Investment Report February 2018

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Investment Report February 2018

Strategy overview Sustained and globally synchronous growth as well as low real yields are

“Support for equity markets cur-

likely to continue underpinning equity markets in the coming months. The

rently remains intact.”

economic cycle in the United States is already well-advanced. This will be given added impetus in 2018 by a greater willingness to invest. No signs of a slowdown in growth are apparent in Europe either. Moderately rising inflation rates and tighter US monetary policies will push bond yields higher, in particular in the dollar region, while the rise in yields in Europe will be less pronounced. The latest rise in yields was brought about primarily by slightly higher inflationary expectations. Globally low real yields contrast, however, with strong economic data.

At the political level, the “America First” policy is a frequent source of uncer-

“America First is the issue of the

tainty, whereby the ongoing NAFTA negotiations are having a significantly

day.”

greater impact than the import customs on solar panels and washing machines that President Trump imposed in January.

As frequently mentioned in earlier Reports, equity markets have enjoyed an

“A suitable instrument has been

impressive rally in recent months. During the period since 20 January 2017,

used to hedge our managed portfo-

that is to say since President Trump’s inauguration, the value of US stocks

lios against unforeseeable events.”

has risen by almost seven trillion dollars (7,000 billion). At the end of January the Dow Jones jumped over the 26,000 point level. This was the eighth 1,000 point rise since the US election. It is difficult to say, at present, just how much the 45th President of the United States has been responsible for this. Stockmarkets do not trade in what has happened in the past, however, but instead in what investors think will happen. In view of the fact that our managed portfolios posted an excellent start to the 2018 investment year, and that certain markets are heavily overbought – also see the following S&P 500 chart for the past ten years – we decided at the end of January to partially hedge our portfolios using a suitable instrument. Low volatility, in historical terms, made the hedging attractive.

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Investment Report February 2018

S&P 500 Index 3000

2600

2200

Source: Bloomberg

1800

1400

1000

600 Jan-08

Jan-09

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Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

In June 2017 we built up a position in the energy field (oil companies) using a

“Sale of the lock-in oil certificate,

lock-in certificate, as we considered this opportune. The 2017 performance

with a profit of slightly over 10%.”

remained disappointing in the second half of the year, however. While the MSCI World gained 20% last year, energy companies such as BP, Chevron, Exxon, Total or Royal Dutch were amongst the biggest losers – in relative terms. This despite significantly higher oil prices and the gathering momentum of the global economy. The situation changed last month, however, and we sold the position with a profit of slightly over 10%.

We are currently leaving the 2% liquidity that this made available on the bank

“We reduced the equity ratio to neu-

account, in order to protect the capital base and to enable any possible in-

tral last month.”

vestment opportunities to be exploited. Coupled with the hedging mentioned in the introduction, this means we now have a neutral equity ratio.

While we continue to see equities as the most attractive asset class, we think it makes sense to seize the opportunity presented by the substantial rise in prices to realise profits and to reduce risks within the portfolio context, and consequently to reduce the equity ratio.

Politics A “government shutdown” in the USA describes a situation in which federal

“What does government shutdown

agencies largely suspend their activities, and perform only tasks that are

actually mean?”

deemed essential. When a “shutdown” occurs, the government apparatus is pared back to the minimum once the previous legal basis for the approval of budget resources expires and the Senate, House of Representatives and

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Investment Report February 2018

President are unable to reach agreement in good time about further budget resources by passing a corresponding law.

In our view, the latest “shutdown” was just a matter of time. This is the eight-

“Collective failure led to shutdown in

eenth shutdown since 1977. The last time the US Congress financed a full

the USA.”

budget year in good time and without temporary resolutions was 1997. Since then, politicians have increasingly resorted to short-term measures to finance the federal administration. The need to pass a new funding resolution every few weeks encourages legislators to link unrelated, but often highly contentious issues to the resolution, and by this means to blackmail the opposing side. This causes regular government activities to be hijacked. The debt cap is often also used as a political weapon in a similar manner. This could be called legislative arson.

The Democrats have steadily lost ground since the 2008 election. First they

“The Democratic Party has been in

lost the House of Representatives, then the Senate and finally the White

decline since 2008.”

House. This had repercussions, and weakened their role. While they are able to influence legislative proceedings with their blocking minority in the Senate, this is limited.

So what was the latest shutdown all about? First and foremost, it concerned

“What are the reasons for the latest

the fate of the approximately 700,000 young undocumented persons who

shutdown?”

came to America as children, and have since come to consider this their home (“dreamers”). While it is certainly a praiseworthy humanitarian gesture to want to help them, this cannot disguise the fact that they are living in the United States without a residence permit. Yet this situation remains a thorn in the side of a proportion of the US population, and is something that needs to be acknowledged. This would suggest the need to handle the topic more sensitively, as “dreamers” have no entitlement whatsoever to legalisation.

Following the defeat of the moderate Hillary Clinton, Democrats have devel-

“Democrats are making a funda-

oped a growing appetite for extreme positions. The assumption that taking

mental error that is unlikely to boost

the state and its employees hostage could be helpful for “dreamers” is a fun-

their electoral prospects in the au-

damental mistake on the part of Democrats. There has been nothing to dis-

tumn.”

perse doubts that the two chambers of Congress would be able to legalise the situation by March. Not because the attempted extortion failed with the “shutdown”, but because the Democrats – not least because of their arrogant approach towards the issue of immigration – comprehensively lost the last election.

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Investment Report February 2018

The American President, Donald Trump, has agreed to be interviewed by

“The US President will speak under

Special Investigator Robert Mueller about the Russia Affair – including under

oath.”

oath. The former FBI Director Mueller is investigating whether Russia intervened in the American election campaign to benefit Trump. This is a welcome step, as the Russia affair has been hanging over Donald Trump’s presidency like a Damocles sword.

The fact that Russia is not exactly a shining example of a democracy was evi-

“Enormous support for Nawalny’s

denced on 28 January. The opposition politician Alexei Nawalny’s movement,

protest – Russia is not exactly a

“Election Strike”, held demonstrations in a number of major Russian cities on

textbook example of a democracy.”

that particular Sunday. Protests were directed towards the forthcoming presidential election on 18 March, which Nawalny has been banned from contesting (for specious reasons), and which does not include any genuine competition for the incumbent Vladimir Putin.

In Europe, attention is shifting to the Italian general election at the beginning

“Does the general election in Italy at

of March. Following their electoral victory last November, the right-wing

the beginning of March bode ill

block, consisting of Forza Italia, the Lega and the patriotic Fratelli d’Italia

wind?”

agreed to cooperate at the national level too. In Sicily, they collectively garnered 40% of the votes, followed by Beppe Grillo’s MoVimento 5 Stelle (35%).

The centre-left electoral alliance, with Renzi’s PD at its centre, did not even manage 20%. Opinion polls for the whole of Italy point to a similar outcome.

The current debate centres on the issues of immigration and tax handouts, which Italy simply cannot afford – notwithstanding the rebound in economic growth. The question of Europe is not at the forefront of attention at present.

The situation in Italy is likely to remain unsettled, even after the election, as coalition plans are not clear. In our view, the potential for a negative impact on markets is low.

Economy The provisional PMI Composite in the Eurozone, which combines polls from

“Economic indicators for the Euro-

the industrial and the service sectors, confounded expectations to rise from

zone remain decidedly upbeat.”

58.1 to 58.6 points, attaining its highest level in some twelve years.

The German Ifo Index also presented a decidedly optimistic picture. This is widely viewed as the best leading indicator for the German economy. It rose unexpectedly at the start of the year, and at 117.6 points has returned to the record level of last November.

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“Ifo Index at record high.”

Investment Report February 2018

The high pace of US economic growth eased slightly in the final quarter of

“US economy showing less momen-

2017, expanding by only 2.6% relative to the previous quarter, while expecta-

tum than expected.”

tions had been in the region of 3%. Although growth has weakened relative to the third quarter (3.2%) and second quarter (3.1%), this is no reason for concern and can be explained by two factors. Foreign trade and declining inventories collectively trimmed 1.8% off growth.

The outlook for 2018 remains excellent. This is also demonstrated by re-

“Leading indicators in the United

cently published leading indicators. The leading indicator index, consisting of

States could rise.”

ten individual indicators, gained 0.6% relative to the previous month. This means leading indicators are pointing to rising economic momentum in the USA. The situation when it comes to first-time applications for unemployment benefit are promising: These fell at the end of January to the lowest level in 45 years.

The US Senate confirmed Jerome Powell in the post of Chairman of the US

“Powell confirmed by the Senate as

Federal Reserve. Senators voted 85 to 12 in favour of Powell. He was seen as

new Fed Chairman.”

President Donald Trump’s favoured candidate. He will be succeeding Janet Yellen, whose tenure ends on 3 February. Trump decided not to offer Yellen a second term in office – the first time in four decades that an existing office holder has not been confirmed in this post. Mr Powell has been a member of the Board of Governors of the US Federal Reserve for the past five and a half years, and the Fed’s monetary policy course is not expected to change significantly.

Equity markets International equity markets performed very heterogeneously in January. Eu-

“Shifts on the currency front are re-

rope gained around 3% in value, while Switzerland posted a slight decline.

sulting in marked differences in the

This was due to the two index heavyweights Nestlé and Roche, which de-

performance of equity markets.”

clined 3% and 6% in value respectively. On the other hand, US equity markets hit new records – the S&P 500 gained 6% and the Nasdaq 7.5%. Emerging countries – measured in terms of MSCI Emerging Markets which gained +8% – posted a fabulous start to the year. One of the main reasons was certainly the significant shift in relative exchange rates. For example, the rise in the value of the Swiss franc, the British pound, the euro and the Japanese yen against the US dollar undermined these stockmarkets, while the weakness of the dollar benefited the US market and emerging countries. The weakness of the dollar is likely to generate additional earnings momentum for major US multinational corporations.

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Investment Report February 2018

On Friday 5 January the Swiss Market Index (SMI) reached a record high after

“The SMI has now also matched its

more than ten years. During the course of the trading day the index rose to

record high.”

9,558 points. The SMI has been something of a laggard, though. Leading US indices such as the S&P 500 or Dow Jones Industrial Average rose above their 2007 levels years ago, and have been racing from record high to record high ever since. Germany’s DAX also reached its high from the year 2007 back in 2013.

The question now is why the SMI took so much longer to top its record high

“There are good reasons why the

of 2007. The SMI is a price index. This means its performance does not take

SMI trailed behind its international

corporate dividend payments into account, in the manner that performance

counterparts.”

indices such as the DAX do. If the index performance takes dividend distributions into account, then this has a massively positive effect over the years.

For example, the broad Swiss Performance Index (SPI), which takes dividends into account, matched its high from the year 2007 back in 2013.

Another factor for the relatively restrained performance is its composition.

“The SMI’s composition gives it a de-

Because of the strong weighting of the two pharmaceutical stocks Novartis

fensive character.”

and Roche as well as the food manufacturer Nestlé, the index has an essentially defensive structure. Since September 2017, the SMI has permitted a maximum weighting of only 18% per stock, meaning that the heavyweights have been set back slightly.

Bond markets The eagerly awaited meeting of the European Central Bank (ECB) confirmed our

“ECB is taking its time.”

assumption that the central bank is still not looking to end its ultra-loose monetary policies any time soon. In addition, notwithstanding speculation ahead of the event, the ECB did not change its forward guidance. ECB President Draghi declared that comments in the most recent ECB minutes, which triggered such speculation, had been wrongly interpreted. Bond purchases amounting to EUR 30 billion per month are to be continued until at least September 2018. The ECB also underscored its previous view that the purchases could be continued beyond this date, if necessary, and might even be increased. This policy would be maintained until the ECB Board registered a sustained correction of the inflationary trend that was in line with its inflation target. As often stated in previous Reports, we are not expecting base rates to rise in Europe before mid-2019.

The Bank of Japan (BoJ) is also sticking to its existing ultra-expansive monetary

“Bank of Japan is sticking to its

policies. As before, the Bank of Japan is aiming to buy government bonds worth

loose monetary policy.”

Yen 80 trillion per annum. In view of the very low inflation rate – the core rate remained stubbornly at 0.3% in December – it is our assumption that the Bank of

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Investment Report February 2018

Japan will be sticking to its current monetary policies for a considerable period to come, and might consider making changes only during the course of next year.

For the first time in a long time, the growth outlook has also been having an im-

“US interest rates rose in January.”

pact on interest rates. Since the start of the year, for example, yields on 10-year US government bonds have risen by a sizeable 30 basis points to 2.71%, climbing to the highest level since September 2014. The key question in this conjunction is likely to be when rising yields begin to be a burden for equity markets. A further important aspect will be whether yields rise on account of strong growth or due to higher inflation expectations. The latter would probably not be favourable for equities. A rise in US yields to well above 3% could be critical for equity markets.

Commodities General business and economic optimism is also having an impact on commodity markets. Over the past twelve months, the dollar prices of not just cobalt, palladium, zinc, aluminium, lead and copper have risen by between 25% and 130%.

Brent-grade North Sea oil has also become about 20% more expensive. Over the past two years, the price has actually risen some 130% to reach USD 67.70. Oil prices recently edged back over the 20-year average, as the following chart shows.

Oil price - above the 20 year moving average 160 140 120 100

Source: Bloomberg

80 60 40 20 0 Jan-08

Jan-09

Jan-10

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“Demand is driving oil prices.”

Investment Report February 2018

According to the latest estimates of the International Energy Agency (IEA), global

“Is the recent rise in the price of

demand for oil or oil-related energy products increased over the past twelve

gold the start of a rally?”

months by 1.5 million barrels per day compared with 2016, while global supply sank by 1.1 million to approximately 98 million barrels, despite increasing production in shale oil fields in the USA. Discipline within the Organisation of Petroleum Exporting Countries (OPEC) does indeed appear to have increased of late. Selfimposed production limits that are in force until the end of 2018 seem to be working. These cuts were imposed after oil prices fell dramatically in the years 2014 and 2015, when cheap money and technological innovations in North America led to a revival of the oil industry and triggered a boom in production.

Gold also had a glittering start to the new year. The price rose by around 3% in January. One of the reasons for this is likely to be the fall in the value of the US currency. In our view, another medium-term driver could be the Fed. If this experiences a regime change and permits a higher inflation rate – the inflation target is currently 2% – then this would provide the price of gold with additional support, as gold is considered a classic inflation hedge.

Currencies The euro is currently favoured by investors, and has reached its highest level in

“Euro has reached its highest level

the past three years. Since the start of 2017 it has risen by around 20% against

against the US dollar in the past

the Greenback. At first sight, this appears excessive and its current level seems

three years.”

too high. It is worth remembering, though, that the euro lost even more in 2014 and 2015 – see following chart EUR/USD – over a comparable period.

EUR/USD 1.4 1.35 1.3

Source: Bloomberg

1.25 1.2 1.15 1.1 1.05 1 Jan-13

Jan-14

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Investment Report February 2018

There has been much debate about the weakness of the USD dollar. In our view, a possible scenario might be that markets are anticipating a change in the balance between financial policy and monetary policy in America. Since the beginning of last year, the US currency has experienced a sinking trend. Measured in terms of the trade-weighted currency basket maintained by the US Federal Reserve, the loss in value has been in the region of 10%. In recent years, though, this rose over a third in value, see above chart. Compared with earlier phases of weakness, the current trend currently appears to constitute a correction.

The weakness of the US currency was accentuated by the WEF in Davos. US Fi-

“Unclear US policy.”

nance Secretary Steven Mnuchin declared that he is not worried about shortterm events. The rather imprecisely formulated addendum that a weaker US dollar would be beneficial for trade would make American exports more competitive abroad, and would boost the profits of internationally operating corporations.

Standard explanations for the weakness of the dollar exchange rate do not ap-

“Reasons for the current weakness

pear to be applicable. The Fed is reducing its balance sheet, while Eurozone and

of the US currency are difficult to

Japanese central banks are still expanding theirs. This means fewer dollars on

identify at first sight.”

the one hand, and more euros and yen on the other. One would have expected this to result in rising, not falling dollar rates. In view of the current political mix, financial policy loosening combined with monetary tightening, then economic theory – i.e. the Mundell-Fleming model – should point to a stronger dollar. Currency markets are currently ignoring the fact that nominal and real interest rates are rising faster in the USA than in other countries.

A possible reason for the weakness of the dollar could be an economic policy re-

“Is a potential change of regime at

gime shift at the Federal Reserve. Against this backdrop, the Treasury might be

the Federal Reserve the possible

planning to fund higher spending and tax cuts above all with short to medium-

reason?”

term government bonds, which would further level the interest rate curve. At the same time, there have been intense discussions within the Federal Reserve about whether to change inflation policy and whether the target inflation of 2% or higher should be tolerated. Together with higher inflationary expectations, the combination of looser financial policies and less tight monetary policies could explain the weaker US dollar.

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Investment Report February 2018

Market overview 31.01.2018 Stock indices

Current

1 Mt (%)

YtD (%)

SMI

9,335.40

-0.50

SPI

10,737.45

-0.13

-0.50 -0.13

3,609.29

3.11

3.11

26,149.39

5.88

5.88

S&P 500

2,823.81

5.72

5.72

Nasdaq

7,411.48

7.40

7.40

23,098.29

1.47

1.47

1,254.59

8.32

8.32

1,345.14

3.25

3.25

64.73

7.13

7.13

US Treasury Bonds 10Y (USD)

2.71

0.30

0.30

Swiss Government 10Y (CHF)

0.11

0.26

0.26

German Bund 10Y (EUR)

0.70

0.27

0.27

EUR/CHF

1.16

-1.22

-1.22

USD/CHF

0.93

-4.41

-4.41

EUR/USD

1.24

3.41

3.41

GBP/CHF

1.32

0.37

0.37

JPY/CHF JPY/USD

0.85

-1.34

-1.34

0.01

3.21

3.21

Euro Stoxx 50 Dow Jones

Nikkei 225 MSCI Emerging Markets Equity indices Commodities Gold (USD/fine ounce) WTI oil (USD/barrel) Bond markets

Currencies

Author: Christof Wille, Dipl. Private Banking Expert NDS Editorial deadline: 31 January 2018 Please do not hesitate to contact us if you have any questions. Factum AG Vermรถgensverwaltung 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 Vermรถgensverwaltung 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.

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