Investment Views
July/August
May/June 2015
2016
Contents
Foreword
Current market assessment
1. Focus
Top issue of the month
Economic outlook
4
5
6
7
9
2. Asset classes
Money market and currencies
Bonds
Equities
Alternative investments
10
10
14
18
22
3. Investment management
26
4. Appendix
30
31
32
34
Glossary
Important legal information
VP Bank Group
Investment Views
July/August 2016
Foreword
Markets wrong-footed
Dear Reader
“It wasn’t supposed to be like this”: words that investors all over the world over are now whispering
to themselves in stunned disbelief. Ahead of Britain’s referendum on membership of the European
Union the markets were unanimous about the likely result. Given the costs and risks of withdrawal,
investors assumed that a vote for Remain was a foregone conclusion. But
the negative attitude of many Britons towards the EU was so strong that
the Brexiteers triumphed. The markets reacted with dismay.
The Brexit vote raises many questions. The event is unprecedented, and
Britain and the EU find themselves in uncharted waters. The markets, too,
are finding it hard to assess the fallout. This issue of Investment Views
therefore focuses on the likely consequences of Britain’s decision
to leave the EU.
In the “Economic outlook” article, we explain the procedure for
negotiations between Britain and the EU and discuss the possible
outcomes.
In “Top issue of the month” we first examine the consequences of
Brexit for the European Union and ask whether other countries might
follow Britain’s lead. We then explore the likely impact on the financial
markets and analyse the opportunities and risks for the various investment sectors.
The subsequent articles by our economists and strategists look at
the impact on individual asset classes.
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 21/06/2016
EUR vs. USD
1.135
Bonds: total return (pages 14–17)
May 2016
July 2016
Â
Â
EUR vs. CHF
1.089
À
À
USD vs. CHF
0.960
À
GBP vs. CHF
1.415
À
USD vs. JPY
High yield bonds
High yield
May 2016
July 2016
À
¼
À
Emerging market bonds
Hard currency bonds
À
À
À
Local currency bonds
¼
¼
104.46
À
À
AUD vs. USD
0.749
¼
¼
USD vs. SGD
1.342
À
À
Switzerland
¼
¼
USD vs. RUB
64.172
¼
¼
Europe
¼
¼
North America
¼
¼
Key interest rates
Switzerland
New
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
À
¼
New
Crude oil
À
¼
New
Investment grade government bonds
Switzerland
À
¼
New
Gold
À
À
Europe
À
¼
New
Real estate shares
¼
¼
USA
À
¼
New
Private equity
¼
¼
Convertible bonds
¼
¼
Hedge funds
¼
¼
Investment grade corporate bonds
Switzerland
À
¼
New
Europe
À
¼
New
USA
À
¼
New
Legal notes on page 32
5 | July/August 2016 | Current market assessment
Alternative investments (pages 22–25)
Bond yields (pages 14–17)
1. Focus
Top issue of the month | Bernd Hartmann
The decision of Britain’s voters to quit the European Union
has far-reaching consequences, not only for Britain itself
but also for the EU and the global financial markets.
solution. In any case this dissatisfaction is by no means
confined to Europe – witness the widespread support
for Donald Trump in the USA.
Implications for the EU
The direct economic consequences are much smaller for
the EU than for Britain itself. As yet, however, it is far from
clear how the EU will react to Britain’s decision to leave.
Although Euroscepticism is especially strong in the UK,
anti-EU sentiment has recently been swirling around in
many other member countries too. The EU cannot and
must not ignore this fact any longer.
What is needed first and foremost is a political response.
The measures taken by the ECB during the debt crisis won
time for politicians to make necessary reforms. But fear of
disintegration cannot now be warded off by further monetary devices. Political initiatives are imperative. The UK’s
departure deprives the EU of an important voice in favour
of liberalisation. There are many advocates of fundamental
change, but proposals vary hugely, ranging from closer
cooperation among a “coalition of the willing” to a return to
the old model of an economic community. It remains to be
seen whether and how the EU will renew itself. A strong
Europe is vital for the world economy and the financial
markets.
Consequences for the financial markets
The financial markets’ initial reaction was unambiguous.
But the heavy falls that ensued need to be seen in the
context of strong market gains prior to the referendum
result. In fact, movements were in line with what we
expected in the event of a vote for Brexit. We therefore
do not regard them as an overreaction. Market performance from here on will depend on how the Brexit negotiations proceed. Investors will probably be betting on a
“soft Brexit” scenario, which is also what we expect. That
suggests some recovery potential for the equity markets
in the short term. But the recovery will be limited – and not
only because of the ongoing mood of uncertainty. Given
current low rates of earnings growth, the fundamentals
provide little support for higher equity prices.
Within Europe there will be uncertainty about whether
other countries might flirt with the idea of leaving. This
will result in valuation discounts on bonds and shares,
especially in Europe’s periphery.
Britain’s decision also has implications for the US Federal
Reserve. Washington’s monetary guardians are now
expected to put further interest rate hikes on hold in
response to the uncertain economic fallout from Brexit.
We therefore currently expect no further interest rate
moves this year. This will hold down yields on the world’s
bond markets and leave no room for major movements.
Who next?
In the coming weeks and months investors will be keeping
a close eye on the negotiations between Britain and the EU.
They will also be asking themselves whether other countries might toy with the idea of pressing the ejector button.
Many citizens blame the EU for the fact that their economic
situation has not improved since the financial crisis whereas
holders of financial assets have been riding high on booming equity markets. Hence Euroscepticism is on the increase in most member countries. Even so, opinion polls
show that a majority of citizens make a distinction between
dissatisfaction with the EU and a desire to leave it. Although
disgruntled, they mostly do not see withdrawal as the
Legal notes on page 32
Opportunities and risks for investors
We advise against aggressive positioning at present.
Given the medium-term outlook, we regard the upside
potential as limited. Even so, there are steps that can
be taken.
In the UK equity market we recommend a selective
approach with the emphasis on export-oriented blue
chips. A weaker pound makes British products more
7 | July/August 2016 | Focus | Top issue of the month
The long shadow of Brexit
8 | July/August 2016 | Focus | Top issue of the month
competitive and can also boost earnings growth via
the “translation effect” (conversion of revenue into the
company’s accounting currency). We recommend a systematic focus on selected shares or an investment in the
FTSE 100 via exchange traded funds (ETFs). Domestically
oriented shares, especially small and mid caps, should
be avoided.
The Brexit decision has hit financial shares particularly
hard. We advise caution regarding UK financials despite
their optically very attractive valuations after the recent
heavy losses. The stringent regulatory environment makes
banks acutely vulnerable to impeded access to European
markets.
Despite the “uncertainty premium”, investors should not
avoid the eurozone completely. We regard companies
in the core countries as more attractive than those in the
periphery. Export-oriented firms, which stand to benefit
from a weaker euro, are based predominantly in the eurozone’s core.
Strong fluctuations mean a sharp rise in volatility measures.
This creates some interesting opportunities. Given the
limited upside potential of the equity markets at present,
investors might find it worth their while to look at products
offering a high coupon rather than participation in rising
share prices.
As regards currencies, we believe that exposures to the
pound sterling should still be hedged at present. But if
concrete signs appear that the UK is going to stay in the
EU’s single market, we would unwind the hedge in
expectation of a higher pound.
Although the euro has performed relatively well so far,
it might lose further ground against the US dollar in the
weeks ahead. Apart from the Brexit negotiations, the transatlantic interest rate gap still argues for euro weakness
against the dollar. Investors based in dollars might consider hedging their euro exposures.
Given that investors are looking for safe havens, the
appreciation of the Swiss franc against the euro comes
as no surprise. But the franc’s rise has not got out of hand,
presumably thanks mainly to interventions by the Swiss
National Bank. We believe that the SNB will continue
to act to stabilise the exchange rate. However, a weaker
Swiss franc can be ruled out as long as current uncertainties persist.
Gold is a winner in this period of uncertainty. 2016 has
seen the end of a five-year bear market in gold, and the
price has recently broken through an important technical
barrier. We recommend including gold in investment
portfolios in the current environment.
Conclusion
Brexit raises many questions and will have far-reaching
reverberations beyond the UK. Financial markets will have
to accustom themselves to yet another period of heightened uncertainty. Investors should take advantage of the
opportunities presented without positioning themselves
too aggressively.
Living with Brexit
After an emotionally driven referendum campaign, the
people of Great Britain have unexpectedly decided to leave
the European Union. 52% voted for Brexit and 48% against.
What now?
The future course of events will depend largely on how the
divorce between Britain and the EU is managed. The procedure for leaving the Union is governed by Article 50 of the
Treaty of Lisbon, which states that any member country
may decide to withdraw from the Union in accordance the
member’s constitutional requirements. The Union then
negotiates an agreement with the departing country on
the basis of guidelines provided by the European Council
and taking account of the country’s future relationship with
the Union. Article 50 allows a negotiation period of two
years, which can be extended by mutual agreement. Britain
remains a member of the EU until an agreement is reached
(or the time allowed expires) and therefore continues to
enjoy unimpeded access to the single market. In a nutshell,
the leave vote on 23 June does not mean the end of relations between Britain and Europe. Article 50 is designed
to provide a solid foundation for future constructive cooperation.
“Soft Brexit” or “hard Brexit”?
Essentially the negotiations can lead to one of two scenarios: either a violent rupture with the EU (hard Brexit) or
an arrangement whereby Britain remains a member of
the European single market (soft Brexit).
Two possible soft Brexit models can be envisaged:
• EEA membership: Britain would join Liechtenstein,
Norway and Iceland as the fourth non-EU country to
be part of the European Economic Area (EEA). EEA
membership involves making financial contributions
to the EU and being inside the single market.
• Bilateral agreements: Britain would make bilateral
agreements with the EU in an arrangement similar
to Switzerland’s.
Legal notes on page 32
In both these models
the economic impact on
Britain and the EU would
be limited. For Britain the
negative consequences of losing
EU membership would be minimised.
We believe that a soft Brexit is the most probable outcome.
Economic and geopolitical imperatives argue for a close
relationship between Britain and the European continent.
Hard Brexit: the worst outcome for Britain
In a hard Brexit scenario the two sides would dig their heels
in, an amicable arrangement would not be reached and
Britain would find itself marooned outside the single market. This would result in the imposition of tariffs and other
barriers to trade, with UK companies enjoying none of the
fruits of association with the EU. As around 50% of UK exports go to the EU, the economic fallout would be considerable. The Bertelsmann Foundation has calculated that by
the year 2030 Britain’s per capita GDP would be between
0.6% and 3% lower than if it had stayed in the EU. British
companies that are deeply embedded in the European
economy would be hit especially hard.
The game is not over yet
Britain and Europe now stand at the beginning of a crucial
process. In the weeks ahead the financial markets will be
trying to gauge the mood of the Brexit negotiations. If it
looks as if the negotiating partners are heading towards a
soft Brexit, current market jitters might subside.
9 | July/August 2016 | Focus | Economic outlook
Economic outlook | Dr Thomas Gitzel
Highlights
• Now that Britain has voted to leave the EU,
there are basically two possible scenarios:
soft Brexit or hard Brexit.
• A soft Brexit outcome would mean that
Britain stays in the European single market.
• A hard Brexit would leave Britain floating
in the Atlantic without fixed ties to the
European continent.
2. Asset classes
Money market and
currencies
Money market and currencies
Market overview
EUR/CHF and EUR/USD: exchange rates since June 2014
USD/CHF: exchange rate since June 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
J J A S O N D J F M A M J J A S O N D J F M A M J
J J A S O N D J F M A M J J A S O N D J F M A M J
EUR/USD (r-h scale)
USD/CHF
GBP/CHF and GBP/USD: exchange rates since June 2014
USD/JPY and USD/AUD: exchange rates since June 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
J J A S O N D J F M A M J J A S O N D J F M A M J
GBP/CHF
1.10
105
J J A S O N D J F M A M J J A S O N D J F M A M J
GBP/USD (r-h scale)
USD/JPY
Key interest rates in Switzerland, eurozone, USA: since June 2006
Key interest rates in UK and Japan: since June 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 | July/August 2016 | Asset classes | Money market and currencies
EUR/CHF
Money market and currencies | Dr Thomas Gitzel
Market outlook
12 | July/August 2016 | Asset classes | Money market and currencies
In the coming weeks the foreign exchange markets will
be focusing on the fallout from the British vote to leave
the EU. The key question is: How will Brexit be managed?
As we explain in “Economic Outlook” on page 9, there are
basically two feasible scenarios: a “soft Brexit” that would
enable the UK to stay inside the European single market,
or a “hard Brexit” that would cut the UK adrift economically. In this article we sketch the implications of the two
scenarios for a number of key exchange rates.
Possible exchange rate reactions: soft Brexit
GBP/USD: If it emerges in the course of negotiations that
the UK is going to stay tied fairly closely to the EU (either
as a member of the EEA or through bilateral treaties), the
possible negative economic impact should be limited. A
serious decline from the pound’s present level could then
be avoided, with the pound moving towards its fair value
in terms of purchasing power parity. If the UK economy
stays on course, the Bank of England might consider putting up interest rates, which would suggest a moderate
strengthening of the pound.
• GBP/USD – soft Brexit scenario: 1.45 – 1.50
EUR/USD: The more smoothly Brexit is managed, the
greater becomes the incentive for other countries to follow
Britain’s lead, especially now that support for the EU has
been eroded in many countries as a result of the refugee
crisis. Anxiety about a possible disintegration of the EU
could weaken the euro. To put it another way, in future
the euro would carry a risk premium. How realistic is the
possibility of further departures? The Brexit example is
most tempting for countries that are net payers into the
EU budget. The biggest net payers in absolute terms are
Germany, France, the Netherlands, Italy and Sweden.
There is little danger of Germany or France wanting to
leave. Their political and emotional commitment to the EU
project is too great. But the populations of Italy, Sweden
and the Netherlands are becoming increasingly Eurosceptic. Crisis-riven Italy, in particular, could be susceptible to
the idea of leaving. There has already been widespread
debate in Italy about quitting the euro, but the rules say
that a country cannot ditch the euro without leaving the
Union. Be that as it may, we expect the euro to move lower
against the dollar over the coming weeks. The interest rate
gap militates in favour of a stronger dollar. The referendum
result on 23 June and speculation about copycat action by
other countries could put extra wind in the dollar’s sails
and push the euro down further.
• EUR/USD – soft Brexit scenario: 1.00 – 1.06
EUR/GBP: As already explained, a soft Brexit might put
more strain on the EU than on Britain itself. A strong tieup between Britain and the EU would probably have no
significant impact on the pound, but the possibility of
further exits could be a drag on the euro.
• EUR/GBP – soft Brexit scenario: 0.65 – 0.72
GBP/CHF: We believe that a soft Brexit would not have
serious economic consequences for Britain, and we would
therefore not expect any substantial negative impact on
the pound’s current rate against the Swiss franc. Indeed,
possible interest rate hikes by the Bank of England could
push the pound slightly higher.
• GBP/CHF – soft Brexit scenario: 1.45 – 1.50
Possible exchange rate reactions: hard Brexit
GBP/USD: We believe that a hard Brexit would have a
major negative impact on the UK economy. Further substantial exchange rate losses for the pound would be likely
to ensue.
• GBP/USD – hard Brexit scenario: 1.10 – 1.20
EUR/USD: A violent rupture with the EU and a consequent
negative impact on the UK economy would be a deterrent
for other potential exiters. The danger of copycat action
would presumably be much smaller than in the case of a
soft Brexit. But even in the absence of speculation about
other countries following Britain’s lead, we believe there
Highlights
• Brexit can basically take two forms: “soft
Brexit” or “hard Brexit”. Reactions on the
foreign exchange markets will depend on
which of these two scenarios materialises.
• A soft Brexit would be negative for the
euro, because it would encourage other
countries to follow Britain’s lead.
are still clear depreciation risks for the euro. The EUR/USD
rate will tend to follow the fundamentals.
• EUR/USD – hard Brexit scenario: 1.06 – 1.15
EUR/GBP: As explained above, if all political and economic
ties across the English Channel are cut, the negative impact
on the UK economy would be substantial, resulting in sharp
losses for the pound.
• EUR/GBP – hard Brexit scenario: 0.88 – 1.00
Conclusion
Reactions on the foreign exchange markets will depend
heavily on whether the negotiation process results in a soft
Brexit or a hard Brexit. The economic implications of the
two scenarios are very different.
Key interest rates
Switzerland
Europe (EMU)
USA
Juli 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
Legal notes on page 32
13 | July/August 2016 | Asset classes | Money market and currencies
GBP/CHF: A hard Brexit and a resultant weakening of the
pound would also have a significant impact on the GBP/
CHF rate. We would expect the pound to fall to somewhere
between CHF 1.20 and CHF 1.30.
• GBP/CHF – hard Brexit scenario: 1.20 – 1.30
2. Asset classes
Bonds
Bonds
Bond yields – overview
Switzerland: yields since June 2014
Emerging markets (hard currency): yields since June 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%
J
J A S O N D J F M A M J
CHF government bonds
J A S O N D J F MA M J
J
CHF corporate bonds (5 to 10 y.)
J A S O N D J F M A M J
J A S O N D J F MA M J
EM government bonds (5 to 10 y.)
EM corporate bonds (5 to 10 y.)
Europe: yields since June 2014
Emerging markets (local currency): yields since June 2014
2.5%
5.5%
2.0%
5.0%
1.5%
1.0%
4.5%
0.5%
4.0%
J
J A S O N D J F M A M J
EUR government bonds (5 to 10 y.)
J A S O N D J F MA M J
J
EUR corporate bonds (5 to 10 y.)
USA: yields since June 2014
J A S O N D J F M A M J
J A S O N D J F MA M J
EM government bonds (local currency)
High yield: yields since June 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%
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 M J
USD corporate bonds (5 to 10 y.)
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 M J
15 | July/August 2016 | Asset classes | Bonds
0.0%
Bonds | Dr Thomas Gitzel, Bernhard Allgäuer
Market outlook
16 | July/August 2016 | Asset classes | Bonds
Brexit anxieties, coupled with shilly-shallying by the Fed,
have pushed government bond prices higher and yields
correspondingly downwards. Yields on 10-year Bunds are
now in negative territory.
Bunds edge into negative yield territory
The yield on 10-year Bunds slipped below zero in June.
This is an epoch-making event on the German bond
market. But sub-zero yields are by no means unique to
Germany. Globally, the volume of bonds carrying negative
yields now amounts to around EUR 9 trillion. Swiss government bonds were among the standard-bearers of this
trend. The current uncertain market environment creates
an overwhelming demand for security, and it is this that
catapulted German government bond prices upwards and
pushed their yields below zero. The trend has also been
supported by the ECB’s asset purchase programme. Almost
15% of all eligible Bunds are now on the books of the ECB.
But central bank purchases cut both ways. When Mario
Draghi crams government bonds into the ECB’s coffers, the
quantity available on the market is diminished. If investors
start to sell, this reduced market liquidity can magnify the
downward pressure on bond prices. That is exactly what
happened in the spring of 2015. Then, too, the ECB was
buying copiously on the bond markets, but a sudden bout
of selling pressure, combined with reduced market liquidity, produced an unprecedented back-up of bond yields,
which jumped by almost 100 basis points within a matter
of weeks. To sum up: although investors’ strong need for
security argues for low yields, the ECB’s bond purchases
do not guarantee an enduring low yield level for long-term
bonds. Even so, as long as the future of UK-European relations remains uncertain, safe haven assets such as government bonds will be in demand.
Interminable discussion about US interest rates
In her semiannual report to Congress, Fed Chair Janet
Yellen cited slower job creation and continuing weak investment as the main risks for the US economy. The IMF took
the same line in its latest analysis of the US economy, warning of current risks and advocating a continued ultra-expansionary bias in monetary policy. After the UK’s vote for
Brexit, we can expect the IMF to stiffen its demand for
globally concerted economic stimulus measures. The Fed
regards a defusing of doubts about the US labour market
in the months ahead as a necessary condition for a further
tightening of US monetary policy. But that alone is no
longer enough. The Fed will want more time to gauge the
impact of Brexit on economic performance and the financial
markets. We give no credence, however, to market speculation about a US rate cut. Our baseline scenario is that
market turbulence will abate after a period of heightened
uncertainty and that the economic repercussions will be
limited, especially on the other side of the Atlantic, enabling
the Fed to resume tightening at a later date. Interest rate
cuts are not on the agenda this year, but Brexit uncertainties will not permit monetary tightening. Yields on safe
government bonds will therefore stay very low for the time
being – an upward movement is unlikely.
Limits of monetary policy
Central banks are like doctors – they do not leave their
patients in the lurch. If one medicine fails to work, they try
another. But mere palliatives do not tackle the underlying
disease. Indeed, there is a risk of side-effects that can
create additional problems. This is exactly where we find
ourselves at present. In the run-up to the Brexit referendum, even yields on 30-year Swiss government bonds
slipped into negative territory. At the same time there
was massive buying of CHF 1,000 bank notes (see chart).
Switzerland is experiencing what amounts to an insidious
bank run as investors turn to physical cash in order to avoid
negative yields. This is the central banks’ worst nightmare.
The simple fact is that the scope for negative interest rates
comes up against a brick wall if the interest rate penalty exceeds the cost of storing cash. The exact numbers depend
on the amounts involved and cannot be precisely stated.
But it is clear that the room for negative rates is now close
to its limit. The abolition of the EUR 500 note and talk about
imposing limits on cash holdings should be seen in this
context.
Highlights
• Brexit uncertainties make a further
US interest rate hike unlikely this year.
• If key interest rates are not raised, there
is little scope for higher bond yields.
• Monetary policy is reaching its limits.
This is reflected in the growing volume
of banknotes in circulation in Switzerland.
• The risk of a misallocation of capital in the
corporate sector is becoming more acute.
Corporate bonds remain unattractive.
the ECB’s medicine
cabinet. CSPP volume
in the first full week of
trading was EUR 1.9 billion,
indicating a likely monthly volume
of EUR 5-10 billion. It is notable that the
purchased paper included bonds of Telecom Italia, which
Moody’s and S&P rate as speculative grade. It was only
the investment grade rating awarded by Fitch that qualified
Telecom Italia for inclusion in the ECB programme. The
ECB might be tempted, if need arises, to launch an asset
purchase programme aimed at bonds without an investment grade rating. But that would involve buying assets
exposed to the risk of default. Germany, which subscribes
about 25% of the ECB’s assets under the so-called “capital
key”, would presumably oppose any such extension. In this
environment corporate borrowers could decide to make
greater use of the primary market to finance dividends
and share buybacks. Thus it is becoming increasingly likely
that central bank policy will lead to misallocations of capital.
We regard corporate bonds as unattractive despite ECB
support.
50,000
–1
45,000
0
40,000
1
Benchmark
2
Gov. bonds Switzerland2
¼
3
Gov. bonds Europe (EUR)2
¼
4
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
35,000
30,000
25,000
20,000
5
15,000
10,000
6
5,000
7
0
1988
8
1991
1994
1997
2000
2003
2006
2009
2012
2015
CHF 1,000 notes in circulation
10 yr Swiss government bond yield (r-h scale, inverted)
Corporate bonds
Against this background, the “Corporate Sector Purchase
Programme” (CSPP) can be seen as the latest addition to
Legal notes on page 32
July 2016
Emerging market bonds (hard currency)3
À
Emerging market bonds (local currency)3
¼
1
As of 21/06/2016
Yield
3
Total return
2
% YTD1
5.14%
4.06%
4.21%
1.92%
3.77%
6.57%
8.08%
8.71%
12.25%
17 | July/August 2016 | Asset classes | Bonds
Switzerland: bond yields and cash holdings
2. Asset classes
Equities
Equities
Equity indices – overview
Switzerland: market movement since June 2014 (indexed)
Pacific: market movement since June 2014 (indexed)
115
115
110
110
105
105
100
100
95
95
90
90
85
85
80
J
J A S O N D J F M A M J
J A S O N D J F M A M J
J
MSCI Switzerland TR Index (net) rebased
Europe: market movement since June 2014 (indexed)
105
J A S O N D J F M A M J
J A S O N D J F M A M J
MSCI Pacific TR Index (net) rebased
Emerging markets: market movement since June 2014 (indexed)
115
110
100
105
95
100
95
90
90
85
85
80
80
75
75
70
65
J
J A S O N D J F M A M J
J A S O N D J F M A M J
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 M A M J
MSCI Emerging Markets TR Index (net) rebased
North America: market movement since June 2014 (indexed)
United Kingdom: market movement since June 2014 (indexed)
115
110
105
110
100
105
95
100
90
95
85
80
90
J
J 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
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 M A M J
19 | July/August 2016 | Asset classes | Equities
70
Equities | Rolf Kuster
Market outlook
20 | July/August 2016 | Asset classes | Equities
As explained in “Top issue of the month”, investors now
need to adopt a highly differentiated approach to the
equity markets. Equities offer opportunities but also
multiple risks. We advise against interpreting the steep
post-referendum falls in UK share prices as a buy opportunity. In Europe a focus on quality has become crucially
important.
British financials: in the eye of the storm
The City of London occupies top place in the global
ranking of financial centres (Z/Yen Group index). As the
undisputed world leader in international foreign exchange
trading, London accounts for almost 40% of global currency
trading volume. The financial services industry is hugely
important for London’s economy, providing one in thirteen
of the 4.8 million jobs in Greater London. American and
also Swiss banks use London as a hub for business with
the European single market.
Britain’s departure from the European Union threatens to
rob UK banks of a decisive regulatory advantage. Under
the EU’s “passporting” arrangement, financial services
companies that are licensed and regulated in an EU member country are free to offer their products and services
in other member countries without having to meet further
regulatory requirements. For example, if an investment
fund is licensed for sale in the UK, it can be offered for
sale in other member countries with no time-consuming
extra formalities. A large part of the British investment
fund industry is based on the UCITS system, under which
investment vehicles can be marketed freely anywhere in
the EU. The prospect of losing this access is a big worry.
In the run-up to the referendum many banks warned of
job losses if Britain voted to leave. Stuart Gulliver, head
of HSBC, has estimated that around 20% of HSBC’s 5,000
investment banking staff in London would have to relocate
to Paris.
Job losses in the financial sector would have a far-reaching
impact on economic growth. The UK financial services
industry generates around 10% of Britain’s GDP. The even-
tual fallout for the City of London will depend on the new
arrangements that are hammered out between Britain and
the EU. The negotiations will be tough and protracted. We
believe that ways will be found to give British financial services companies continued access to the single market, but
no bank or insurance company can afford to sit on its hands
and wait for the outcome of the negotiations. Precautionary
measures will have to be taken.
However, what is bad for the big financial companies could
mean opportunities for smaller players. The “alternative investments” sector, for example, which has a strong position
in London, would stand to benefit from a looser regulatory
framework and tailor-made rules.
Even before Britain voted for Brexit, financials had already
been the weakest-performing sector of the UK equity
market this year. But this is by no means a purely British
phenomenon. The picture in the USA and the eurozone is
the same. Feeble share price performance reflects difficult
operating conditions, i.e. tougher capital ratio requirements
combined with narrower interest margins and shrunken
earnings in investment banking business. All this has left its
mark on valuation ratios. A majority of bank shares are now
trading below book value. Low valuations might be enough
to stabilise share prices in the present environment, but a
significant share price recovery would require changes in
the fundamentals.
London’s financial centre will remain exposed to regulatory
and legal uncertainties for a protracted period. Considering
the risks involved, we therefore currently advise against
investing in UK banks. We also continue to exclude bank
shares from our European Top 10, and in our model portfolios we remain defensively positioned in this sector.
Selective opportunities in UK market
A distinctive feature of the broad UK equity market is its
strong international exposure. UK blue chips in the FTSE
100 generate almost 80% of their sales outside Britain. A
weaker pound makes British products more competitive
and can also boost earnings growth via the “translation
Highlights
• Despite recent heavy losses, we still
regard UK financials as unattractively risky.
• Within the UK market we favour
export-oriented blue chips.
• In Europe, quality shares in core
eurozone countries are attractive.
Europe: focus on quality
The immediate economic consequences of Brexit for
EU equity markets appear limited at first sight. Only 7%
of EU exports go to Britain. A slowdown of UK economic
growth would therefore have only a marginal effect.
The fundamentals for equity markets in the eurozone itself
are comparatively robust. Low valuation levels compared
with other regions, combined with above-average earnings
growth, are a plus factor for eurozone equities.
Nevertheless it is hard to predict when investors will start
focusing strongly on the fundamentals again. The possibility that other countries will be tempted to follow Britain’s
example is a major cause of uncertainty. Further departures
would weaken the eurozone and its equity markets. As long
as this danger remains, eurozone equities will tend to trade
at a slight discount. Investors who buy eurozone shares
should concentrate on high-quality companies in politically
stable economies. We advise against an increased engagement in the peripheral countries.
Legal notes on page 32
Benchmark
% YTD1
July 2016
Switzerland
¼
Europe
¼
North America
¼
Pacific (incl. Japan)
¼
Emerging markets
À
–7.35%
–1.40%
3.19%
–2.43%
4.31%
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 21/06/2016
21 | July/August 2016 | Asset classes | Equities
effect” (conversion of revenue into the company’s accounting currency). Thus the pound acts as a sort of natural
hedge. Indeed, Deutsche Bank forecasts that UK shares
will outperform the eurozone, and this view is supported
by a correlation analysis. In the past, companies in the
commodities sector, e.g. Rio Tinto, Anglo American and
BHP Billiton, have chalked up relatively strong share price
gains when the pound has weakened. Sectors like health
care and IT also have a comparatively low sales exposure to
the domestic market, whereas utilities and manufacturers
of cyclical consumer goods are strongly tied to domestic
growth.
Many small and mid caps must now be regarded as unattractive. These companies often have a relatively strong
domestic focus and therefore do not profit significantly
from a weaker currency. We therefore recommend concentrating on selected blue chips or investing in the FTSE 100
via exchange traded funds (ETFs). For investors based in
euros, dollars or Swiss francs it still makes sense to hedge
the pound when holding UK assets.
2. Asset classes
Alternative
investments
Alternative investments
Alternative investments – overview
Commodities: performance since June 2014
Private equity: performance since June 2014 (indexed)
145
120
110
135
100
90
125
80
115
70
105
60
50
95
40
85
30
75
20
J
J A S O N D J F M A M J
J A S O N D J F M A M J
Bloomberg Commodity Index (rebased on oil)
J
WTI crude oil (USD)
Precious metals: performance since June 2014
1,500
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 M A M J
LPX Major Market TR Index (USD)
Convertible bonds: performance since June 2014 (indexed)
110
1,400
105
1,300
100
1,200
1,100
90
900
800
85
J
J 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
Silver (rebased on gold)
Real estate: performance since June 2014 (indexed)
120
J A S O N D J F M A M J
UBS Convertible Index (USD)
J A S O N D J F M A M J
UBS Convertible Index (CHF hedged)
Hedge funds: performance since June 2014 (indexed)
130
125
115
120
110
115
110
105
105
100
100
95
95
90
90
85
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 M A M J
SXI Swiss Real Estate Index (CHF)
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 M A M J
Newedge CTA Index
23 | July/August 2016 | Asset classes | Alternative investments
95
1,000
Alternative investments | Bernhard Allgäuer, Norman Quaderer
Central bank interventions
Japan, too, would therefore like to see its currency weaken
and has stated that interventions are a possibility. At the
latest G7 meeting, however, Japan agreed to refrain from
a unilateral competitive devaluation. Such a move could
encourage other countries to follow suit, plunging the
world into a new currency war. The yen jumped 8% in
the hours immediately following the Brexit result, but
then fell back somewhat, presumably thanks to concerted
action by central banks. But, as the example of the Swiss
franc has shown, such intervention is not sustainable and
is likely to be set at nought sooner or later by the markets.
More expansionary central bank bias after Brexit
Gold should continue to profit from these developments.
Uncertainty about the UK’s future is likely to put a drag on
economic growth. The markets have been quick to price
out any further interest rate hikes by the Fed. This is positive for gold, because rising interest rates mean higher
opportunity costs. Gold broke through the technical barrier
of USD 1,300 an ounce when the referendum result was
announced. Fears of a domino effect – possible departures
by other EU members – will keep uncertainty alive, and that
is good for gold. We therefore believe that the way is clear
for gold to head towards USD 1,500.
Gold price and central bank balance sheets
5,000
2,200
4,500
2,000
4,000
1,800
1,600
3,500
1,400
3,000
1,200
2,500
1,000
2,000
800
ECB balance sheet (bn EUR)
Gold price in USD per oz.
(r-h scale)
2016
2015
2013
2014
2011
2012
2010
2009
200
2007
500
2008
400
2005
600
1,000
2006
1,500
2003
Gold boosted by Brexit
Gold is a Brexit winner. Investors are reacting to heightened
uncertainty by rushing into safe havens, and gold is a
favoured destination. In fact, gold had already started to lift
itself out of its five-year bear market at the start of the year,
when weak economic growth in China ignited fears of
global contagion. In the wake of the financial market crisis,
the Chinese government had launched economic stimulus
measures totalling over USD 600 billion, but the economy
is still suffering from enormous overcapacity, especially
in steel and cement. The problem has been bridged by
the provision of cheap credit, but this has created a huge
mountain of debt and fuelled a runaway property boom.
Real estate prices in Shenzhen, for example, are up by over
75% compared with last year. The policy of cheap credit is
therefore likely to be ditched. An alternative course would
be to try to boost exports by weakening the exchange rate.
The renminbi has depreciated by around 6% against China’s
European and US trading partners over the last 12 months
and by over 20% against rivals like Japan – hence the fall of
over 11% in Japanese exports compared with last year.
2004
24 | July/August 2016 | Asset classes | Alternative investments
Market outlook
Fed balance sheet (bn USD)
Conclusion
Various countries would favour a depreciation of their
national currencies. After the Brexit-inspired turbulence
on the foreign exchange markets the risk of competitive
devaluations remains. Gold is a stable currency with the
advantage that its supply cannot be increased by resort
to the printing press. The coming months will show how
Britain’s international relations are going to be reshaped
and whether Brexit will provoke some form of contagion.
In this environment the inclusion of gold in investment
portfolios is advisable.
Metal prices and Chinese economic growth
140
16%
120
14%
12%
100
10%
80
8%
This is basically
positive for industrial
metals because it weakens
the currency in which they
are traded (USD).
On the other hand, the new uncertainties have resulted in a repatriation of dollars. The dollar,
like the Swiss franc, is seen as a safe haven. Much will
depend on the extent to which Brexit impinges on world
growth. China, still the most dynamic buyer of industrial
metals, should be affected only marginally if at all.
Conclusion
Industrial metal prices are vulnerable to lower Chinese
demand, but the fundamentals indicate an upbeat trend
for the time being. One should bear in mind, however,
that the risk of a setback due to an interest rate hike by the
Fed has not been completely banished. Overall, we expect
a stabilisation at current price levels with the possibility of
an upward trend until year-end.
60
6%
40
4%
20
0
2006
2%
2008
2010
China’s GDP (yoy, r-h scale)
Copper price (indexed)
2012
2014
2016
LME index (indexed)
Aluminium price (indexed)
The underlying demand outlook in the medium and long
term is therefore strained. Even so, industrial metal prices
are currently on a recovery track. Higher oil prices and
and economic data from China have recently been rather
more encouraging.
Brexit and metal prices
The money markets reacted to the Brexit decision by
pricing out any further interest rate hikes by the Fed.
0%
Benchmark
Commodities
Gold
Crude oil
Commercial real estate
Private equity
Convertible bonds
Hedge funds
¼
¼
À
¼
¼
¼
¼
% YTD1
13.59%
18.36%
20.95%
6.94%
–1.92%
0.63%
–1.13%
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
Legal notes on page 32
July 2016
As of 21/06/2016
25 | July/August 2016 | Asset classes | Alternative investments
Industrial metals – focus on China
Prices of industrial metals depend heavily on economic
and seasonal factors. China is a major driver of markets in
industrial metals thanks to the meteoric growth achieved
in recent years.
The current faltering of economic momentum in China is
bound to have an impact on the commodity markets. In the
past, industrial metals often experienced double-digit rates
of price increase, but those halcyon days are unlikely to be
repeated. Future demand for copper, aluminium and especially steel will tend to be weaker. The growing role played
by the services sector erodes the importance of industrial
metals.
Highlights
• Gold is a Brexit winner.
• Ructions on the foreign exchange markets
appear to have prompted intervention
by the central banks, but a new round of
currency wars cannot be ruled out.
• While uncertainties continue, it makes sense
to include gold in investment portfolios.
• Industrial metals take their cue mainly
from China and are therefore less affected
by Brexit.
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
Convertibles
3
Commodities
12
12
14
2
Strategic
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
5
14
6
10
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
21/06/16
1,032.33
no
yes
–0.65%
VP Bank Strategy Fund Conservative (EUR)
EUR
LI0017957528
21/06/16
1,364.40
no
yes
0.25%
VP Bank Strategy Fund Conservative (USD)
USD
LI0100145379
21/06/16
1,298.14
no
yes
0.74%
VP Bank Strategy Fund Balanced (CHF)
CHF
LI0014803709
21/06/16
1,481.26
no
yes
–2.01%
VP Bank Strategy Fund Balanced (EUR)
EUR
LI0014803972
21/06/16
929.38
no
yes
–1.30%
VP Bank Strategy Fund Balanced (USD)
USD
LI0014804020
21/06/16
1,408.54
no
yes
0.30%
For detailed information on our investment management mandates, please contact your personal advisor.
Legal notes on page 32
27 | July/August 2016 | Investment management | Investment management portfolios
Emerging markets
Government bonds
5
Investment management
28 | July/August 2016 | Investment management | Current investment tactics
Current investment tactics
Current investment tactics
The financial markets were dominated in the first half year
by political uncertainty and partially downbeat economic
data. The upshot was a buoyant performance on the bond
markets and rather disappointing results for equity investors. European markets, in particular, were driven by wild
shifts in sentiment, which resulted in violent movements.
Equity markets in Europe are still trading well below the
levels recorded at the start of the year. This volatile trend
looks likely to continue after the British vote for Brexit.
When it became clear that Britain would be leaving the EU,
the markets’ initial reaction was one of shock, even though
the UK will continue to be a full member of the EU for the
duration of the exit negotiations. It will be at least two years
before the break is formalised. Recent macroeconomic data
have been encouraging, and we do not believe that Brexit
will jeopardise this positive trend. Our baseline scenario
foresees steady US growth and continuing economic recovery in Europe. The emerging economies are expected to
continue to stabilise. Investors should initially adopt a waitand-see attitude and exploit volatile movements selectively. Our equity positioning remains neutral at present.
Bonds
Government bonds have profited from growth worries.
The ECB’s bond purchase programme is also helping to
push yields lower. Our focus on short durations has not yet
paid off, but we are sticking to our present positioning and
keeping durations below benchmark in all base currencies.
Our positioning in other fixed-income categories is likewise
unchanged. Government securities and other investment
grade bonds are generally underweighted. We regard current inflation expectations as too low and therefore hold a
position in inflation-linked bonds as an alternative to standard government issues.
Equities
Although global leading indicators are already pointing
upwards, this is not yet reflected in hard economic data –
hence the volatile movement of equity prices. Clear
impulses that would give the markets a sense of direction
are lacking. However, if the world economy performs in
line with our expectations, this should have an impact on
corporate earnings expectations. Earnings revisions are
still on a downward trend at present. A solid rise in equity
prices requires revisions to bottom out or – preferably –
turn upwards. Valuation levels in the eurozone are still
attractive, especially in comparison with bonds. Further
support is provided by high dividend yields. Emerging
markets are currently 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
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 | July/August 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 | July/August 2016 | Appendix | Glossary
Glossary
Important legal information (Disclaimer)
32 | July/August 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 | July/August 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
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VP Fund Solutions (Luxembourg) SA
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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
4 July 2016
This publication was finalised on
24 June 2016
Closing prices as at
21 June 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
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