Monthly Market Monitor
March 2022
Table of contents In a Nutshell Our view on the markets
Macro Radar Taking the pulse of economic activity
04 06
Theme in Focus
Satellite View
Asset Allocation
Geopolitical heat map
Notes from the Investment Committee
07
08
Bitcoin – beloved, loathed and (in) dispensable(?)
10
Ask the experts Questions stirring our clients (and the financial markets)
The Back Page
14
Asset classes & agenda
15 Kaiser Partner Privatbank AG | Monthly Market Monitor - March 2022
3
In a Nutshell
Our view on the markets
Keep a cool head Vladimir Putin’s war of aggression against Ukraine is a humanitarian catastrophe whose long-term political and economic consequences cannot yet be entirely foreseen at the moment. Investors must reckon with sustained high volatility on the financial markets in the weeks ahead, but should nonetheless keep a cool head. It is too late now for (panic) selling. Old stockmarket adages, however, could come into play once more. Interest-rate hikes despite the crisis The armed conflict in eastern Europe presents a new variable that central banks have to factor into their monetary policy considerations. However, their focus will probably concentrate mainly on the further rise in inflation risks. The European Central Bank therefore will likely stick with the pivot in monetary policy that it has already initiated verbally, and an initial rate hike by the US Federal Reserve remains set for March. Putin’s poker game Vladimir Putin’s assault on Ukraine is a human tragedy and is bound to prompt Europe and NATO to rethink Europe’s security architecture and enlarge their military presence in eastern Europe. Over the longer
Chart of the Month Smile?! | The interest-rate turnaround is here (and is visible in price charts) Yield on 2-year US Treasury notes
Sources: Bloomberg, Kaiser Partner Privatbank 4
Monthly Market Monitor - March 2022 | Kaiser Partner Privatbank AG
term, Russia's aggressive expansion towards the east will result in direct (war) expenses as well as high indirect costs in the form of increasing isolation and an accelerated decoupling from the West. Bitcoin – beloved, loathed and (in)dispensable(?) Is Bitcoin a Ponzi scheme in which the proverbial hot potato keeps getting passed around until the house of cards finally collapses? Or are cryptocurrencies a new asset class that belongs in every portfolio? The debate about this hasn’t been decided yet. But the increasing adoption of cryptocurrencies is unmistakable – more and more financial institutions are offering large-scale and small investors financial products based on cryptos. We answer the question of whether private investors should pounce on cryptocurrencies. Ask the experts And still more questions: How long will prices continue to rise? Are central banks “behind the curve”? How enduring is the sector and regional rotation? And should stocks be underweighted in these uncertain times? You’ll find our answers in our quarterly Q&A.
Last autumn, higher interest rates seemed a thing of the distant future (in the USA) or were practically inconceivable (in Europe), but circumstances have quickly changed. Now that inflation rates on both sides of the Atlantic have been continually surprising well on the upside lately and central-bank officials are increasingly becoming more hawkish, a turnaround in market interest rates is long since underway today. An example is the 2-year US Treasury yield – its chart, depending on the viewing angle, resembles either the silhouette of a saucer or a wide grin and implies a substantial increase in interest rates. Six to seven quarter-point rate hikes by the end of this year are priced in at the moment. But interest rates are already expected to start falling again from 2024 onward. The fixed-income market is thus speculating that the US Federal Reserve will soon capitulate again (due to falling stock prices) or the upcoming rate-hiking cycle will be exceptionally short (because the next recession will already loom).
Kaiser Partner Privatbank AG | Monthly Market Monitor - March 2022
5
Macro Radar
Taking the pulse of economic activity
A vibrant springtime recovery had actually been “scheduled” for the European economy in the weeks ahead, but the escalating crisis in Ukraine poses a near-term risk. However, it is unlikely to result in anything more than “just” a renewed setback in sentiment and a lengthier period of high energy prices, which central banks cannot ignore.
Signs of relief… The results of monthly business surveys like Germany’s Ifo index and European purchasing managers’ indices signaled clear signs of relief in February and exceeded consensus forecasts across the board. The extensive (or complete) lifting of COVID-19 restrictions has entrepreneurs and especially the service sector feeling confident about a vigorous upturn in the spring, which is likely to be buttressed in the months ahead by consumers who amassed savings during the pandemic. …and risks The escalated crisis in Ukraine is putting this bullish baseline expectation to the test. Russia is not just the biggest supplier of natural gas to western and central Europe, but is also a world-leading exporter of petroleum, metals and grain. An impaired raw materials conduit could therefore lead to a renewed setback in sentiment and another small burst of inflation mainly in those European countries that are particularly reliant on natural resource imports. An oil price stuck above USD 100 per barrel for a protracted period would also adversely affect global economic growth and is a risk to be taken seriously. But there’s hope that this won’t become a reality because a substantial risk premium is already priced into oil by now. A potential deal with Iran could bring additional oil onto the market. Moreover, the West is likely to refrain from imposing sanctions that jeopardize energy security. For Russia, meanwhile,
More growth, more inflation | Solid PMIs give reason to expect a blossoming of economic activity this spring Purchasing managers’ indices (manufacturing and services combined)
the costs (of war) would climb even higher if the country casts doubts on its role as a reliable supplier. Central banks in a quandary? The armed conflict in eastern Europe presents a new variable that central banks have to factor into their monetary policy considerations. However, their focus will probably concentrate mainly on the further rise in inflation risks. The European Central Bank, for instance, will probably want to keep all of its options open in March in light of the increased uncertainty. But little is likely to change in the fundamental pivot in monetary policy that has already been initiated. A gradual tapering of securities purchases by the ECB and an initial interest-rate hike toward the end of this year remain likely despite the geopolitical crisis. And an initial rate hike by the US Federal Reserve remains set for March even if Jerome Powell is likely to leave it at 25 basis points. Consensus estimates 2021
2022
2023
GDP growth (in %) Switzerland
3.6
2.9
1.8
Eurozone
5.2
4.0
2.5
UK
7.2
4.3
2.1
USA
5.7
3.7
2.5
China
8.1
5.2
5.2
Switzerland
0.6
1.0
0.6
Eurozone
2.6
3.9
1.8
UK
2.6
5.4
2.4
USA
4.7
5.1
2.5
China
0.9
2.1
2.2
Inflation (in %)
Kaiser Partner Privatbank interest rates view Last
3M
12M
Key interest rates (in %) Switzerland
-0.75
→
→
Eurozone
-0.50
→
↗
UK
0.50
↗
↗
USA
0.25
↗
↗
China
2.85
↘
↘
10-year yields (in %) Switzerland
0.12
→
↗
-0.02
→
↗
UK
1.17
→
↗
USA
1.73
→
↗
China
2.83
→
→
Eurozone
Sources: Bloomberg, Kaiser Partner Privatbank 6
Monthly Market Monitor - March 2022 | Kaiser Partner Privatbank AG
Sources: Bloomberg, Kaiser Partner Privatbank
Satellite View Geopolitical heat map
Back to business in the West, recession in Russia Freezing Russian central-bank assets, shutting the bulk of Russian banks out of the SWIFT system, and much more – except for imposing direct sanctions on Russian energy exports, Europeans and Americans have pretty much pulled all of the sanction levers in their power in the last few days. The Western sanctions are bound to further worsen the existing problems already plaguing Russia’s economy and will likely impair its long-term growth potential. If the hostilities do not deescalate very soon, a recession in Russia appears inevitable. Ruble depreciation, rampant inflation and economic misery could ratchet up the Russian public’s and oligarchs’ criticism of Putin. Meanwhile, the implications for the West hinge on the issue of natural resources. Higher energy prices are bound to deal another near-term setback to Western consumer and business sentiment, so the economic recovery from the Omicron wave may end up getting delayed a little once more. However, the West could very well get back to business as usual relatively soon. Apart from the energy issue, Russia’s weight is too small to lastingly impact economic activity in the national economies of (western) Europe. Economic growth and monetary policy may therefore
soon return to their pre-crisis trajectory. Contrary to Putin’s hopes, NATO will probably strengthen its military presence in eastern Europe. A paradigm shift in European foreign and security policy appears to have already been put into effect. Putin sidelined Over the longer term, Russia's aggressive expansion towards the east will result in direct (war) expenses as well as high indirect costs in the form of increasing isolation and an accelerated decoupling from the West. Although Russia’s natural resources and good connections (with China, for example) could enable the country to live even without ties to the West, Putin could lose his most important customers for energy exports, and Russia’s biggest source of revenue could run dry. A highly armed Russia in economic decline would pose a major challenge for the USA and Europe for an indeterminate time.
Vladimir Putin’s war of aggression against Ukraine is a humanitarian catastrophe. It calls Europe’s security architecture into question and has forced the West to do a lot of rethinking in the span of a few days. What are the implications of the geopolitical crisis?
Kaiser Partner Privatbank AG | Monthly Market Monitor - March 2022
7
Asset Allocation
Notes from the Investment Committee
Vladimir Putin’s war of aggression against Ukraine is a humanitarian catastrophe whose long-term political and economic consequences cannot all be foreseen at the moment. Volatility on the financial markets accordingly looks set to stay high in the weeks ahead. Investors should keep a cool head in this climate.
Asset Allocation Monitor -
+
-
Cash
Equities
Fixed Income
Global
Sovereign bonds
Switzerland
Corporate bonds
Europe
Microfinance
UK
Inflation-linked bonds
USA
High-yield bonds
Emerging markets
Emerging-market bonds
Alternative Assets
Insurance-linked bonds
Gold
Convertible bonds
Real estate
Duration
Hedge funds
Currencies
Structured products
US dollar
Private equity
+
Swiss franc Euro British pound
Scorecard + Equities: How long are the legs of “political markets”? Macro • “Political markets have short legs” and “buy when Monetary/fiscal policy the cannons are rumbling” – stock market adages Corporate earnings like these imply that geopolitical crises in the past Valuation often turned out to be attractive buying opportuniTrend ties. Given the human suffering that Russia’s assault Investor sentiment on Ukraine brings in its wake, it doesn’t seem by all means opportune to want to extract a profit from this humanitarian catastrophe. But investors would at • The anticipation of a tactical bottom in stock prices is least be well advised to keep a cool head in the combeing buttressed by market participants’ pessimistic ing weeks because sustained high volatility is foreseesentiment. Bears are clearly in the majority by now able on the equity markets for a while. It is too late among (US) retail investors, and optimism among innow for (panic) selling. vestment newsletter authors has drastically receded. • Viewed objectively, we have to acknowledge that Many investors have probably already scaled back their stocks have already been in risk-off mode for several risk exposure lately. Meanwhile, near-term momenweeks now and a substantial risk premium is already tum indicators are now signaling substantially oversold priced in. Immediate further downside potential may conditions. How far a potential retracement rally might therefore be constrained. In this case, the war in go will probably depend in large part on the duration Ukraine would join a long list of geopolitical events of the military conflict and on how long the highest that did not inflict lasting harm on price charts on level of sanctions against Russia will be maintained. equity markets. This assessment is corroborated by Persistently elevated energy prices and a disappeara recent study by BCA Research, which analyzed the ance of other key raw-material exports from Russia geopolitical crises of the last 100 years. According to and Ukraine could noticeably brake global economic the study, stock market corrections (measured on the growth and would ultimately also hurt corporate earnbasis of the S&P 500 index) during events comparable ings. This would constrain the upside potential for the to the current crisis in Ukraine averaged out to beequity market this year. tween –11% and –14%. The consolidation of the US blue-chip index underway since the start of this year Fixed income: Still a safe haven? fits perfectly in that template, so there is no cause for • After bond yields initially climbed higher in Februfurther share-price dips from this standpoint. ary, the rally in market interest rates was brought to 8
Monthly Market Monitor - March 2022 | Kaiser Partner Privatbank AG
on the back of receding inflation and rising nominal a screeching halt by the escalating conflict in Ukraine. market interest rates, so any gold rally would have only Bond prices have surged and yields have plunged in limited upside potential from this perspective. recent days. The yield on 10-year German Bunds, for instance, even dropped back into negative territory. The massive reaction on the bond markets reflects the Currencies: Risk off gravity of the geopolitical crisis and the risk of a last- • EUR/USD: The EUR/USD exchange rate fluctuated in February between 1.11 and 1.15. Upward impetus ining deterioration of global economic growth prospects. duced by more restrictive rhetoric from the European The future trajectory of bond prices and yields is likely Central Bank was followed by a downward lurch driven to hinge on the actions taken by central banks. Will by a flight to the safe haven known as the US dollar. they focus on inflation risk, which has now increased In the bigger picture, though, the EUR/USD cross is even further, or will they concentrate on the risk to continuing to form a floor from which the euro could economic activity? Our baseline scenario anticipates emerge strengthened in the medium term because that they will place a higher weight on inflation and will the ECB still has some ground to make up against the stay on track to increasingly tighten monetary policy US Federal Reserve in terms of tightening its monetary going forward. Under those circumstances, it would be policy. This is bound to become reflected also in the questionable how long government bonds can retain EUR/USD exchange rate over the course of this year. their safe-haven properties. • GBP/USD: The risk-off movement on the financial markets has also affected the British pound, which Alternative assets: Gold as a geopolitical “hedge” has depreciated against the greenback in recent days. • In mid-February, the price of gold dynamically broke However, the Bank of England, like the Fed, is unlikely upward out of the triangle pattern that we wrote to let the conflict in Ukraine deter it from raising inabout in this space last month, sending a clear techniterest rates. On the contrary, additional rate hikes can cal buy signal. The escalating situation in Ukraine gave already be expected in the near term in the face of furthe yellow precious metal an additional boost. Gold ther mounting inflation risks. So, if the pound continthus delivered proof of its function as a hedge against ues to fall, it should find a floor by the time it reaches geopolitical risks and of its usefulness as a diversifyits December trough level of 1.32 against the US dollar, ing component of an investment portfolio. Going by if not before. the textbook, a necessary consolidation as a result of gold’s already overbought near-term conditions ought • EUR/CHF: The Swiss franc, too, has been in demand lately as a classic representative of defensive assets. to be followed by a resumption of upward impetus and The euro hit a marginal new low beneath the 1.03 level a test of the psychologically important USD 2,000-peragainst the franc in late February, but this was no longounce mark. A narrative in support of a further upmove er supported by momentum indicators, so positive diby gold would exist in any case in the face of further vergences formed. They imply that the euro looks set rising inflation risk as a result of the crisis in Ukraine. to stabilize in the weeks ahead, which fundamentally However, how far a potential gold rally might go likely would be well underpinned by the ECB’s more hawkish will ultimately depend also on real interest rates. We stance lately. see them climbing higher over the course of this year
The prominent macro trends at the moment – rising inflation/interest rates and higher commodity prices – have been reflected also in sector performances year-to-date. Things aren’t going downhill everywhere. Two months into the year, the clear winner thus far is the energy sector, which has posted a double-digit gain year-to-date. Value stock segments sensitive to changes in interest rates – like the financial sector – have also done relatively well (particularly in Europe). The clear laggard in the performance rankings is the technology sector, which was deep in red territory with a decline of more than 10% as of end-February. Investor sentiment toward the tech sector has since become very bearish, and fund managers are deeply underweight the tech sector according to a survey by BoAML, so a near-term countermovement in sector trends wouldn’t be surprising from a sentiment perspective. But it’s doubtful whether that will turn into a tech comeback because the underlying trends look destined to resume in the medium term and the sector is still trading at rich premiums.
Chart in the Spotlight Top or flop? | Considerable performance differences between sectors Sector performances year-to-date (MSCI World index)
Sources: Bloomberg, Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - March 2022
9
Theme in Focus
Bitcoin – beloved, loathed and (in)dispensable(?)
value there. Before we address this question, let’s The Weeble of the financial markets Those declared dead live longer – this old German first draw up a list of some of the most prominent saying certainly applies to Bitcoin, which seemingly pro and con arguments regarding Bitcoin and its relahas died a dozen deaths over the last decade but is tives. The aim of this list, which is not exhaustive, is nonetheless still vibrantly alive today and remains to provide a little insight into the debate surroundthe king of all cryptocurrencies. In retrospect, every ing cryptocurrencies, about which everyone should swan song about Bitcoin was premature, and every form his or her own opinion. purportedly burst bubble was followed by new alltime price highs. In fact, the digital currency has Pros: To the moon experienced seven boom-bust cycles with price • Cryptos are eating gold’s lunch: Investors hold the precious metal gold not first and foremost in drawdowns of more than 50% since 2011. To Bitcoin view of its function as jewelry or for its electrical devotees, this volatility is normal everyday business conductivity, but primarily as a hedge against the on the road to a rosy future of mass adoption of the devaluation of paper currency. For many cryptocryptocurrency as a revolutionary medium of excurrencies as well (and especially Bitcoin), their change or at least as a new asset class. To foes of Bitfunction as a medium of exchange does not stand coin and its cohorts, in contrast, their volatility is just in the foreground. They are viewed instead as an one of the many “problems” they pose. We take a alternative to gold and as being immune to potenneutral stance in the debate about the pros and cons tially inflationary central-bank monetary policies. of cryptocurrencies. We are not blind to the promisThe market value of all of the world’s gold mined ing future potential of blockchain technology, but we to date amounts to almost USD 10 trillion. If crypalso cannot close our eyes to undeniable shortcomtocurrencies were to reach only half the “market ings such as Bitcoin’s sustainability deficit. In our role capitalization” of gold, from their present level as a private wealth management bank, what inter(USD 1.7 trillion) they would have the potential ests us most is the question of whether Bitcoin beto triple in price. longs in investment portfolios and provides an added • The future belongs to proof-of-stake: The slowness of Bitcoin transactions is by design and owes to Bitcoin’s proof-of-work architecture, by which the Bitcoin algorithm solves complex mathematiHow often can a bubble burst? | Bitcoin crashes remain a routine occurrence cal puzzles to verify transactions and thus guarHistoric Bitcoin corrections exceeding 50% antee the security of the network. This process undeniably is extremely energy-intensive, which is a problem that can easily be solved by switching to a proof-of-stake verification mechanism. That’s precisely what Ethereum, the world’s second-largest cryptocurrency by market value, intends to do soon. It is generally assumed that this will lower Ethereum’s energy consumption by 99% and that Ethereum transactions will become 5,000 times faster. • Bitcoins are social: Although Bitcoin does not score particularly high on the “E” aspect of “ESG”, it veritably shines with regard to the “S” aspect. As a completely decentralized open-access system, the Bitcoin network comes as close as possible to being a direct democracy. It provides a high level of data protection and privacy and does not discriminate against users on the basis of gender
Is Bitcoin a Ponzi scheme in which the proverbial hot potato keeps getting passed around until the house of cards finally collapses? Or are cryptocurrencies a new asset class that belongs in every portfolio? Despite the ups and downs of Bitcoin and the like, cryptocurrencies are conspicuously being increasingly adopted in financial products. We examine here whether private investors should pounce on cryptocurrencies.
Sources: Bloomberg, Kaiser Partner Privatbank 10
Monthly Market Monitor - March 2022 | Kaiser Partner Privatbank AG
value. Their value is determined solely by what or provenance. Anyone with access to the interother people are willing to pay for them. net can participate in the crypto revolution, even • Regulation will come: Cryptocurrencies have without a bank account. largely been unregulated thus far in most countries, but governments are already changing their Cons: Back to earth laissez-faire stance. The environmental problem • The costs of cryptos: Who pays for cryptocurrenposed by cryptocurrencies is just one aspect here cies? Not just those who speculate with them – – protecting consumers, businesses and banks some negative externalities (especially with Bitfrom the high volatility of cryptocurrencies is also coin) are undeniable. A single Bitcoin transaction increasingly moving into the foreground. In addiconsumes 14 times as much energy as 100,000 tion, governments will strive to ensure that they Visa card transactions. The annual electricity consumption of Bitcoin exceeds the yearly power consumption of Pakistan and its 217 million inhabitants. Mining for new digital coins makes Comeback kid | High volatility: A normal circumstance on the road to mass adoption? energy more expensive than necessary in some Bull and bear markets in Bitcoin countries. Even if all Bitcoin mines were operated with “green” electricity in the future, they would still divert a lot of resources away from other places where they are more urgently needed. Crime 10000 is another negative externality and remains a big problem in the crypto industry to this day. Chain1000 alysis reports that digital wallet addresses linked to illicit activity received USD 14 billion worth of cryptocurrency payments in 2021, a year that saw 100 crypto fraud increase by 82% year-on-year and crypto theft surge by 516%. 10 • What is Bitcoin good for? The number of retailers that accept Bitcoin as a means of payment has 1 hardly increased in recent years. Speculative capital flows – not e-commerce – continue to account 0.1 for the majority of cryptocurrency transactions. 2011 2013 2015 2017 2019 The Bitcoin network is capable of processing just five transactions per second (in contrast to the 20,000 per second that the Visa network is able Sources: Bloomberg, Kaiser Partner Privatbank to settle). Bitcoin transaction fees can vary significantly and are usually much higher than credit card transaction fees. Although there are technological possibilities to make Bitcoin more efficient, the Bitcoin fanbase hasn’t shown any inclination Limited supply? | The crypto money supply is theoretically unlimited to date to deviate from the current protocol. Number of cryptocurrencies • Hyperinflation of cryptocurrencies: One of the selling points put forth by Bitcoin enthusiasts is that the supply of the cryptocurrency is capped at 21 million coins. Other cryptocurrencies also cap their maximum supply of coins. The limited money supply aims to prevent the kind of inflation that looms with paper money issued by central banks and to ensure continually rising currency prices over the long run. However, there is absolutely no limit to the number of cryptocurrencies that can come into existence. Anyone can mint his or her own Dogecoin. The obvious hyperinflation of digital coins exposes the fragility of the inflation protection argument. • How much is Bitcoin worth? The value of a share of stock is based on the fundamentals and future cash flows of the company that issued it. Cryptocurrencies, in contrast, do not have an intrinsic
2021
Sources: Coinmarketcap, Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - March 2022
11
The annual electricity consumption of Bitcoin exceeds the yearly power consumption of Pakistan and its 217 million inhabitants.
don’t lose control over the monetary system. The ability to create and control legal tender mediums of exchange is a crucial component of states’ economic sovereignty. If cryptocurrencies proliferate uncontrollably, central banks and policymakers lose their ability to effectively manipulate the money supply and general price levels and to stimulate economic activity if necessary. Added value for portfolios? More than questionable Regardless of where you stand on cryptocurrencies, the question or whether they provide an added value for an investment portfolio can be answered independently of your stance. For the past (and taking Bitcoin as an example), the answer is a resounding yes. Although one had to stomach an average volatility of around 80% and weather drawdowns of up to 83% during the observation period from 2014 onward (it wasn’t so easy to invest in Bitcoin prior to 2014), the prodigious annualized performance of around +68% made this rollercoaster ride worth the gut-wrenching thrills. With a resulting Sharpe ratio of 0.85 (better than that of the S&P 500 index over the same period), an investment in Bitcoin was also acceptable from a risk-adjusted perspective. In addition, Bitcoin’s correlation with other assets classes was relatively low. Viewed in hindsight, this means that the digital currency would have generated an added value within a broad-based portfolio from
12
Monthly Market Monitor - March 2022 | Kaiser Partner Privatbank AG
both a return standpoint and a diversification perspective. But does this also apply to the future? As the evolution of Bitcoin’s price since the start of November 2021 (with its 50% plunge in the span of just ten weeks) illustrates, Bitcoin hasn’t lost any of its volatility despite the increasing involvement of institutional investors in the cryptocurrency. But whoever takes on that much risk would like to continue to be compensated in the future with a reasonably attractive risk-adjusted return. If we set the threshold at a Sharpe ratio of 0.5, Bitcoin (factoring in its long-term annualized volatility of 80%) would have to deliver a performance of +40% per annum to be attractive. This means that one Bitcoin would have to be worth more than a million US dollars in 2030 to represent a worthwhile investment. Every investor must decide for him or herself whether such a price target is realistic. But whoever considers a Bitcoin trading at seven figures by the end of this decade an exaggeration should tend to refrain from investing in the cryptocurrency because if Bitcoin doesn’t deliver the requisite performance, the risks taken will not be adequately compensated. At any rate, it is not worth investing in cryptocurrencies solely for their diversification attributes. Although the correlation between Bitcoin and stocks stood at just 0.1 for the aggregate period of the last ten years, whenever things got dicey on the equity markets and a low correlation
would have been needed, the correlation between stock and cryptocurrency prices spiked significantly. During equity market corrections of more than 5%, Bitcoin’s performance averaged out to –13% and was negative 86% of the time. It is hardly to be expected that this behavior will change along with the increasing institutionalization of cryptocurrencies. Quite the contrary, their correlation with stocks has generally risen considerably over the last two years. Large- and small-scale investors alike appear to view digital currencies as being the riskiest part of their portfolios (for good reason) and the first assets to be dumped in the event of rising risk aversion. In this sense, cryptocurrencies have recently been behaving like a leveraged variant of (unprofitable) growth stocks. Like such growth stocks, Bitcoin and its cohorts are also particularly vulnerable to the upcoming return of (US) monetary policy to normal. This is another reason why cryptocurrency price volatility is unlikely to decrease much anytime soon. If you do invest in cryptocurrencies, do it in a diversified way Developments in the crypto universe unfold at a very fast pace. That’s why we will regularly review our appraisal of cryptocurrencies. As things stand today, we do not consider cryptocurrencies a compulsory component of our asset allocation particularly in view of the price behavior described above and the problematic sustainability aspects. An optimist, though, who believes that the price of Bitcoin really will soar to the moon should construct a potential investment in cryptocurrencies in the most diversified way possible. Alongside Bitcoin as the still-leading digital coin, competitors like Cardano, Solana and Polkadot that employ more promising and sustainable proof-of-stake technology should also be part of any crypto basket. But even the biggest optimist should invest no more than 5% of his or her liquid assets in cryptocurrencies. Even such a small admixture of cryptocurrencies would already account for 20% of a diversified portfolio’s volatility. A larger allocation to cryptocurrencies would overconcentrate risk and would raise expected drawdowns for the overall portfolio during weak market phases to unreasonably high levels. Another aspect of elevated volatility also mustn’t be forgotten: adding in cryptocurrencies makes it necessary to regularly rebalance a portfolio, which entails elevated trading expenses.
No more than a proxy for highly speculative stocks (any longer)? | Cryptocurrency prices increasingly correlate with stock prices Correlation between Bitcoin and S&P 500 index (2-year rolling)
Sources: Bloomberg, Kaiser Partner Privatbank
Not a safe haven | Only for investors with strong nerves? Volatility (6-month rolling)
Sources: Bloomberg, Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - March 2022
13
Ask the experts
Questions stirring our clients (and the financial markets)
We are always available to answer our clients’ questions and concerns regarding their portfolios. Once every quarter, we summarize clients’ most frequently asked questions and our experts’ answers and give you firsthand insights into our asset management and investment advisory operations.
We answer the following questions in the current edition of "Ask the experts" on our investment blog: Inflation: upply-chain problems, more expensive raw materials – how long will prices continue to rise, and what role does the shortage of skilled labor play? Monetary policy: Are central banks “behind the curve”? What interest-rate policy are the markets pricing in, and how realistic are those market expectations? Investment strategy (1): How enduring is the sector rotation from technology to cyclical stocks?
Investment strategy (2): US equity markets have been underperforming lately. Does this mark the start of a trend reversal? What are the implications for investors? Investment strategy (3): Rising inflation, an impending interest-rate reversal, lofty market valuations and geopolitical conflicts – a lot of issues are worrying investors right now. Should stocks be underweighted in these uncertain times?
Find out more on our blog:
News Article | Seventh Performance Project of the Fuchs | Richter Auditing Body Kaiser Partner Privatbank AG is participating for the first time in a performance project conducted by the Fuchs | Richter auditing body. Over a period of five years, a total of 43 banks and asset managers based in German-speaking countries will be compared with one another as they manage the assets of a private client in accordance with the client’s requirements. An ETF portfolio consisting of six ETFs is also used as a benchmark to be outperformed. Asset management is a marathon, not a sprint – and that principle also applies for this performance project. Nevertheless, three months into the competition, we can pause the stopwatch and take a preliminary look at the performance ranking: after the first quarter, we are in a good intermediate position, coming in at fifth place, and we are also beating the benchmark. This demonstrates that active asset management can provide added value for clients. Added value is reflected in particular in an investment strategy that remains robust even in difficult times, a forward-looking tactical approach to asset allocation, and a targeted selection of securities.
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Monthly Market Monitor - March 2022 | Kaiser Partner Privatbank AG
2022 PERFORMANCE-PROJECT 7 P R I VA T E B A N K I N G P O R T F O L I O
Better than the Benchmark KAISER PARTNER PRIVATBANK AG among 43 participants during 1.10.2021 to 31.12.2021
fuchsrichter.de
The Back Page Asset classes & agenda
Performance as of 28 February 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%
2.8%
Fixed Income Sovereign bonds
-1.0%
-2.3%
4.1%
Corporate bonds
-2.1%
-5.4%
10.6%
Microfinance
0.1%
3.0%
9.2%
Inflation-linked bonds
0.3%
7.3%
22.4% 13.6%
High-yield bonds
-0.7%
0.5%
Emerging-market bonds
-6.5%
-7.1%
3.1%
Insurance-linked bonds
0.2%
5.2%
14.5%
-0.6%
-8.4%
43.3%
Convertible bonds Equities Global
-2.7%
12.8%
49.8%
Switzerland
-1.9%
15.9%
34.6%
Europa
-5.2%
9.3%
25.6%
UK
0.8%
21.5%
16.9%
USA
-3.0%
13.9%
63.7%
Emerging markets
-3.1%
-12.5%
11.5%
Commodities
6.2%
34.3%
40.7%
Gold
6.2%
10.1%
45.4%
Real estate Switzerland
-3.4%
5.5%
30.6%
Hedge funds
-0.4%
0.4%
14.9%
Alternative assets
Currencies EUR/USD
-0.1%
-7.1%
-1.3%
EUR/CHF
-1.2%
-6.2%
-9.4%
GBP/USD
-0.2%
-3.7%
1.2%
On our Agenda March 14: Pi Day Pies will be eaten once again this year on March 14. This is the way that fans of pi commemorate the famous mathematical constant. The date of the day of honor traces back to the US calendar notation 3/14, which corresponds to the first three digits of pi (3.14). March 16: FOMC meeting Seldom has an interest-rate hike by the US Federal Reserve been so certain (and overdue) as it is at the upcoming March FOMC meeting. The Fed looks set to initiate a new rate-hiking cycle after having amply laid the groundwork for it verbally. The only question is: Will it be 25 or 50 basis points? A small hike is the more probable outcome, also partly in view of the war in Ukraine. March 26: Earth Hour On the last Saturday of March, it will be that time again – at 8:30 p.m. local time, millions of people around the world and thousands of cities and companies will switch off the lights for an hour to promote a living planet. Earth Hour has been raising public awareness of the need to protect our climate since 2007.
Kaiser Partner Privatbank AG | Monthly Market Monitor - March 2022
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Monthly Market Monitor - March 2022 | Kaiser Partner Privatbank AG
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Monthly Market Monitor - March 2022 | Kaiser Partner Privatbank AG
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