Investment Views
September/October 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
September/October 2016
Foreword
666
Dear Reader
Compared with the multi-billion stimulus programmes launched by central banks in recent years,
the number 666 seems vanishingly small. But it stands for something very important. An analyst
at Bank of America Merrill Lynch has pointed out that 666 is the number of interest rate cuts made
by the world’s central banks since the collapse of Lehman Brothers in
September 2008.
The rate-cutting splurge was started by the US Federal Reserve when it
introduced a mix of conventional and unconventional measures to combat
the repercussions of the subprime crisis in 2008. Recently the markets have
been looking to the Fed to lead rates upwards again. After an initial
tentative hike last December, 2016 was supposed to be the year when
US interest rates turned around decisively. But that has not happened.
It now looks as if the uncertain global environment will cause the Fed
to hold fire until next year. Meanwhile, another major central bank, the
Bank of England, has actually lowered its key rate.
The failure to put up US interest rates, combined with the recent fall in
bond yields, has a major implication for investors: the yield famine is set
to continue. Investors’ focus on generating a return or at least avoiding
negative yields is probably a major reason why the markets recovered
their composure so quickly after the Brexit shock.
The yield famine has pushed up valuation levels in virtually all asset
classes. In recent months we have seen a rotation into market segments
which investors had long neglected. There has also been substantial
growth in investor demand for exchange traded funds (ETFs). Comparatively low management fees are not these funds’ only advantage. A wave
of innovation is now adding to their appeal. In “Top issue of the month” we
look at current developments in this sector, critically examine the innovations and describe some interesting approaches.
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 16.08.2016
EUR vs. USD
1.130
July 2016
Bonds: total return (pages 14–17)
Â
September 2016
¼ New
EUR vs. CHF
1.085
À
¼
New
USD vs. CHF
0.960
À
¼
GBP vs. CHF
1.245
À
¼
USD vs. JPY
99.82
À
À
AUD vs. USD
0.774
¼
¼
USD vs. SGD
1.336
À
À
USD vs. RUB
63.742
¼
¼
Key interest rates
Switzerland
High yield bonds
High yield
July 2016
¼
September 2016
¼
New
Emerging market bonds
Hard currency bonds
À
À
New
Local currency bonds
¼
¼
Switzerland
¼
¼
Europe
¼
¼
North America
¼
¼
Equities (pages 18–21)
–0.75%
¼
¼
Pacifi c
¼
¼
Europe (EMU)
0.00%
¼
¼
Emerging markets
À
À
USA
0.50%
À
À
Commodities
¼
¼
Crude oil
¼
¼
Investment grade government bonds
Switzerland
¼
¼
Gold
À
À
Europe
¼
¼
Real estate shares
¼
¼
USA
¼
¼
Private equity
¼
¼
Convertible bonds
¼
¼
Hedge funds
¼
¼
Investment grade corporate bonds
Switzerland
¼
¼
Europe
¼
¼
USA
¼
¼
Legal notes on page 32
5 | September/October 2016 | Current market assessment
Alternative investments (pages 22–25)
Bond yields (pages 14–17)
1. Focus
Top issue of the month | Rolf Kuster
Active innovation in passive products
Index funds – a new competitor from the old days
Contrary to common perceptions, passive investment vehicles have a relatively long history. The first passive index
funds, based on Eugene Fama’s efficient market hypothesis
and aimed at institutional investors, were launched in 1973
by Wells Fargo and American National Bank. Some 20 years
later State Street Global Advisors created the first widely
known exchange traded fund for small investors. This fund,
which tracks the S&P 500, is still one of the biggest ETFs in
the world with a current volume of USD 180 billion.
Traditional index funds, the forerunners of today’s ETFs,
were for a long time used almost exclusively by institutional
Legal notes on page 32
investors. This situation has recently changed somewhat.
In the battle to increase their share of a booming market,
traditional index fund providers are muscling into private
client business by applying for sales authorisation for their
products and doing away with prohibitive minimum outlay
requirements. Unlike ETFs, traditional index funds can only
be bought or returned for redemption on predefined dates.
Their advantage is that they generally carry even lower
costs and – depending on the investor’s domicile – involve
a lower tax liability. Index funds are especially suitable as a
long-term core investment.
Smart beta – what is it?
Faced with growing competitive pressures, many providers
of passive investment vehicles are resorting to innovative
index methodologies. A common catchphrase in this context is “smart beta”. In the financial markets the Greek letter
beta refers to the market risk of an individual investment.
In order to cover the whole market, traditional indexes are
weighted according to the market capitalisation of their
constituent securities. This approach, theoretically impeccable though it seems, has certain weaknesses. For
example, the well-known bond index “Barclays Global
Aggregate” weights its underlying bonds on the basis of
outstanding debt. This means that countries or companies
with particularly high indebtedness get a higher index
weighting than those with a lower and therefore more
sustainable debt exposure. Similar potential problems
affect equity funds.
Smart beta is designed to help mitigate such problems.
Terminology in this field can be confusing, but for investors
there is a simple rule of thumb: all indexes that do not
weight their component assets on the basis of market capitalisation fall into the smart beta category. But how smart
is smart? Here opinions differ. John Bogle, founder of the
traditionally oriented asset management firm Vanguard,
can find nothing smart in these newfangled products at
all, whereas many other ETF providers swear by them. One
in four new products is now in the smart beta category.
7 | September/October 2016 | Focus | Top issue of the month
It’s hard to imagine the investment world without them.
Exchange traded funds – ETFs for short – offer diversification at an attractive price. Designed to track a given market
index as closely as possible, these collective investment
vehicles are referred to as “passive” investments. Unlike
traditional investment funds, ETFs do not aim to outperform a benchmark index. As the portfolio makeup does not
depend on the skill of a fund manager, they are generally
less risky and almost always cheaper.
Numerous studies have shown that, after deduction of
costs, most active investment funds fail to beat their benchmark index over the long term. Morningstar calculates that
just 39% of active fund managers have outperformed their
index over the last five years.
Blackrock, the world’s biggest asset manager and owner
of iShares (the largest provider of ETFs), reckons that there
are now over 6,000 exchange traded products in existence.
But the market is nowhere near saturated. The ETF share
of the US equity market amounts to only 7%, compared
with around 36% accounted for by active fund managers.
Despite the enormous growth of the market in recent years,
competition is fierce. Alongside the big names, numerous
medium and small providers are battling for market share.
Stiff competition in a growing market is good for investors.
Bid-ask spreads are squeezed, and costs are ratcheted
down.
8 | September/October 2016 | Focus | Top issue of the month
Smart beta for equity investors
Although alternative weighting methods intuitively
seem especially fitted for bond funds, the large majority
of these products are in the equity sector. Smart beta
equity indexes are nothing new. Dividend indexes, the
most well-known and widespread sub-form of smart
beta, have been around for over ten years. Around five
years ago, Ossiam launched the first European products
based on equal weighting and volatility reduction. But
the latest products in this sector tend to focus on “factor
indexes”. These indexes apply a rules-based and transparent selection and weighting process in order to harvest
alternative risk premiums (“factor premiums”). This concept
is based on the insight that other risk and return factors
exist alongside normal market risk. Such approaches have
long been applied in professional asset management.
Exploitable factors include value (undervalued companies),
size (small and mid caps) and momentum (historically
strong price performance). The theoretical basis for the
factor premium approach was provided by the economists
Fama and French in their three-factor model published
in 1993.
According to research conducted by Blackrock, factor
premium strategies based on value, size and momentum
all outperformed their market capitalisation competitors
in the period from the start of 2001 to the end of 2015.
Over time, the performances of the various factors are
often at odds with each other, so fluctuations can be
reduced by mixing. Investors who are not confident
about getting the timing of the different factors right
can opt directly for a mixed strategy.
Smart beta for bonds
The available range of smart beta bond products for European investors is limited. Two innovative product types
offered by Deutsche Bank deserve mention: “Yield Plus”
and “Quality Weighted”. “Yield Plus” products are designed
to enhance yield in the current low interest environment
by systematically accepting a slightly higher level of risk,
while “Quality Weighted” products focus on higher quality
borrowers. The latter may be especially suitable for investors in emerging market bonds.
Conclusion
Passive index-based investment vehicles are a fast growing
sector. Amid fierce competition, providers are developing
new-style products in the battle to optimise market share.
Smart beta strategies, i.e. products and indexes that do
not apply traditional weighting methods based on market
capitalisation, are relative newcomers. Experts are divided
about the usefulness of such innovations. But some factorbased approaches have long been applied by active fund
managers and have generated extra returns.
Economic outlook | Dr Thomas Gitzel
Brexit: much ado about what?
What next?
The widely feared convulsions on the equity markets in
reaction to the Brexit decision did not last long. Our assessment that the vote should be seen merely as the start of a
process has so far proved correct. The financial markets are
betting on an amicable divorce, and they are probably not
far wrong. It is in both sides’ interests, the EU’s as much
as Britain’s, to hammer out a mutually acceptable solution.
Even with Britain outside the EU, membership of NATO
will remain an overriding common denominator. All
members of a military alliance want their fellow members
to be strong. Britain’s new Prime Minister, Theresa May, is
asking for more time before lodging an official application
to withdraw. Diplomats will want to see which way the
wind is blowing before they embark on negotiations. How
will Scotland and Northern Ireland react? Are new independence referenda on the cards? These are major issues
that need to be addressed. At the same time Britain will
want to know what negotiation strategy the EU intends
to pursue. A clear approach has not yet emerged. Will it
be a “soft Brexit”, a “hard Brexit” or a mixture of the two?
The EU faces a delicate balancing act. It will not want to
inflict draconian punishment on the UK economy, but nor
will it wish to give other member countries an incentive
to follow Britain’s lead.
Relaxed reaction in continental Europe
The future political relationship between Britain and the EU
is shrouded in mist at present. So let’s stick to the economic
facts. The UK economy will head for tougher times in the
coming quarters. Major economic indicators point inexorably to an economic slowdown. Companies will postpone
Legal notes on page 32
capital spending
plans in reaction to
Brexit uncertainty, while
higher import prices due to
the weak pound will put a drag on
consumer spending. Whereas most
financial markets rebounded after a brief initial setback, the
pound is still trading over ten percent lower than before the
referendum. The mood in continental Europe, by contrast,
remains confident. Company surveys indicate an unwelcome knock but no serious damage as yet. The real economic consequences will take time to emerge. The UK is
not the most important trading partner for most European
countries, but it is far from insignificant. The lower pound
undermines demand for EU goods, but it will be several
months before that shows up in companies’ order books.
Conclusion
The economic damage caused by the Brexit decision has
so far been limited – at least in continental Europe. The real
impact will only emerge in the medium term. On the other
side of the Atlantic, however, a much more momentous
event might be looming. If Donald Trump is elected President, a reordering of US foreign trade strategy could be on
the agenda. Trump regards free trade as a job-killer. If the
United States’ international trade relations are called into
question, Brexit would become little more than a sideshow.
9 | September/October 2016 | Focus | Economic outlook
It was widely forecast that a vote for Brexit would unleash
a multitude of horrors. So far, however, the negative impact
has been limited. Major leading indicators in continental
Europe have been dented only slightly, and stock markets
quickly recovered from the initial shock. The economic
damage will be felt most strongly in Britain itself.
Highlights
• Brexit has so far caused little damage,
if any, within the EU.
• The UK is being hit harder. Uncertainty
is putting a brake on capital spending.
• The real impact of Brexit will not emerge
until the shape of the divorce settlement
becomes clear.
2. Asset classes
Money market and
currencies
Money market and currencies
Market overview
EUR/CHF and EUR/USD: exchange rates since August 2014
USD/CHF: exchange rate since August 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 S O N D J F M A M J J A S O N D J F M A M J J A
A S O N D J F M A M J J A S O N D J F M A M J J A
EUR/USD (r-h scale)
USD/CHF
GBP/CHF and GBP/USD: exchange rates since August 2014
USD/JPY and USD/AUD: exchange rates since August 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
1.30
1.35
120
1.30
115
1.25
1.45
110
1.20
1.40
105
1.15
1.10
1.35
1.25
1.30
1.20
1.25
1.00
0.95
95
A S O N D J F M A M J J A S O N D J F M A M J J A
GBP/CHF
1.05
100
A S O N D J F M A M J J A S O N D J F M A M J J A
GBP/USD (r-h scale)
USD/JPY
Key interest rates in Switzerland, eurozone, USA: since August 2006
Key interest rates in UK and Japan: since August 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 | September/October 2016 | Asset classes | Money market and currencies
EUR/CHF
Money market and currencies | Dr Thomas Gitzel
Market outlook
The biggest headache for major central banks in recent
years has been historically low inflation. Rates of price
increase have been way below the generally accepted
target of 2%. But now that the deflationary effect of reduced oil prices is fading, the way is clear for a stronger
rise in consumer prices. Inflation in the eurozone is heading
towards 1%, while Switzerland’s inflation rate will move out
of negative territory. In the USA, meanwhile, the Fed’s 2%
target looks set to be exceeded by the end of the year.
Inflation: last year and this (VP Bank forecasts)
2.5%
against him. But even in the event of a no vote it now looks
as if new elections will not be held until the end of the
current legislative period in spring 2018. Extreme measures
such as ditching the euro or leaving NATO remain unlikely
even if Beppe Grillo’s populist Five Star Movement is victorious, because Grillo would presumably be blocked by the
Senate. On the other hand, a change of government would
produce an even stronger trend towards fiscal laxity, resulting in bigger deficits and an even higher mountain of public
debt. That would raise the danger of political disputes between Brussels and Rome, further inflaming the already
strained nerves of many financial market participants.
2.0%
1.5%
1.0%
0.5%
12 | September/October 2016 | Asset classes | Money market and currencies
0%
–0.5%
–1.0%
–1.5%
–2.0%
01.2015
05.2015
USA
09.2015
Eurozone
01.2016
05.2016
09.2016
Switzerland
Increased focus on political risks
Central bankers should be happy about this, as accelerating
inflation enhances the credibility of their policies. That does
not mean, however, that their work has become any easier.
They still face a formidable array of political complications.
The economic repercussions of the UK’s surprise vote to
leave the EU are still unclear, and other political pitfalls also
lie ahead. Market attention is now focussing on Italy again.
The primary worry at present is the crisis in the Italian banking system, but the country’s political future has also become muddier in recent weeks. This autumn the Italian
people will vote on Prime Minister Matteo Renzi’s proposed
reform of the Senate. For Renzi the curtailment of the Senate’s powers is the cornerstone of his reform policy, and
he originally said that he would step down if the vote went
Fed and US presidential election
Across the Atlantic, all eyes will be on November’s presidential election. Opinion polls are not yet giving a clear
picture. For a while they were putting Donald Trump and
Hillary Clinton neck and neck. But a Trump victory would
be a nightmare for the financial markets. The Republican
candidate is calling for a major revision of economic policy.
He regards the current account deficit as unacceptable,
claiming that the hole in the foreign trade account makes
America a loser. He therefore wants to roll back globalisation, which would mean tearing up free trade agreements.
A Trump victory would therefore presumably have serious
negative consequences for the equity markets in the short
term and could also jeopardise the recovery of the US
economy if investment plans are put on hold in reaction
to a planned reorientation of economic policy.
Difficult balancing act for central banks
Higher inflation rates will not cause any change in central
bank policy as long as current uncertainties persist. This
applies particularly to the Fed. Following the Brexit vote,
US money markets have priced out a US interest rate hike
this year. Three-month US interest rate futures are not
anticipating a further hike until the end of 2017, after which
a resumed upward trend would be possible. What makes
this pessimistic assessment so surprising is that recent
weeks have seen the publication of a raft of unexpectedly
robust US economic data – even though GDP growth in
the second quarter was again disappointing. It appears
that the markets are giving more weight to political and
international economic developments than to the current
solid state of the US economy.
Sceptics believe that their position is confirmed by the
Fed’s behaviour so far this year. In the first quarter Fed
Chair Janet Yellen decided against further interest rate
hikes because of worries about the Chinese economy.
Then, in the spring, she was pointing to the risks arising
from the Brexit referendum. Now that Britain has voted
to leave the EU, this could be seen as another reason for
delaying a hike. The US presidential election is a further
complication. There is a danger that these uncertainties
will distract attention from the growing inflation risk. US
wages are already broadly on the rise. If this trend continues, a wage price spiral could be in the offing unless the
Fed takes action. Interest rate hikes should therefore not
be deferred too long.
Conclusion
Although we are not as sceptical as the US money markets,
we believe that continuing uncertainty about the economic
impact of Brexit and the upcoming US presidential election
will cause the Fed to give greater weight to prevailing risks.
We have therefore abandoned our original forecast of two
US rate hikes. Janet Yellen and her colleagues will probably
again decide to hold fire. Monetary tightening will therefore not be on the agenda again until the end of the year
at the earliest. In continental Europe current political uncertainties in Italy and the woes of the Italian banking sector
could tempt Mario Draghi to implement further monetary
easing despite accelerating inflation. Meanwhile the Swiss
National Bank will continue with its policy of ad hoc interventions on the foreign exchange markets.
Legal notes on page 32
Key interest rates
Switzerland
Europe (EMU)
USA
September 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 | September/October 2016 | Asset classes | Money market and currencies
Highlights
• Inflation rates will head higher in the coming
months.
• The Fed will achieve its 2% inflation target,
but central banks will still face formidable
challenges.
• Political uncertainties will probably deter
the Fed from a further tightening of policy
this year.
2. Asset classes
Bonds
Bonds
Bond yields – overview
Switzerland: yields since August 2014
Emerging markets (hard currency): yields since August 2014
1.5%
7.0%
6.5%
1.0%
6.0%
0.5%
5.5%
0.0%
5.0%
4.5%
–0.5%
4.0%
3.5%
–1.0%
A S O N D J F M A M J
J A S O N D J F M A M J
CHF government bonds
CHF corporate bonds (5 to 10 y.)
J A
A S O N D J F M A M J
J A S O N D J F M A M J
EM government bonds (5 to 10 y.)
J A
EM corporate bonds (5 to 10 y.)
Europe: yields since August 2014
Emerging markets (local currency): yields since August 2014
2.0%
5.5%
1.5%
5.0%
1.0%
4.5%
4.0%
0.0%
A S O N D J F M A M J
J A S O N D J F M A M J
EUR government bonds (5 to 10 y.)
J A
A S O N D J F M A M J
EUR corporate bonds (5 to 10 y.)
USA: yields since August 2014
J A S O N D J F M A M J
J A
EM government bonds (local currency)
High yield: yields since August 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 S O N D J F M 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
USD corporate bonds (5 to 10 y.)
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 M A M J
J A
15 | September/October 2016 | Asset classes | Bonds
0.5%
Bonds | Dr Thomas Gitzel, Bernhard Allgäuer
Market outlook
16 | September/October 2016 | Asset classes | Bonds
Economics students’ eyes often glaze over at the very
mention of balance of payments theory. In practice,
though, a look at merchandise and payment flows can
reveal weak points in the economy. This is especially
true at present in the eurozone.
Enormous outflow of capital from eurozone
Monthly balance of payments data published by the European Central Bank (ECB) show a huge outflow of fixed
income investments. This is a consequence of actions by
the eurozone’s monetary guardians in Frankfurt. The ECB’s
monthly asset purchases, coupled with a negative deposit
rate, are driving long-term government bond yields downwards. Most Bunds are now trading with negative yields.
Even debt-stricken member countries of the eurozone are
now able to borrow extremely cheaply. Low borrowing
costs are good news for finance ministers, but not for
investors.
While private investors groan with frustration about low
and negative interest rates, pension funds and insurance
companies face an immediate practical problem. To meet
their contractual commitments to their clients, pension
funds and insurance companies have to generate a positive
return. If they cannot find suitable investments in the home
market, they look elsewhere. That is what is happening at
present. Data published by the ECB show that a record figure of almost EUR 500 billion of fixed income investments
flowed out of the eurozone in the 12 months to April 2016
(see chart).
Destination USA
The capital flowing out of the eurozone goes principally
to the USA. The USA offers a relatively high rate of return
compared with the eurozone, with the yield on 10-year
US Treasuries currently standing at around 1.5%. From a
European perspective that looks pretty high, though in
fact it is disconcertingly low in view of the fact that the Fed
has already started putting rates up. It appears that the ECB
is “exporting” its low interest rate policy, as meagre yields
Capital outflow from eurozone
600
400
200
0
–200
–400
–600
2009
2011
2013
2015
Net change in fixed income investment in eurozone in EUR bn
(sum over 12 months)
in the eurozone drive capital abroad and thereby push
down yields in the recipient country. This situation will not
change much in the foreseeable future. An end of the ECB’s
ultra-expansionary monetary policy is not in sight. Indeed
the ECB has stated that further measures are on the cards
in the event of negative fallout from the Brexit decision.
This underlines the gulf separating monetary policy on the
two sides of the Atlantic. While the Fed will basically stick
to a less accommodative course, the ECB is prepared to
contemplate further easing, with the result that the outflow
of investment capital can be expected to continue. This is
another reason why we do not expect to see a significant
rise in US yields.
ECB buying corporate bonds
The ECB’s Corporate Sector Purchase Programme (CSPP)
started on 8 June. Total purchases by 12 August amounted
to EUR 16 billion. So far 94% of these transactions have
been on the secondary market and only 6% on the primary
market. The longer the programme continues (currently
planned until March 2017), the greater will be the negative
impact on bond market liquidity. Private and institutional
investors will increasingly be squeezed out. It already looks
as if the purchase programmes will have to be extended
next year. Then, if not before, the supply of securities
that meet the ECB’s purchase criteria will be insufficient.
Under present rules, no bonds may be purchased that
have a lower yield than the official deposit rate of –0.4%.
Of the 541 bonds that are eligible for purchase under the
CSPP, 129 (around a quarter) have negative yields.
Highlights
• The ECB’s low interest rate policy is causing
huge outflows of capital from the eurozone.
• The main destination for these outflows
is the USA. In effect, the ECB is exporting
its monetary policy.
• The eligibility rules of the ECB‘s asset
purchase programmes will have to be
adjusted no later than March 2017, when
the programmes are expected to be
prolonged.
justify. The ECB’s
Corporate Sector
Purchase Programme
also has implications for other
currencies and market segments.
The high yield sector stands to benefit
from the possible inclusion of lower quality securities.
Volume of ECB asset purchase programmes (EUR bn)
1,200,000
1,000,000
800,000
600,000
400,000
200,000
01.2015
ABSPP
04.2015
CBPP3
07.2015
10.2015
CSPP
01.2016
04.2016
07.2016
PSPP
ECB will have to loosen the rules
The ECB could tackle this problem by simply lowering
the deposit rate, but that would be risky. Nobody knows
exactly how low interest rates can go before they trigger
large-scale hoarding of cash. That is a central banker’s
worst nightmare, because cash hoarding takes money out
of financial circulation. The ECB is therefore more likely to
relax its bond buying criteria, e.g. by raising the upper limit
per borrower or per bond. A much stronger impact could
be achieved by relaxing quality requirements. If the CSPP
were enlarged to include lower quality borrowers (sub
investment grade) or bank bonds, the ECB would be close
to providing “helicopter money” as first described by
Milton Friedman in 1969.
Conclusion
Given the outlook described above, credit spreads are
likely to remain narrower than the fundamentals would
Legal notes on page 32
Benchmark
September 2016 % YTD1
Gov. bonds Switzerland2
¼
Gov. bonds Europe (EUR)2
¼
Gov. bonds USA 2
¼
Inv. grade corp. bonds Switzerland2
¼
Inv. grade corp. bonds Europe (EUR)2
¼
Inv. grade corp. bonds USA 2
¼
High yield bonds3
¼
Emerging market bonds (hard currency)3
À
Emerging market bonds (local currency)3
¼
1
As of 16.08.2016
Yield
3
Total return
2
6.41%
6.51%
5.15%
2.14%
6.07%
9.21%
12.62%
14.54%
19.33%
17 | September/October 2016 | Asset classes | Bonds
0
10.2014
2. Asset classes
Equities
Equities
Equity indices – overview
Switzerland: market movement since August 2014 (indexed)
Pacific: market movement since August 2014 (indexed)
120
110
115
105
110
100
105
95
100
90
95
85
90
80
75
85
A S O N D J F M A M J
J A S O N D J F M A M J
J A
A S O N D J F M A M J
MSCI Switzerland TR Index (net) rebased
J A S O N D J F M A M J
J A
MSCI Pacific TR Index (net) rebased
Europe: market movement since August 2014 (indexed)
Emerging markets: market movement since August 2014 (indexed)
105
110
105
100
100
95
95
90
85
90
80
85
75
70
80
A S O N D J F M A M J
J A S O N D J F M A M J
J A
A S O N D J F M A M J
MSCI Europe TR Index (net) rebased
J A S O N D J F M A M J
J A
MSCI Emerging Markets TR Index (net) rebased
North America: market movement since August 2014 (indexed)
United Kingdom: market movement since August 2014 (indexed)
120
115
115
110
105
110
100
105
95
100
90
95
85
80
90
A S O N D J F M A M J
J A S O N D J F M A M J
MSCI North America TR Index (net) rebased
Legal notes on page 32
J A
A S O N D J F M A M J
J A S O N D J F M A M J
MSCI UK TR Index (net) rebased
J A
19 | September/October 2016 | Asset classes | Equities
65
60
75
Equities | Rolf Kuster
Market outlook
20 | September/October 2016 | Asset classes | Equities
Divergences between emerging and developed markets
Recent equity market performance has been surprisingly
robust. Downside factors, e.g. Britain’s decision to quit the
EU, the possibility of a Trump victory in November and
continuing weak corporate earnings growth, are being
largely swept under the carpet. Implied volatility (a common measure of expected market fluctuations) dipped
to around 11% for a while in early August. The basically
confident mood among many investors is surprising. Equity
markets in the developed world cannot be regarded as
cheap, and no recovery of corporate earnings is expected
in the months ahead. The tailwind provided by monetary
policy looks set to fade in the coming months, especially
in the USA, and support from this quarter will dry up once
interest rates start to rise. Higher interest rates indicate a
solid economy and positive inflation, but at the same time
they mitigate the yield famine in the fixed income sector
and thereby reduce the relative attractiveness of equity
investments. In this situation investors must beware of
chasing the markets upwards and should keep equity
weightings close to strategic levels.
Emerging markets in fashion again?
Equity markets in the emerging world present a much
brighter picture. After three lean years the MSCI Emerging
Markets Index has gained almost 20% since the start of
2016, outperforming developed markets by around 10%.
Data published by the research company ECR Research
illustrates the level of investor interest. While a growing
number of investment banks are recommending caution
regarding traditional equity investments, emerging market
equities are being classed as attractive. HSBC, for example,
reports that institutional investors are increasingly moving
back into the Chinese market.
This growing optimism appears to be largely confined to
professional investors. Continuing outflows of money out
of traditional investment funds suggest that private investors are still worried about recession in Brazil or a serious
weakening of Chinese economic growth.
Emerging markets performance
150
125
100
75
50
25
0
01.2013 06.2013 11.2013 04.2014 09.2014 02.2015 07.2015 12.2015 05.2016
MSCI EM Asia (USD)
MSCI EM EMEA (USD)
MSCI EM (USD)
MSCI EM Latam (USD)
Attractive fundamentals in emerging markets
The changed attitude of many professional investors can
be explained largely by the fundamentals. Even if emerging
market equities can no longer be regarded as cheap per
se, they still offer a valuation discount versus shares in the
developed markets. Here it is useful to look at valuation
levels in relation to future earnings growth, as measured
by the price/earnings to growth ratio (forward PEG). This
figure is arrived at by dividing a company’s P/E by the
growth rate of its earnings for a specified future period.
A low PEG means that a share can be acquired cheaply
in relation to its expected earnings growth. Emerging
markets currently score well on this measure.
According to the I/B/E/S (Institutional Brokers’ Estimate
System) database run by Thomson Reuters, analysts’
consensus forecast for earnings growth in the emerging
markets in 2016 is 6.6%, with a P/E ratio of around 12.
Developed markets offer a P/E of 16 with expected
earnings growth close to zero. Emerging markets are
also supported by accommodative monetary policies,
stabilising commodity prices and stronger local currencies.
Highlights
• Equity markets are becoming increasingly
expensive. Developed markets with high
valuations are handicapped by low earnings
growth.
• Emerging markets offer an interesting
alternative. Low PEG ratios mean that
shares can be bought quite cheaply in
relation to their future earnings growth.
• We currently recommend a broad exposure
focussed on Asia.
P/E ratios. Further
support is provided
by local monetary policy,
stable commodity prices
and stronger local currencies.
Price/earnings to growth ratio (PEG)
3.00
2.50
2.00
1.50
1.00
0.50
0
MSCI
North America
MSCI
Europe
MSCI
Switzerland
MSCI
Emerging Markets
Emerging markets yes, but which?
There are numerous opportunities for investment in
emerging markets. Investors can choose a low-cost passive
approach (ETFs) or entrust their money to an active fund
manager with special expertise. More important at present,
however, is choosing the right region. MSCI divides emerging markets into three regions: Latin America, Asia and
EMEA (Europe, Middle East and Africa). Asia is easily the
most important, accounting for 70% of the overall MSCI
Emerging Markets Index. Based on our current assessment
of the crude oil outlook (neutral) and increasingly high
valuation levels in Latin America, we now have a stronger
preference for Asia again. Although we see above-average
return potential in specific countries (e.g. Philippines),
we nevertheless recommend reducing risk by spreading
exposure over the whole region rather than investing in
a particular country.
Conclusion
Global equity markets are getting increasingly expensive.
Low earnings growth rates combined with high equity
valuations suggest caution. But opportunities still exist
in the emerging markets. These are benefiting from high
and stable earnings growth combined with relatively low
Legal notes on page 32
Benchmark
September 2016
Switzerland
¼
Europe
¼
North America
¼
Pacific (incl. Japan)
¼
Emerging markets
À
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 16.08.2016
% YTD1
–2.42%
0.38%
8.75%
4.89%
17.32%
21 | September/October 2016 | Asset classes | Equities
Current PEG ratio (3 years forward earnings growth)
2. Asset classes
Alternative
investments
Alternative investments
Alternative investments – overview
Commodities: performance since August 2014
Private equity: performance since August 2014 (indexed)
145
110
100
135
90
125
80
70
115
60
105
50
95
40
85
30
75
20
A S O N D J F M A M J
J A S O N D J F M A M J J A
Bloomberg Commodity Index (rebased on oil)
A S O N D J F M A M J
WTI crude oil (USD)
Precious metals: performance since August 2014
J A S O N D J F M A M J
LPX Major Market TR Index (EUR)
J A
LPX Major Market TR Index (USD)
Convertible bonds: performance since August 2014 (indexed)
110
1,400
1,300
105
1,200
95
1,000
90
900
800
85
A S O N D J F M A M J
Gold (USD)
J A S O N D J F M A M J
J A
A S O N D J F M A M J
Silver (rebased on gold)
UBS Convertible Index (USD)
Real estate: performance since August 2014 (indexed)
J A S O N D J F M A M J
J A
UBS Convertible Index (CHF hedged)
Hedge funds: performance since August 2014 (indexed)
120
130
125
115
120
110
115
110
105
105
100
100
95
95
90
90
85
A S O N D J F M 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
SXI Swiss Real Estate Index (CHF)
A S O N D J F M A M J
HFRX Global HF Index (USD)
J A S O N D J F M A M J
Newedge CTA Index
J A
23 | September/October 2016 | Asset classes | Alternative investments
100
1,100
Alternative investments | Bernhard Allgäuer
Market outlook
24 | September/October 2016 | Asset classes | Alternative investments
Precious metals shine again
The years after the financial crisis saw a flight into safe
haven investments. Precious metal prices were driven
skywards. But determined action by central banks
subsequently checked these metals’ high-flying antics
by reducing the need for security. Investors turned to
other asset classes, and precious metals were sidelined.
This year, however, they have staged a surprise comeback.
Few analysts had put precious metals on their favourites
list for this year. But the numbers speak for themselves:
silver is up 46%, followed by platinum (+32%), palladium
(+30%) and gold (+27%). Precious metals’ muscular
performance ahead of the Brexit referendum was generally
attributed to their safe haven characteristics. But financial
markets have reacted relatively calmly to the Brexit decision
(UK shares are now significantly higher than before the
vote), so an explanation now has to be sought in other
factors.
Precious metal prices (indexed)
350
300
250
200
150
100
50
2008
2009
Gold
2010
Silver
2011
2012
Platinum
2013
2014
2015
2016
Palladium
Difficult exit from super-easy monetary policy
At the start of the year, further interest rate hikes by the
Fed seemed a foregone conclusion. But Janet Yellen bottled
out. The fed funds rate has been left unchanged since last
December’s 0.25% rise, and a look at the futures markets
makes it is questionable whether there will be any further
move this year. Hundreds of billions of investment capital
had been transferred from Europe to the USA in anticipation of a Fed rate hike (see “Bonds” on page 16). Disappointment is corresponding great, and the trade-weighted
dollar is shedding its previous gains. As precious metals
are traded in dollars, a lower USD pushes up prices in
these markets.
The European Central Bank is nowhere near hiking interest
rates. Here the accent is on ease. The ECB is buying bonds
on the market to the tune of EUR 80 billion a month.
The Bank of England followed suit at the start of August,
announcing asset purchases of GBP 60 billion spread over
the next six months. Japan is being even more aggressive.
If the latest USD 276 billion stimulus package does not
achieve the desired effect, there is talk of the Bank of
Japan resorting to “helicopter money”, i.e. channelling
newly created money direct to consumers or even remitting
outstanding public debt. The value of paper money would
then be called into question, and the central bank could
deliberately stoke up inflation as a way of reducing the burden on borrowers. In this scenario precious metals would
be a more attractive store of value than a bank account.
Gold in demand again as an ersatz currency
Even if central banks do not go that far, monetary policy
is already in uncharted waters. Exiting from quantitative
easing will not be easy, and the process will be accompanied by repeated bouts of market stress. Against that
background, gold will be seen as an attractive ersatz
currency. Demand for gold is already on the rise. Total
demand in the first half of this year was 2,335 tonnes
(+ 17%). Investment demand for gold more than doubled
to 1,064 tonnes, outstripping jewellery demand (888
tonnes) and technology (161 tonnes) for the first time ever.
Demand for gold bars and coins was stable at 485 tonnes,
but demand for gold-based ETFs exploded to 580 tonnes.
Jewellery demand was disappointing. This is attributable to
falling exchange rates in the two chief markets (China and
India). China is devaluing slowly and in a controlled fashion,
but the Indian rupee has lost a third of its value in the last
five years. For Indian buyers the price of gold in rupees is
therefore only just below its all-time high.
ETF gold holdings
2,800
2,600
2,400
2,200
2,000
1,800
1,600
1,400
Highlights
• Precious metals have been surprise
winners this year.
• A turnaround in US interest rate policy
is proving more difficult than expected.
The trade-weighted dollar is retreating
and precious metals are profiting.
• Gold provides a hedge against further
central bank easing.
• We favour platinum and palladium, which
are supported by stricter emission standards
in China and the threat of strike action in
South Africa.
mineworkers union
(the Association of
Mineworkers and
Construction Union – AMCU)
is now demanding wage increases
of up to 57%. A new strike is on the
cards. The 2014 strike of almost 70,000 mineworkers lasted
six months, knocking one-third off global output. This time
inventories will not be as full as in 2014, and a strike would
therefore have a greater effect on prices. The strongest
reaction would be in the platinum market.
1,000
800
2008
2009
2010
2011
2012
2013
2014
2015
2016
ETF holdings of gold (tonnes)
Platinum and palladium as favourites
Compared with gold, platinum and palladium have only
limited suitability as a safe haven. They should rather
be seen as industrial metals. Besides jewellery making,
they are used mainly in the manufacture of catalytic
converters for the automobile industry. Ten years ago
automobile sales in China totalled 6.5 million units a year,
but that figure has now soared to 25.5 million. The resultant
damage to the environment is being combatted by increasingly strict rules on emissions. The tougher the rules become, the greater is the use of platinum (diesel engines)
and palladium (petrol engines).At the end of this year China
will shift to the more stringent China 5 emission standard,
which is comparable to the Euro 5 standard introduced in
Europe in 2009. The combination of increased automobile
production and a higher platinum and palladium content
in catalytic converters should give a sizeable boost to
demand.
Threat of new strike in South Africa
On the supply side, South Africa accounts for 41% of
palladium production and 71% of platinum. South Africa’s
Legal notes on page 32
Conclusion
The Fed’s current stance shows how difficult it is for
central banks to extricate themselves from ultra-loose
monetary policies. Gold is suitable as a store of value
to guard against the possibility that central banks might
go further along the ultra-expansionary road. At present,
however, we prefer platinum and palladium. The demand
outlook is favourable, and a new strike in South Africa
could push prices higher.
Benchmark
Commodities
Gold
Crude oil
Commercial real estate
Private equity
Convertible bonds
Hedge funds
September 2016
% YTD1
¼
9.24%
8.58%
27.60%
13.02%
1.42%
3.04%
1.02%
¼
À
¼
¼
¼
¼
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 16.08.2016
25 | September/October 2016 | Asset classes | Alternative investments
1,200
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
9
3
Commodities
12
12
14
2
Strategic
Emerging markets
9
8
2
3
Pacific
41
10
8
40
15
34
5
15
5
5
Corporate bonds
6
16
40
Money market
Bonds
Equities
Alternative investments
15
3
3
North America
10
5
14
6
Government bonds
5
Tactical
Europe
3
Global bonds
6
16
Emerging markets
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
16.08.2016
1,048.90
no
yes
VP Bank Strategy Fund Conservative (EUR)
EUR
LI0017957528
16.08.2016
1,390.03
no
yes
0.95%
2.13%
VP Bank Strategy Fund Conservative (USD)
USD
LI0100145379
16.08.2016
1,323.27
no
yes
2.69%
VP Bank Strategy Fund Balanced (CHF)
CHF
LI0014803709
16.08.2016
1,519.33
no
yes
0.50%
VP Bank Strategy Fund Balanced (EUR)
EUR
LI0014803972
16.08.2016
953.15
no
yes
1.22%
VP Bank Strategy Fund Balanced (USD)
USD
LI0014804020
16.08.2016
1,447.97
no
yes
3.11%
For detailed information on our investment management mandates, please contact your personal advisor.
Legal notes on page 32
27 | September/October 2016 | Investment management | Investment management portfolios
Convertibles
Investment management
28 | September/October 2016 | Investment management | Current investment tactics
Current investment tactics
Current investment tactics
The second half of the year has started encouragingly.
Positive corporate results, continuing monetary ease and
some better than expected macro data have resulted in
a significant relaxation of tension on the financial markets.
Equity markets have done especially well. With interest
rates at rock bottom, equities lack viable rivals. The current
dividend yield in Switzerland is over three percent, rising
to almost four percent in the eurozone. Compared with
that, ten-year government bonds are offering marginal or
negative returns.
The financial markets’ current behaviour reflects expectations that this situation will not quickly change. However,
despite the robust recovery of share prices, there are
still substantial political risks. We expect the markets
to become more nervous again as the fourth quarter
approaches. The upcoming US presidential election in
November could cause jitters, while in the eurozone Italy
will be voting on a reform of the Senate. The Italian Prime
Minister has said he will step down if he fails to get a majority for his proposed reform, and that could have a negative
impact on the eurozone. Thus the world faces numerous
political imponderables. Moreover, valuation levels in the
equity markets are rather high, even though equities are
favourably priced relative to bonds. Overall, we are therefore maintaining a neutral allocation.
Bonds
Government securities have profited from worries about
economic growth. At the same time, ECB buying of government and corporate bonds has been pushing down yields.
We are sticking to our previous overall bond positioning
and are keeping duration below benchmark in all base
currencies. Our positioning in individual fixed income
sectors remains unchanged; government and investment
grade bonds are underweighted. We regard inflation-linked
bonds as an attractive alternative to nominal government
bonds.
Equities
The tension between high valuations and weak earnings
growth continues, especially in the USA. In the past such
situations have often resulted in market setbacks. The
picture in the eurozone and emerging markets is more
positive than in the USA. Emerging markets are benefiting
from a stabilisation of commodity prices and ongoing
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
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
Liquidity requirement
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 | September/October 2016 | Investment management | Our solutions
Risk
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 | September/October 2016 | Appendix | Glossary
Glossary
Important legal information (Disclaimer)
32 | September/October 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, 8 Marina View, #27-03 Asia Square Tower 1, Singapore 018960,
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 | September/October 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.
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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
Stefan Schwitter, 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
31 August 2016
This publication was finalised on
24 August 2016
Closing prices as at
16 August 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
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