Monthly Market Monitor
February 2022
Table of contents In a Nutshell
Macro Radar Taking the pulse of economic activity
Our view on the markets
04
06
Satellite View Geopolitical heat map
07
Asset Allocation Notes from the Investment Committee
Theme in Focus
08
An update of our capital market expectations
10
Drawdown: Private Banking Corner “Buy high, sell low” – a real-world case example
12
The Back Page Asset classes & agenda
14 Kaiser Partner Privatbank AG | Monthly Market Monitor - February 2022
3
In a Nutshell
Our view on the markets
US Federal Reserve seeking an exit Disconcertingly high inflation and an overheated employment market – this pair of concerns is keeping US central bankers busy at the moment and looks set to accelerate moves to return US monetary policy to normal. Fed Chairman Jerome Powell recently reserved the option to undertake more than the four quarterpoint rate hikes currently priced in for this year. In any case, the world’s leading central bank is unlikely to show any consideration for the (weak) financial markets in the near future. End of the one-way street Falling asset prices, high volatility, and massive sector and style rotations – right from the outset, the new investment year has made it clear that the days of ever rising asset prices may be over for the time being. It will probably take some time to digest the change in the monetary policy regime. A little more volatility this year would not be surprising also in light of the US presidential cycle. US midterm election years are traditionally bumpier-than-average ones for the markets. The Russian risk What is Vladimir Putin up to with his saber-rattling on Russia’s border with Ukraine? The West is hardly likely
Chart of the Month Regime change? | The mountain of negative-yielding debt is shrinking Market value of negative-yielding bonds (in USD trillion)
Sources: Bloomberg, Kaiser Partner Privatbank 4
Monthly Market Monitor - February 2022 | Kaiser Partner Privatbank AG
to be willing to heed his demands, and Russia would have plenty to lose in the event of an armed conflict. However, a military escalation scenario is more than just a tail risk. If the 2014 conquest of Crimea turns out to be a blueprint of future moves by Russia, the adage that “political markets have short legs” would nevertheless still apply. Update of our capital market expectations We traditionally review our strategic asset allocation and update our capital market expectations for the next five years at the start of each new investment year. The short version of our review findings is that stocks remain more attractive than bonds and that alternative assets are becoming even more relevant than before. Buy high, sell low The human psyche likes to play pranks on investors on the financial markets. Buying (too) late and selling (too) late – bad timing of trading causes the average investor to achieve a much worse performance than he or she would by following a simple buy-and-hold strategy. The ups and downs of the initially hyped and ultimately fallen ARK Innovation ETF provide a vivid real-world case example of what not to do.
In the face of high inflation rates, more and more central banks risk falling behind the proverbial curve. Expectations of monetary policy returning to normal have thus been pulled forward some more, stirring up some bond-market turbulence in the form of rising yields and falling prices as the new investment year got underway. The yield on 10-year Swiss Confederation bonds spent some days back in positive territory and the yield on benchmark German Bunds also scraped the zero line. The worldwide volume of negative-yielding bonds outstanding recently dropped below the USD 10 trillion mark for the first time since April 2020. However, bonds are still a long way from being attractive (with a few exceptions). When inflation is factored in, investment-grade bonds particularly deliver a guaranteed negative return if they are held to maturity. This makes interest-bearing alternatives all the more important again in 2022.
Kaiser Partner Privatbank AG | Monthly Market Monitor - February 2022
5
Macro Radar
Taking the pulse of economic activity
Western national economies are getting over the pandemic a little better with each successive wave. Even though the Omicron variant is causing disruptions at the moment, the growth outlook remains positive for 2022. The pandemic also doesn’t pose an obstacle to a more restrictive monetary policy.
Light at the end of the tunnel? The Omicron wave has Europe firmly in its grip at present and is bound to leave brake marks on GDP growth figures for the first quarter of 2022. Businesses, however, appear intent on looking through and beyond the latest infection wave. Various surveys like the ZEW and Ifo indices for Germany and European purchasing managers’ indices reveal a certain degree of optimism about the business outlook. The spring reawakening on the old continent is likely to be especially vibrant this year. What’s more, the Eurozone looks set to surpass the USA in terms of economic growth this year. Where is the “Fed put”? At the first FOMC meeting of 2022, US Federal Reserve Chairman Jerome Powell reserved the option of further accelerating the process of returning monetary policy to normal in the face of high inflation and a tight labor market. An initial rate hike now will likely be on the agenda in March. Afterwards there may be another 25-basis-point rate hike each subsequent quarter, but Powell’s hawkishly construed comments also leave room for even more aggressive tightening. In addition, the Fed looks set to begin shrinking its balance sheet from the start of the second half onward. This process as well could proceed more quickly than the last round of quantitative tightening (which began in autumn 2017). In any case, weak equity markets are not a reason (for the time being) for Fed officials not to tighten sooner rather than later. During the FOMC press conference, Powell made it abundantly clear that
No long-term inflation concerns | But markets are pricing in elevated near-term inflation US inflation breakeven rate
the markets are loftily valued and pose a risk to financial stability. This means that the “Fed put” is way out of the money right now. Can China attain stability? China’s official 2021 GDP growth rate released in January came in at a higher-than-expected +8.1%. However, an economic headwind is blowing at the moment because the downturn in China’s real estate sector and sluggish consumer demand due to recurring COVID-19 outbreaks pose a near-term risk to growth. Since the government of China will not veer from its zero-COVID strategy anytime soon (for which the Omicron variant poses an even tougher challenge) and in view of the upcoming 20th Party Congress in autumn, it will probably resort more to monetary and fiscal policy support measures going forward, as it already has in recent weeks. China’s low inflation compared to Western industrialized countries gives Beijing enough leeway to do that. Consensus estimates 2021
2022
2023
GDP growth (in %) Switzerland
3.5
3.0
1.7
Eurozone
5.1
4.0
2.5
UK
7.1
4.5
2.2
USA
5.6
3.8
2.5
China
8.1
5.2
5.1
Switzerland
0.6
1.0
0.6
Eurozone
2.6
3.1
1.6
UK
2.6
4.7
2.1
USA
4.7
4.8
2.4
China
0.9
2.3
2.2
Inflation (in %)
Kaiser Partner Privatbank interest rates view Last
3M
12M
Key interest rates (in %) Switzerland
-0.75
→
→
Eurozone
-0.50
→
→
UK
0.25
↗
↗
USA
0.25
↗
↗
China
2.85
↘
↘
10-year yields (in %)
Sources: Bloomberg, Kaiser Partner Privatbank 6
Monthly Market Monitor - February 2022 | Kaiser Partner Privatbank AG
Switzerland
0.08
→
↗
Eurozone
0.00
→
↗
UK
1.30
→
↗
USA
1.77
→
↗
China
2.71
→
→
Sources: Bloomberg, Kaiser Partner Privatbank
Satellite View Geopolitical heat map
The Russian risk The border conflict between Russia and Ukraine is the world’s most closely watched geopolitical hotspot at the moment and accordingly features prominently on our heat map this month. What is Vladimir Putin up to with his saber-rattling and his amassing of more than 100,000 troops north and east of Ukraine? Only he can answer that question. His demands – an end to NATO’s eastward expansion, including a withdrawal of arms and the cessation of military exercises – obviously cannot be met by the West. However, Putin has already succeeded in getting the world talking about Russia and in securing a seat at the table with the USA to discuss the fate of Europe, occasionally with Europe’s representatives not in attendance. There’s good reason to hope that Russia’s president is playing his cards solely for the purpose of consolidating the status quo in the wake of Russia’s 2014 conquest of Crimea and that a larger-scale invasion of Ukraine is not a fundamental part of his plan. In any case, Putin would have a lot to lose in the event of an armed conflict. The Ukrainian army is much better equipped these days than it was eight years ago. This time an attack would likely lead to heavier casualties on the Russian side. A Russian invasion also would hardly keep NATO at bay, but would instead end up provoking
NATO to beef up its presence in eastern Europe. Moreover, a further tightening of Western sanctions would further weaken Russia’s economy and might seriously annoy Russian elites (and Putin’s protégés). Finally, using oil and gas as an overt means of bringing pressure to bear could also backfire if it prompts Europe to accelerate its switchover to alternative energy sources and to seek out more reliable suppliers. So, there are high barriers to a Russian invasion of Ukraine, but such a scenario nonetheless is more than just a tail risk. What if Russia were to invade? One immediate effect that we would expect to see is sudden price spikes on the market for crude oil and particularly for European natural gas. However, apart from temporarily elevated energy price inflation, harm to European business sentiment and the ultimate impact on economic growth on the old continent could stay within reasonable limits like they did during the conquest of Crimea in 2014. As long as a military escalation remains confined to the Ukraine region, the adage that “political markets have short legs” is likely to prove true on the financial markets. Potential risk-off movements in stocks, bonds or gold would probably turn out to be short-lived.
Geopolitical developments do not stop at the gates of the financial markets. On the contrary, they have become an increasingly important influencing variable in recent years. Our Satellite View takes a look at the major hotspots at the moment.
Kaiser Partner Privatbank AG | Monthly Market Monitor - February 2022
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Asset Allocation
Notes from the Investment Committee
Falling asset prices, high volatility, rising market interest rates, and massive sector and style rotations – the new investment year held quite a few challenges in store for investors right from the get-go. The environment looks set to remain challenging in the near term, but it also presents opportunities.
Asset Allocation Monitor -
+
-
Cash
Equities
Fixed Income
Global
Sovereign bonds
Switzerland
Corporate bonds
Europe
Microfinance
UK
Inflation-linked bonds High-yield bonds Emerging-market bonds
USA Emerging markets Alternative Assets
Insurance-linked bonds
Gold
Convertible bonds
Real estate
Duration
Hedge funds
Currencies
Structured products
US dollar
Private equity
+
01/2022
01/2022
Swiss franc Euro British pound
Scorecard
Equities: Not a one-way street after all + • Right from the outset, the year 2022 has made it clear Macro that the days of ever rising stock prices are over for the Monetary/fiscal policy 01/2022 time being and that we will have to reckon with much Corporate earnings more volatility this year, as we expected would be the Valuation 01/2022 case. US equity markets posted a particularly weak Trend 01/2022 Investor sentiment performance in January as they underwent one of the worst starts to a new year in stock-market history. The S&P 500 index plunged 10% within a span of just three figures in the ongoing reporting season thus far have weeks and didn’t find support until it dipped below only been mediocre and, more importantly, earnings its 200-day moving average line. Meanwhile, the onguidance for the year ahead has been on the cautious going correction in the Russell 2000 small-cap index side. But even though the environment looks set to reunderway since last November has intermittently almain challenging in the near term, the current correcready surpassed 20%. The turbulence has particularly tion phase also presents opportunities. We particularbeen caused by sharply rising real interest rates and ly see a lot of value right now in value stocks. They are adjustments to interest-rate expectations, which now still trading at a massive valuation discount to growth foresee up to four quarter-point rate hikes by the US stocks despite their outperformance in recent weeks, Federal Reserve this year. This accordingly sent the US so value stocks possess further catch-up potential. equity market reeling and especially hammered (technology) stocks sensitive to changes in interest rates. Fixed income: Hardly attractive despite higher yields • Very high put-call ratios, record-high trading volumes, • The price downswing on the bond markets continued oversold momentum indicators and bearishness as the new year got underway. While the yield on 10among (retail) investors – a number of signs suggest year US Treasury notes rose to as high as 1.9%, yields that a trough was reached at the end of January and on 10-year German Bunds and Swiss Confederation that at least a temporary rebound could be in the bonds climbed back into positive territory for a while cards soon. However, an immediate reconquest of for the first time in three years. But despite the yield previous highs is unlikely. Rate-hiking phases are typiincrease, bond investors continue to face a dilemma. cally accompanied by a compression of stock valuaGovernment and corporate bonds are closer to being tions, so share prices need support from corporate a practically interest-free risk than they are to being a earnings in order to climb higher. However, earnings value-boosting asset. Moreover, the recent bond sell8
Monthly Market Monitor - February 2022 | Kaiser Partner Privatbank AG
cation attributes – they instead have exhibited a very off, which has occurred intermittently in sync with the high correlation with equity markets. But after correctselloff on the equity markets, shows that their diversiing by around 50% over the last three months, crypfication attributes are less pronounced than in earlier tos too now look set to embark on a retracement rally. times. Traditional bonds also remain unattractive with few exceptions in view of upcoming quantitative tightening by the US Federal Reserve, which may already Currencies: The euro is plumbing new depths commence at mid-year. The reduction of the Fed’s • EUR/USD: The EUR/USD exchange rate hit a new low in its downward trend in January, dropping briefly bond purchases should ultimately cause a key source below the 1.12 mark. From a technical analysis perof demand and liquidity to gradually dry up and should spective, a longer phase of forming a floor and a funtend to exert upward pressure on the yield landscape. damental improvement in European economic data Alongside insurance-linked and microfinance bonds, would be needed to spark a longer-term trend reverwhose peg to a variable reference interest rate prosal. For the time being, the prospect of a tighter US tects them against rising rates, we judge high-yield monetary policy works in favor of a continued strong bonds as still being the most attractive securities in US dollar. However, since four quarter-point rate hikes the fixed-income universe in the wake of the recent by the US Federal Reserve for 2022 are priced in by widening of credit spreads. now and market participants have a net long positioning on the dollar, the greenback’s further upside poAlternative assets: Gold on the verge of sending a tential appears constrained. technical chart signal • Although US real interest rates climbed 50 basis points • GBP/USD: The Bank of England is currently a step ahead of the Fed in raising interest rates, and its next in January, the price of gold held extremely steady. hike to 0.5% could be in the offing by as early as FebruMarket participants evidently focused less on the inary. The BoE is also thinking about (actively) shrinking creased opportunity cost of holding precious metals its balance sheet by selling bonds, which it may start and concentrated more on their function as a safe to do once its policy rate hits 1%. Alongside this monhaven in a risk-off environment. An ever more distinct etary policy tailwind, the British pound is also being triangle pattern is now forming on gold’s price chart. buttressed by the UK’s near-term economic growth An upside or downside breakout of the triangle theoprospects – the Johnson administration’s “Omicron retically should signal the start of the next directional strategy” seems to be working. trend. But after multiple false signals over the course of the past year, a certain degree of caution is appropri- • EUR/CHF: The Swiss franc has been benefiting doubly lately from its function as a safe haven, but also on ate. Instead of viewing gold as a speculative asset, we the back of an increasingly prevailing narrative that prefer to consider it a fixed strategic component of our the Swiss National Bank will continue to tolerate a asset allocation. Trading-oriented investors, in contrast, strengthening franc in the near future, not least in are likely to have felt drawn more to cryptocurrencies view of the big inflation differential between Switthan to gold for quite some time now. However, the zerland and other countries. Without interventions past few months have shown that cryptos at the least by the SNB to bolster the euro, the franc looks set to should not be viewed as a store of value and a protecremain strong against the euro as the EUR/CHF extor against inflation. Bitcoin and the like have also fallchange rate seeks out its “fair” market price. en short lately in terms of delivering desired diversifi-
From a statistical standpoint, there’s a lot suggesting that the (US) equity market will not deliver double-digit share-price gains this year (after having done so three years in a row in 2019, 2020 and 2021). Over the last 70 years, the S&P 500 has accomplished the feat of posting four straight years of double-digit gains only once, during the roaring bull market of the 1990s. Moreover, the US presidential cycle also gives reason to expect that the sky won’t be the limit this year. Historically, midterm election years (US congressional elections take place this autumn) are rather sluggish and volatile affairs for the stock market aside from the almost obligatory year-end rally. Since 1950, for example, the maximum drawdown in midterm election years has averaged out to around 17%. The good news, though, is that those setbacks have usually turned out to be good entry points – the market historically has advanced by more than 30% on average over the period from the interim low to the end of the succeeding year.
Chart in the Spotlight Statistical headwind | The equity market often has a tough time in mid-term election years US stock-market performance over the course of the presidential cycle (S&P 500 index)
Sources: Bloomberg, Kaiser Partner Privatbank
Kaiser Partner Privatbank AG | Monthly Market Monitor - February 2022
9
Theme in Focus
An update of our capital market expectations
We traditionally review our strategic asset allocation and update our capital market expectations for the next five years at the start of each new investment year. The short version of our review findings is that stocks remain more attractive than bonds and that alternative assets are becoming even more relevant than before.
Annual compulsory exercise Reviewing the near-term tactical positioning of our portfolios is part of our everyday work in the responsibility we bear as a private wealth management bank. Once a year, however, we go well beyond our daily business and review the longer-term strategic positioning of our various discretionary asset management mandates. We described the formula for this recurring routine process conducted at regular intervals in the April 2021 edition of Monthly Market Monitor. Below we briefly outline our updated capital market expectations for the next five years and sum up our drawn conclusion for our investment strategy:
Learn more about our strategic asset allocation (April issue 2021):
Equities: Improved prospects despite rally(?) Our return expectation for the world equity market has climbed compared to last year from +5.7% to +6.7% despite the very good performance in 2021. The revised numbers for emerging-market stocks turn out even better: we now anticipate an annualized return of +7.5% for the next five years (previously +6.4%). The heightened return expectations in both cases owe particularly to higher equity risk premiums (weight: 40%) compared to last year. Since the increase in corporate earnings in recent quarters has outpaced the rise in share prices, this has compressed stocks’ valuations, which in turn increases their medium-term return potential. Meanwhile, our sectorbased model (weight: 40%), which we use to derive
Increased upside potential | Emerging markets particularly look attractive Return expectations for stocks
Source: Kaiser Partner Privatbank 10
Monthly Market Monitor - February 2022 | Kaiser Partner Privatbank AG
implied growth expectations on the basis of industryspecific free cash flow yields, delivers only marginally changed return expectations compared to last year, with regional projections ranging between +3.9% (UK) and +5.1% (USA). Our third sub-model, which takes historical returns into account, once again indicates higher return expectations compared to 2021 and contributes – perhaps not entirely intuitively at first glance – to the improved outlook for equities. Fixed income: Higher (but hardly attractive) returns There is a very high correlation between the current yield on government and corporate bonds and the return that an investor ultimately earns (at the end of the time horizon). Our return expectations are therefore derived – relatively simply – from yields to maturity in each region and sub-asset category. Since yields today are at a somewhat higher level than they were at the start of 2021, our return expectations have increased, but nevertheless are unattractive, particularly for government bonds. We, for example, continue to foresee negative returns on German Bunds (–0.4%) and Swiss Confederation bonds (–0.2%). US Treasurys are a bit more attractive at an expected yield of 1.6%, but when inflation is factored in, an investment in them likewise risks losing purchasing power on a five-year horizon. Whoever wants to earn more yield has to climb a little higher up the risk ladder, as is almost always the case. We, for instance, estimate an expected yield of 4.3% on emerging-market bonds (previous year: 3.3%). High-yield bonds are the most attractive segment of the traditional fixed-income universe in relative terms, with an expected yield of 5.2%, and are likely to provide the best protection against rising interest rates in the upcoming US Federal Reserve hiking cycle. However, in historical comparison, the return potential and the buffer against rising interest rates are both much smaller than they were in previous interest-rate cycles. The medium-term return potential of fixed-income instruments pegged to (short-term) benchmark interest rates has also increased a bit on the prospect of rising USD LIBOR (and LIBOR alternatives). In the ongoing ultralow interest-rate environment, interest-bearing alternatives such as microfinance bonds (3.8%) and insurance-linked bonds (5.3%) offer a rare triad of comparatively high yields, protection against rising interest rates (thanks to the peg to a floating benchmark rate) and valuable diversification (thanks to the low correlation with other asset classes).
Alternative assets: Important portfolio components adding in a conservative “manager skill premium” to With a performance of –3.6% (in US dollars) last year, at least rudimentarily reflect the performance potengold disappointed all those investors who expect the tial of above-average managers. This way we arrive yellow precious metal to protect against inflation. at an expected return of +4.3% for hedge funds. Last Gold’s performance serves as a reminder that valua- year’s performance, which saw the managers used tion models and the formulation of capital market ex- in our mandates earn a return of +6.1%, significantly pectations are not precise rocket science, but instead outperforming the HFRX hedge fund index (+3.7%), depend mainly on (and thus can be influenced by) the shows that this forecasting approach is justified. choice of model or combination of models employed. Private equity (buyout) funds have historically generAnd one general principle particularly worth noting is ated an excess return of 300 to 400 basis points verthe longer the forecast horizon, the more reliable the sus public stock markets. We consider it realistic that return projection. So, the idea of gold providing pro- this liquidity and complexity premium will remain intection against inflation thus isn’t an erroneous notion tact in the years ahead. So, at an expected return of despite the “misprediction” last year – it just tends to +10.2% for the next five years, private equity funds prove true more over the medium to long term. Since can therefore be an especially valuable performanceinflation expectations – the foundation of our fore- boosting component of a diversified portfolio. casting model – picked up over the course of the past year, we now expect gold to deliver a higher return of +3.0% p.a. (previous year’s forecast: +2.4%), but on a five-year timeframe, not on a 12-month horizon. Our model outputs at the start of 2022 also point to slightly higher return expectations for liquid real estate assets (real estate funds), which – as classic real assets – can likewise serve to (partially) hedge an investment portfolio against inflation. As (1) hybrids straddling the line between stocks and bonds, liquid real estate assets deliver (2) continuous dividend income and (3) an attractive risk premium versus government bonds, which many investors have increasingly replaced with shares of real estate funds in recent years. Our return expectations for real estate funds are based on those same three aspects and have risen compared to 2021 – to +4.3% (previously +3.3%) for global property funds and to +3.3% (+2.4%) for Swiss real estate investment vehicles – on the back of higher estimates of risk premiums. Compared to the asset classes discussed above, it is even harder to formulate (sensible) return expectations for alternative categories like market-neutral (hedge fund) strategies and private equity due to their inherent heterogeneity, i.e. mainly the multitude of sub-strategies that exist, but also because the actual investment returns realized in both of those asset classes depend much more on the skills of the fund managers than investment returns on public stock and bond markets do. The wider performance differentials between the best and worst managers ultimately make picking the right ones crucial to investment success. Any return expectation can therefore only be construed as an indication of the feasible performance potential. Historical returns over the last ten years – a period that includes good as well as tough years on the financial markets – provide a good reference point. Hedge funds, as measured by the broad HFRX hedge fund index, achieved a (rather modest) annualized return of +2.4% over this period. To gauge return expectations for our marketneutral strategies, we adjust this figure upward by
Government bonds remain unattractive | Interest-bearing alternatives are absolutely imperative Return expectations for fixed income
Source: Kaiser Partner Privatbank
Private equity… | …belongs in (almost) every portfolio Return expectations for alternative assets
Source: Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - February 2022
11
Drawdown: Private Banking Corner “Buy high, sell low” – a real-world case example
In the November edition of Drawdown, we theoretically described why the human psyche often plays pranks on us on the financial markets. This time we use an actual real-world case example to illustrate why the average investor only earns belowaverage returns.
12
The disposition effect… turn captured by the totality of the ETF’s investors Investors sometimes pay dearly for incurring losses, (which factors in fund inflows and outflows) is thus especially when they allow them to get too large and extremely wide, amounting to almost 20 percentage don’t pull the emergency brake in time. Because the points since the ETF’s inception in autumn 2014. greater the loss, the disproportionately higher the subsequent gain has to be to get back to the original Buy high… acquisition price. Even though we may know this in What went wrong here (for investors)? The reason theory, we usually act as if we were unaware of this for the big differential between the time-weighted fact. Losers are often held too long in the hope that return and the money-weighted return is simple: the they will stage a comeback, and in the worst case, strategy generated the bulk of its performance at a they end up getting sold close to their low point. time when few investors were invested in it. Even in Profits, in contrast, tend to get taken too soon be- year three of its existence (2017), when the ARK Incause gains make us feel good. Almost every investor novation ETF posted a spectacular performance for has probably fallen victim to this “disposition effect” the first time with a gain of 87.4% for the year, an at one time or another. It’s one of the reasons why average of only USD 116 million was invested in the the average investor only earns below-average re- product. Two years later, in 2019, the fund’s asset turns. As an analysis by Dalbar shows, over the last volume was much higher at an average of USD 1.6 20 years, the average Joe has captured less than half billion. However, around 90% of the ETF’s cumulative of the average annual return (+2.9% as opposed to net inflows occurred during the 18 months thereaf+7.5%) that he would have earned simply by buying ter up until the ETF’s total assets under management and holding the S&P 500 index. reached its high point to date at USD 25.5 billion in June 2021. But the real buying frenzy by investors …and other quirks But there is at least one other reason why many investors underperform: they enter the market at the wrong time. When it comes to making a decision about buying a stock or an investment product, the mind of an investor yearns for a confirmation, which is much more likely to come when a trend is already visible on a price chart, is underpinned by narratives and is endorsed by other investors. This is why the large mass of investors often don’t jump on the train until long after it has left the station and until an (investment) idea has gone mainstream or has landed in the (boulevard) press. The hype surrounding the ARK Innovation ETF and its rollercoaster ride over the last two years provides a topical extreme case example of this stock-market psychology. This ETF, which invests in fast-growing but thus far mostly unprofitable “disruptively innovative” growth companies, posted a stellar performance in 2020 (+152.5%) in year one of the pandemic, catapulting itself and its fund manager, Catherine Woods, to fame and attracting the interest of millions of retail investors – but only after the party was largely over, i.e. after the ETF’s share price had already skyrocketed. The performance gap between the ARK Innovation ETF’s time-weighted rate of return and the money-weighted rate of re-
Monthly Market Monitor - February 2022 | Kaiser Partner Privatbank AG
didn’t take place until December 2020 and the weeks thereafter – after the ETF’s share price had already peaked. For all those investors who bought in (too) late, their investment in the ARK Innovation ETF is likely to have been less an innovative adventure and much more a gut-wrenching disruptive experience.
A poor track record | Many investors make life (too) hard for themselves Average annual return over 20 years (2001–2020)
…sell low(?) The ARK-ETF episode is arguably the best-known recent example of the large mass of investors’ poor timing skills, but it’s not the only one. Other high-profile themes in 2020, such as clean energy, had a similarly hard time. What can investors learn from this? • Triple-digit-percent price gains don’t recur. It is highly unlikely that a mutual fund or an (actively managed) ETF can earn spectacular returns year in and year out. Annual gains of 100% or more are typically only achievable by placing concentrated bets on individual stocks in the hottest sectors of the market, which potentially may be overvalued. This commonly leads to severe losses when a trend reverses and valuations pull back to more realistic levels. • Risk(-bearing capacity) is not irrelevant. It is impossible to earn high returns without taking correspondingly high risks. Here, too, the ARK Innovation ETF is an extreme example – the composition of the fund’s portfolio exhibits a very high risk level in practically every fundamental aspect (concentration, momentum, liquidity, valuation, financial quality). Investors who wish to jump aboard that kind of a speeding train should be aware of the associated risks. • “Chasing returns leads to the poorhouse.” As a general rule, it pays for investors to refrain from trying to time the market and instead to stick consistently to a chosen strategy. Whoever does that can confidently expect to outperform the “average” investor and at least keep pace with the broad market indices. • Satellite strategy and cost averaging effect. Those who nevertheless would like to participate in specific investment themes should play them with a smaller budget, treating them in his or her portfolio as (more) speculative satellites alongside a large, stable core of portfolio assets. Furthermore, it’s helpful to buy into a young trend as early as possible and to build out a satellite position gradually. You can profit from the cost averaging effect and outfox the investor psyche this way.
Sources: Dalbar, Kaiser Partner Privatbank
Mind the gap | Only few reaped the marquee return Performance earned by investors (volume-weighted) vs. performance of ARK Innovation ETF
Sources: Morningstar, Bloomberg, Kaiser Partner Privatbank
(Too) late to the party | Most investors bought (and buy) at the top ARK Innovation ETF and monthly inflows and outflows
Sources: Morningstar, Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - February 2022
13
The Back Page Asset classes & agenda
Performance as of 31 January 2022 Asset class
YTD
1 Month
1 Year
3 Years
Cash CHF
-0.1%
-0.7%
-2.0%
EUR
0.0%
-0.5%
-1.4%
USD
0.0%
0.2%
3.0%
Fixed Income Sovereign bonds
-1.4%
-3.1%
5.1%
Corporate bonds
-3.0%
-4.9%
13.3%
Microfinance
0.2%
3.1%
9.7%
Inflation-linked bonds
-2.0%
4.1%
21.6%
High-yield bonds
-2.9%
1.3%
16.2%
Emerging-market bonds
-3.0%
-3.6%
11.3%
0.1%
4.7%
14.2%
Convertible bonds Equities
-6.1%
-6.1%
47.7%
Insurance-linked bonds
Global
-4.9%
19.0%
59.1%
Switzerland
-5.8%
17.5%
43.6%
Europa
-3.5%
19.5%
37.8%
UK
1.9%
22.7%
18.6%
USA
-5.7%
20.4%
74.2%
Emerging markets
-1.9%
-9.1%
15.1%
Commodities
8.8%
34.7%
33.6%
Gold
-1.8%
-2.7%
36.0%
Real estate Switzerland
-0.2%
11.0%
36.8%
Hedge funds
-1.8%
1.9%
15.6%
Alternative assets
Currencies EUR/USD
-1.2%
-7.4%
-1.9%
EUR/CHF
0.4%
-3.7%
-8.5%
GBP/USD
-0.6%
-1.9%
2.6%
On our Agenda February 11: US consumer sentiment US consumer confidence recently fell to its lowest level in a decade as the COVID-19 pandemic and rampant inflation depress the collective mood. In addition, public confidence in the government’s ability to deal with the challenges facing the USA dropped to an eight-year low. Slowed consumer spending could act as a brake on economic growth in the months ahead. February 13: World Radio Day Radio continues to be the world’s number one mass medium of communication. It reaches the widest audience and enables a vast array of voices to express themselves. “Radio and Trust” is the theme of this year’s World Radio Day. March 1: Chinese purchasing managers’ indices Will the government succeed in turning around China's economic growth in the Year of the Tiger? Stability is more important than ever in light of the upcoming 20th Party Congress this autumn. China’s PMIs provide an indication of whether the recent support measures are bearing fruit.
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Monthly Market Monitor - February 2022 | Kaiser Partner Privatbank AG
Kaiser Partner Privatbank AG | Monthly Market Monitor - February 2022
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Notes
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Monthly Market Monitor - February 2022 | Kaiser Partner Privatbank AG
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Monthly Market Monitor - February 2022 | Kaiser Partner Privatbank AG
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