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Investment Report December 2017

Strategy overview In the year 1996 the former Federal Reserve Chairman Alan Greenspan de-

“Irrational exuberance versus ratio-

scribed events on stockmarkets as “irrational exuberance”. Does this state-

nal exuberance.”

ment also apply to the current state of markets? The fact is that the Dow Jones gained 331 points or 1.4% on the final day of trading in November. Within four days the index gained 714 points, rising above the level of 24,000 points for the first time in history. Over the month as a whole the Dow gained 3.8%. This made it the eighth positive month in succession, corresponding to the longest period of market expansion since 1995. We tend to share the view of the Goldman Sachs analyst David Kostin, who describes the current situation as “rational exuberance”. US companies, in particular, have posted steady earnings growth over the years. Another aspect is the lack of alternatives, brought about by the low interest rate environment. In addition, we think that efforts to reform the US tax system are likely to succeed, which should further boost stockmarkets. At the same time, some of the positives are already likely to have been priced in. At the political level, the situation is dominated by the above-mentioned tax

“The Saudi Crown Prince is taking an

reform in the United States, the events in the Middle East as well as the pro-

aggressive stance.”

cess of forming a government in Germany. Because the Saudi Crown Prince is seen as the driving force behind a tougher approach to Iran, in our view tensions in the Middle East are likely to increase. We are sticking to our view that global economic momentum remains intact.

“Overweighting of European equi-

A positive sign is that investment ratios have risen for the first time since the

ties relative to American”

financial crisis. This is the result of positive corporate expectations as well as looser lending by banks. As mentioned on numerous occasions in earlier Investment Reports, the US economy is in a late-cyclical phase. In the equities field we favour Europe over the USA. Seen from a historical context, stockmarkets in Europe are more attractively valued and in our view the earnings boosting potential is higher in the “Old World". In addition, US companies, FACTUM AG Asset Management

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Investment Report December 2017

which tend to be more heavily indebted, are likely to feel the headwind of rising interest rates sooner than their counterparts in Europe. We did not change the equity ratio in November. We left equities and alter-

“We are sticking to our moderate

native investment overweighted, bonds underweighted and convertible

overweighting of equities.”

bonds neutral. Liquidity remains temporarily overweighted, because we want to retain the maximum possible flexibility in the event of a possible consolidation. Economy The US economy grew even more strongly than anticipated in the third quar-

“The US economy is firing on all cyl-

ter. In the second revision annualised growth was adjusted upwards from 3%


to 3.3%, representing the strongest growth recorded since the third quarter of 2014. The unemployment rate has fallen to the lowest level for 17 years, and consumer sentiment is the highest it has been for 13 years. The USA opened the Christmas shopping season with “Thanksgiving”. Retailers are expecting Americans to spend USD 967 on average per capita. This would be a new record. Most retailers generate around 40% of their annual sales in November and December. There are two developments in the USA that could impact the market, how-

“The US tax reform is set to be final-

ever. Firstly the much-discussed tax reform, and secondly the short-term

ised soon.”

search for a budget compromise in order to avert the so-called “government shutdown”. The US tax reform has reached a further hurdle. The Senate voted by a thin majority to accept the Senate proposal. The two proposals of the Senate and of the House of Representatives are now on the table. These will need to be moulded into a new version before being submitted to both chambers of US Congress for approval. The core element is the reduction in corporation tax from 35% to 20%. Without doubt, this is the most significant domestic policy project since the start of the Trump administration. A looming “government shutdown” is likely to be avoided by the passing of socalled “stop-gap” measures.

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Investment Report December 2017

The Indian economy continued to expand strongly in the 3rd quarter of 2017.

“India sees economy pick up further,

Relative to the same quarter of the previous year, GDP grew 6.3% between

Brazil is pulling itself out of the cri-

July and September. At 5.7%, growth in the previous quarter was the weak-


est it had been for three years. The Indian economy appears to have overcome the weak phase that had been triggered by the cash reform in November 2016 and the introduction of a new, uniform value added tax. Brazil also presented its GDP figures for the third quarter of 2017 last week. Following the most serious recession since the Second World War, the South American country is increasingly working its way out of the crisis. While the recovery remains sluggish, GDP nevertheless grew 1.4% in year-on-year terms, driven by higher investment. The economic situation in the Eurozone remains favourable. The EU Commis-

“Eurozone is gaining momentum.”

sion lifted its growth forecast for the current year significantly from 1.7% to 2.2%. According to forecasts, the unemployment rate - latterly at 8.9% - is set to decline to 8.5% next year and to 7.9% in 2019. Financial market specialists are also looking more favourably at the Eurozone’s economy than they have done for the past decade. The economic barometer compiled by Sentix, see following chart, improved by 5 points in November to reach 42 points. The economic barometer consists of a survey conducted amongst 1,000 investors.

Sentix Investors Sentiment Eurozone 60 40 20

Source: Bloomberg

0 -20 -40 -60 Nov-07






The business climate, which is determined in a separate survey, also im-

“Outstanding sentiment amongst

proved, although not as strongly as anticipated. This indicator also hit the

European companies.”

highest level seen for ten years, signalling strong economic growth in the Eurozone. In overall terms, we are able to state that Europe finds itself in the FACTUM AG Asset Management

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Investment Report December 2017

middle of an economic upturn that is gaining momentum strongly, and that companies are confident that this is set to continue. Equity markets The major indices in the USA, specifically the S&P 500, Dow Jones and

“American equity markets posted

Nasdaq Composite have moved only in one direction this year. By the end of

stunning price gains.”

November they had gained around 20%, 26% and 32% respectively in local currency terms. Small and medium caps, as defined by the Russell 2,000, rose by around 15% and consequently trailed behind the so-called "blue chips”, that is to say the companies with large market capitalisation. The small and medium-sized companies that are listed in the Russell 2‘000 should specifically be able to benefit disproportionately from a US tax reform. Aside from a very few exceptions, the performance in Europe was also

"Europe and emerging countries

strong, meaning that investors in the Old World have much reason to look

have also been impressive."

back at the past stockmarket year with gratitude. The Swiss stockmarket SMI and the DAX in Germany have gained around 17% and 13% respectively so far this year. The leading Italian index managed an even more impressive 20%. The Austrian ATX was one of the most successful stockmarket barometers in Europe, posting a gain of around 30%. The EuroStoxx 50 and the British FTSE 100 trailed behind these star performers with gains of around 10% and 6% respectively. Emerging countries are also in bullish form, and have gained around 33% in terms of the MSCI Emerging Markets Index. The detailed market overview is set out on page seven. Due to the brightening economic environment in Europe, the attractive valu-

“We are of the view that Europe has

ation and the fact that the economic cycle is not so advanced as in the USA,

significant upside potential.”

we are favouring Europe. We value the Swiss stockmarket on account of the high-quality dividends, which establish a marked yield advantage over CHF bonds. Due to their defensive composition, Swiss market indices are however likely to profit less strongly from the robust state of the global economy. On the other hand, Swiss indices (one only needs to think of the 2008 financial crisis) are relatively robust in comparison to foreign indices.

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Investment Report December 2017

Bond markets Following their latest economic report (Beige Book), the 12 Federal Reserve

“98% - likelihood of an interest rate

districts noted that the US economy continued to grow moderately between

hike in the USA on 13 December

the beginning of October and mid-November. Employment growth rose dur-


ing this period, and there have been many reports of labour shortages. In most districts, companies are reporting difficulties finding qualified personnel. While wage growth remains moderate, general pressure on prices has increased since the last report. The market is currently pricing in an interest rate hike in December, with a likelihood of 98%. Statements made by the outgoing Federal Reserve Head Yellen and the designated successor Jerome Powell in recent weeks also point in this direction. Both suggest that the gradual normalisation of US monetary policy needs to be continued. The market is currently anticipating “only” one interest rate in 2018. In our view, this scenario is not entirely realistic – we are expecting two or three interest rate increases. The situation in Europe is very different. According to ECB President Mario

“In Europe interest rates are likely to

Draghi, the Eurozone remains dependent on the ECB’s support. While the

be lifted only during the course of

Eurozone is experiencing a robust economic upturn, inflation remains exces-

the year 2019.”

sively subdued. Wage growth is the key variable. While this has increased, it remains too low. For this reason, patience and persistence remain the order of the day. We are expecting base rates to be lifted only during the course of the year 2019. Commodities The price of a barrel of crude oil moved sharply upwards once again in No-

“Oil prices remain at high levels on

vember (+5.5%) to reach the highest level seen since the summer of 2015.

account of geopolitical tensions.”

The latest price jump is likely to be attributable above all to events in Saudi Arabia. The arrest of high-ranking government representatives and members of the Royal Family on corruption charges serve to consolidate the power of the new Crown Prince and designated King Mohammed bin Salman. Opaque domestic policy machinations in Saudi Arabia and the tough foreign policy approach to Iran have stoked fears of a confrontation between the two leading powers in the Middle East, which has put a certain risk premium on oil markets. In fact, an escalating conflict between Saudi Arabia and Iran would not have any foreseeable impact on oil prices, as the two countries together account for some 40% of OPEC production, corresponding to around 14% of global oil supply.

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Investment Report December 2017

In our view, however, higher oil prices have been brought about by the fact

“OPEC extends production cuts by

that global oil inventories sank significantly during the summer months, and

nine months.”

that the upbeat growth outlook for the global economy points to rising demand for oil. Furthermore, the OPEC meeting produced the anticipated agreement. The production cuts, which were due to expire at the end of March 2018, have been extended by a further nine months to the end of 2018. Also on board is the weighty non-OPEC member Russia. The agreement did not have much impact on the oil market, as it had been anticipated in advance. Geopolitical risks (inter alia Venezuela, Kurdistan, Saudi Arabia) have pushed the potential for oil prices further northwards. Currencies At the end of November the Turkish lira fell to a historical low of 3.92 against

“Markets punish Ankara – Turkish

the greenback. Within just two months, this emerging market currency has

lira weaker than it has ever been.”

consequently shed around 20% of its value. The leading Istanbul share index and government bonds also came under pressure. The background to this are growing tensions between America and Turkey as well as monetary policies that have left investors perplexed. Irrespective of persistent inflation, which recently hit 11.9%, President Er-

“President Erdogan flexes his mus-

dogan is pushing for interest rate cuts. In contrast to established economic


theory, he continues to preach that inflation can be controlled by cheaper money. There is a distinct impression that the Central Bank (TCMB) is currently bowing to political pressure. A lawsuit in New York that is scheduled to open at the beginning of December is also triggering uncertainty. According to US prosecutors, the IranianTurkish businessman Reza Zarrab and the partly state-owned Halkbank circumvented the Iran sanctions. Zarrab and a high-ranking bank manager have been remanded in custody in America. If they are convicted, very substantial penalties are likely to be imposed. At the end of November it was announced that Turkish bank law (inter alia concerning mergers) has been amended. This stoked speculation that a rescue operation for Halkbank is being prepared. Ankara has denied this, stating that the lawsuit is an antiTurkish conspiracy.

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“This is not political stability.”

Investment Report December 2017

Market overview 30.11.2017 Stock indices


1 Mt (%)

YtD (%)





Euro Stoxx 50










Dow Jones S&P 500 Nasdaq
















US Treasury Bonds 10Y (USD)




Swiss Government 10Y (CHF)






























Nikkei 225 MSCI Emerging Markets Aktienindizes Commodities Gold (USD/Fine ounce) WTI-Oil (USD/Barrel) Bond markets

German Bund 10Y (EUR) Currencies

Author: Christof Wille, Dipl. Private Banking Expert NDS Editorial deadline: 30 November 2017

Please do not hesitate to contact us if you have any questions. Factum AG Vermögensverwaltung is a licensed, independent asset management company that is subject to the Liechtenstein Financial Market Authority. It is the exclusive purpose of this publication to inform; it is neither a request nor an offer nor a recommendation to purchase or sell financial instruments or to take any other decisions on investments. It is therefore not a financial analysis in terms of the Marktmissbrauchsgesetz (Act on Market Misuse), either. The information and opinions contained in this publication originate from reliable sources and have been prepared with the utmost diligence. Nevertheless, we exclude any liability for accuracy, completeness and topicality. All information contained and all prices stated in this publication may change at any time without notice. The value of financial instruments may rise or fall. Future performance cannot be deduced from the past development of prices. Under particular market-related or title-specific circumstances, financial instruments can be sold only with delay and the risks that it is subject to. We would like to point out that Factum AG Vermögensverwaltung and its employees are allowed in principle to hold, purchase, or sell the financial instruments mentioned in this document, without however putting clients at any disadvantage whatsoever. This publication and the information contained in it are subject to Liechtenstein law. In the event of any disputes, jurisdiction rests exclusively with the Liechtenstein courts at the legal venue of Vaduz. FACTUM AG Asset Management

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Investment Report December 2017  
Investment Report December 2017