euro have exposed the eurozone
to a stronger headwind, and this has been aggravated by
other factors such as difficulties in Greece and the ongoing
discussion about a possible “Brexit”. Thus the recovery
in the eurozone has been more subdued than expected.
However, the recent worldwide uptick in purchasing
managers indices for the manufacturing sector makes a
moderate recovery of economic activity more probable.
In view of the risks that exist, we have taken measures to
lock in profits as far as possible in the event of a correction.
Bonds
Government bonds have been boosted by anxiety about
economic growth. We have taken profits on government
bond holdings in EUR-based portfolios and are keeping
duration below benchmark in our base currencies. Overall
we are still underweight in investment grade bonds. Emerging market bonds, however, are weighted at neutral. This
asset class features an attractive risk premium and is supported by increased risk-tolerance and rising commodity
prices. We regard current inflation expectations as too low
and therefore hold a position in inflation-linked bonds as an
attractive alternative to standard government issues.
Equities
Manufacturing companies are now looking to the future
rather more optimistically, as evidenced by leading indicators in the developed countries and also in the emerging
economies. This is the main reason why we remain over-
weight in equities. We favour the eurozone as well as the
emerging markets. Eurozone equities benefit from attractive valuations and continuing support from the European
Central Bank. As long as global growth rates stay positive,
equities have upside potential. Additional support comes
from dividend yields, which are high compared with yields
in the fixed income market. Emerging markets are underpinned by the stabilisation of commodity prices and continued earnings growth.
Alternative investments and currencies
We hold positions in alternative investments, notably commodities, convertible bonds and hedge funds, as a useful
portfolio component providing risk diversification. These
categories are weighted at neutral. We have an open EUR
position in our CHF-based portfolios. Otherwise currencies
of the major developed countries remain 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 | May/June 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 | May/June 2016 | Appendix | Glossary
Glossary
Important legal information (Disclaimer)
32 | May/June 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. The new address as from June 2016 is
as follows: VP Bank (Singapore) Ltd, 8 Marina View, #27-03 Asia
Square Tower 1, Singapore 018960, 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 | May/June 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
VP Bank Ltd
Aeulestrasse 6
9490 Vaduz · Liechtenstein
T +423 235 66 55 · F +423 235 65 00
info@vpbank.com · www.vpbank.com
VAT No. 51.263 · Reg. No. FL-0001.007.080-0
VP Bank (Switzerland) Ltd
Bahnhofstrasse 3
8001 Zurich · Switzerland
T +41 44 226 24 24 · F +41 44 226 25 24 · info.ch@vpbank.com
VP Bank (Luxembourg) SA
26, Avenue de la Liberté
L-1930 Luxembourg · Luxembourg
T +352 404 770-1 · F +352 481 117 · info.lu@vpbank.com
VP Bank (BVI) Ltd
VP Bank House · 156 Main Street · PO Box 3463
Road Town · Tortola VG1110 · British Virgin Islands
T +1 284 494 11 00 · F +1 284 494 11 44 · info.bvi@vpbank.com
VP Bank (Singapore) Ltd
9 Raffles Place · #49-01 Republic Plaza
Singapore 048619 · Singapore
T +65 6305 0050 · F +65 6305 0051 · info.sg@vpbank.com
VP Wealth Management (Hong Kong) Ltd
33/F · Suite 3305 · Two Exchange Square
8 Connaught Place · Central · Hong Kong
T +852 3628 99 00 · F +852 3628 99 11 · info.hkwm@vpbank.com
VP Bank Ltd
Hong Kong Representative Office
33/F · Suite 3305 · Two Exchange Square
8 Connaught Place · Central · Hong Kong
T +852 3628 99 99 · F +852 3628 99 11 · info.hk@vpbank.com
VP Bank (Switzerland) Ltd
Moscow Representative Office
World Trade Center · Office building 2 · Entrance 7 · 5th Floor · Office 511
12 Krasnopresnenskaya Embankment · 123610 Moscow · Russian Federation
T +7 495 967 00 95 · F +7 495 967 00 98 · info.ru@vpbank.com
VP Fund Solutions (Luxembourg) SA
26, Avenue de la Liberté · L-1930 Luxembourg · Luxembourg
T +352 404 770-260 · F +352 404 770-283
fundclients-lux@vpbank.com · www.vpfundsolutions.com
VP Fund Solutions (Liechtenstein) AG
Aeulestrasse 6 · 9490 Vaduz · Liechtenstein
T +423 235 67 67 · F +423 235 67 77
fundsetup@vpbank.com · 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
investmentviews@vpbank.com
Editors and contributors
Hendrik Breitenstein, Head of Group Active Advisory & Consulting
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
2 May 2016
This publication was finalised on
26 April 2016
Closing prices as at
22 April 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
Swiss Climate
climate neutral
printing
SC2016011404 • www.swissclimate.ch