Kaiser Partner Privatbank AG - Monthly Market Monitor November 2022 EN

Monthly Market Monitor

November 2022

Contents In a Nutshell

Macro Radar Taking the pulse of economic activity

Our view on the markets

04

Satellite View

06

Geopolitical heat map

Asset Allocation

08

Notes from the Investment Committee

10

Theme in Focus Crypto winter 2.0?

13

Drawdown: All about private banking

The Back Page

Private markets – new investment prospects for individual investors

Asset classes & agenda

16

20

Kaiser Partner Privatbank AG | Monthly Market Monitor - November 2022

3

In a Nutshell

Our view on the markets

Seasonal tailwind Recent weeks have seen stock indices regain some lost ground. From a seasonal perspective, a very propitious window is now opening in the four-year US presidential cycle. But even if markets stabilize further in the near future, weak macro- and microeconomic data could create cognitive dissonance among investors for the time being.

Fed pivot in sight How much interest-rate hiking can the US economy take? US policy rate expectations have recently been getting projected at ever higher altitudes above the “neutral” interest-rate level and are likely overblown by now. The Fed will soon slow its rate hiking in view of the mounting risks to economic growth, but the “final” federal funds rate level next year nonetheless looks destined to well exceed 4%.

President Xi for life Disillusionment has set in among geopolitical analysts in the wake of 20th National People’s Congress in China.

The Middle Kingdom and the West look set to drift farther apart in the future not just ideologically, but also economically. The threat of a military conflict with Taiwan is mounting, and vital global issues such as climate change risk fading from view.

Chart of the Month Gone off course | The ECB has fallen far short of its mandate in recent years 2% inflation trend and actual Eurozone inflation

Sources: Bloomberg, Kaiser Partner Privatbank 4

Monthly Market Monitor - November 2022 | Kaiser Partner Privatbank AG

Crypto winter 2.0?

The bears are in the ascendant this year. Stocks and bonds aren’t the only asset categories currently in a bear market. Cryptocurrencies also have lost a massive amount of value over the last 12 months. Institutional investors, however, are not turning their backs on Bitcoin and the like, but are instead increasingly viewing “cryptos” as a distinct asset class of their own.

The slump on the financial markets (including a second crypto winter) gives crypto optimists an opportunity to rethink their investment strategy and broaden their portfolios’ diversification.

Private markets – new investment prospects for retail investors Rising interest rates, rampant inflation, geopolitical instability and merely mediocre return outlooks on equity markets – it sure feels as though investors have known simpler times than the present. Private-market assets help to overcome these current challenges. They enlarge the investment universe, protect against inflation, motivate adherence to a disciplined investment strategy and improve a portfolio’s risk-return profile.

Kaiser Partner Privatbank is now making the benefits of private markets accessible also to retail investors.

For over two decades, the European Central Bank (ECB) had set itself the goal of keeping inflation in the Eurozone “below but near 2%.” It impressively succeeded in doing that under ECB Presidents Duisenberg and Trichet until the early 2010s. Then under Mario Draghi, the 2% inflation trend went off-kilter under the influence of powerful disinflationary forces. Even highly inventive monetary-policy creativity couldn’t get it back on track. Against this backdrop, the ECB defined a new inflation target in July 2021. It has since been striving for an average 2% level “over the medium term.” However, the monetary-policy torpidity built into the ECB’s modified mandate has proven suboptimal thus far and has probably actually tended to abet today’s overshooting inflation rates. The ECB now needs to restore its credibility. Monetary policy and inflation look set the stay volatile in the near term.

Kaiser Partner Privatbank AG | Monthly Market Monitor - November 2022

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Monthly Market Monitor - November 2022 | Kaiser Partner Privatbank AG

Macro Radar

Taking the pulse of economic activity

Growth dynamics deteriorate further in Europe Purchasing managers’ index readings for the Eurozone retreated further in October and entrenched themselves even deeper in contraction territory. The PMI pullback in the manufacturing sector in particular was once again more severe than the consensus had projected. Meanwhile, in the fourth quarter underway, the Eurozone economy is probably in a dreaded recession by now, which will hit former growth engine Germany especially hard. The USA, in the meantime, is still a ways off from negative growth figures at present, but another indicator there has recently sounded a recession alarm (see chart below).

Fed pivot in sight Conditions have changed drastically in recent months particularly on the US housing market. The US Federal Reserve’s swift monetary policy U-turn has caused US market interest rates to soar, driving up rates on 30-year mortgages to above 7% at last look. Various activity indiConsensus estimates 2022

2023

2024

GDP growth (in %) Switzerland

2.2

0.8

1.6

Eurozone

3.0

-0.1

1.5

UK

4.2

-0.4

1.2

USA

1.7

0.4

1.4

China

3.3

4.9

4.9 1.3

Inflation (in %) Switzerland

2.9

2.0

Eurozone

8.3

5.5

2.1

UK

9.0

6.3

2.6

USA

8.0

4.1

2.5

China

2.2

2.4

2.2

3M

ECB striving to return to normal The European Central Bank raised its deposit rate in October by another 75 basis points to 1.5%. Since the latest Eurozone inflation reading clocked in at 10%, combating inflation will continue to take top priority. Even the inevitable recession is unlikely to alter the restrictive course anytime soon. On the contrary, the ECB, too, soon looks set to resort to quantitative tightening to shrink its balance sheet that has been bloated by securities purchases and long-term loans to banks (TLTROs).

US policy rate expectations have recently been getting projected at ever higher altitudes above the “neutral” interest-rate level and are likely overblown by now.

The Fed will soon slow its rate hiking in view of the mounting risks to economic growth, but the “final” federal funds rate level next year nonetheless looks destined to well exceed 4%.

No end to zero-COVID policy The 20th Congress of the Communist Party of China was orchestrated down to the last detail – nuisances like weak economic data, for instance, didn’t fit into the program. The GDP growth figure for the third quarter was thus released with a delay. Although it turned out better than in the prior quarter at 3.9%, it was still far away from China’s official growth target (5.5%). President Xi’s motto for the months ahead continues to be first and foremost “stability.” China’s zero-COVID policy looks set to remain in place at least until spring 2023.

Growth impetus for world economic activity is unlikely to be forthcoming in the near term.

Down three consecutive months | Reliable US recession indictor flashing amber Conference Board Leading Economic Index (annual rate of change in %)

Kaiser Partner Privatbank interest rates view Letzter

cators (including home sales and (re)financing volumes) have cooled substantially while housing prices are now on the decline. The pullback in housing prices should soon spill over to rent prices, which respond more slowly to changes in market conditions. The Fed is soon likely to attach greater weight to these dynamics and is bound to slow its rate-hiking pace in the near future.

12M

20%

10%

Key interest rates (in %) Switzerland

0.50

↗

↗

Eurozone

1.50

↗

↗

UK

2.25

↗

↗

USA

3.25

↗

↗

China

2.75

→

→

Switzerland

1.14

→

↘

Eurozone

2.13

→

↘

UK

3.47

→

↘

USA

4.03

→

↘

China

2.68

→

→

10-year yields (in %)

Quellen: Bloomberg, Kaiser Partner Privatbank

0

-10%

-20%

-30% 1992

1996

2000

2004

2008

2012

2016

2020

Sources: Bloomberg, Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - November 2022

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Satellite View Geopolitical heat map

Disillusionment has set in among geopolitical analysts in the wake of 20th National People’s Congress in China. The Middle Kingdom and the West look set to drift farther apart in the future not just ideologically, but also economically. The threat of a military conflict with Taiwan is mounting, and vital global issues such as global warming risk fading from view.

President Xi for life Optimists and realists are both likely to have been surprised and disappointed in equal measure by the choreography and final outcome of the 20th Congress of the Communist Party of China. It had been expected from the outset that Xi Jinping would allow himself to be reelected to a third term in office as president in contravention of unwritten rules. But it ultimately was a surprise that the new leadership circle consists solely of acolytes loyal to Xi and that every independent technocrat left was removed from office. The party and its leadership only have room for Xi’s worldview, and criticism looks destined to fall silent altogether soon. The fact that no women will have a seat on the 24-member Politburo for the first time since 1990 is a disappointing side note. Loyalty superseded competence in all of the personnel changes. Since a potential successor to the new-old president is not discernable among the new Politburo members, the world will have to brace itself for at least another ten years influenced by Xi. China as a strategic rival Ongoing geopolitical tensions look destined to escalate further in the long term. Chinese diplomats will likely continue to take an aggressive tone in keeping with the spirit of the “wolf warrior diplomacy” ethos established under Xi Jinping.

Europe, which is viewed by China as an economic partner but at the same time also as a competitor and systemic rival, will increasingly face a dilemma. But the greatest geopolitical escalation potential lies in the continually in-

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Monthly Market Monitor - November 2022 | Kaiser Partner Privatbank AG

tensifying and seemingly irreversible conflict between the United States and China. Demonization of China in the USA has long taken root across party lines. Trumpian punitive tariffs have not been rescinded under US President Biden. Quite the contrary, in fact, the recently imposed restrictions on semiconductor-industry exports to China have taken American efforts to contain China’s ambitions to a whole new qualitative level. This will likely deal a significant blow to China’s chip industry over the next five to ten years. Retaliation in the form of export restrictions on rare earth elements, for example, could further exacerbate the spiral of escalation. The risk of a military miscalculation and escalation over Taiwan is also mounting inexorably. With regard to the global climate, however, one can only hope that China’s desire to achieve (energy) autarky will soon ignite a boom for green environmental technologies.

Kaiser Partner Privatbank AG | Monthly Market Monitor - November 2022

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Asset Allocation

Notes from the Investment Committee

Recent weeks have seen stock indices regain some lost ground. From a seasonal perspective, a very propitious window is now opening in the four-year US presidential cycle. But even if markets stabilize further in the near future, weak macroand microeconomic data could create cognitive dissonance among investors for the time being.

Asset Allocation Monitor -

+

Cash Fixed Income Sovereign bonds

+

Global Switzerland

10/2022

Corporate bonds Microfinance

Equities

Europe 10/2022

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

Equities: Seasonal tailwind • After sinking to new year-to-date lows in September and registering a volatile start to October, stock indices have since regained lost ground in recent weeks, advancing by more than 10%. It remains to be seen whether this will prove to be the solid floor that investors have been hoping for or merely marks another bear market rally. However, investor positioning, technical market indicators and sentiment readings suggest good odds that the recovery will continue. Over the past several months, fund managers have continually reduced their risk positions and built up high cash allocations and/or have hedged their equity exposure, so a continuation of the rally would ratchet up buying pressure. Demand for volatility-based and trend-following strategies could also increase if indices climb to higher levels. From a seasonal perspective, the onset of November marks the start of the historically stronger “winter half-year,” which has a sensational track record particularly during US midterm election years: since 1950, the performance of the S&P 500 index has consistently been positive between November and April following mid-term elections (success rate: 100%; average performance: +15.2%).

• For the moment, though, a potential stabilization on equity markets could stand in stark contrast to macroand microeconomic data because the slowdown in economic activity will increasingly be reflected in weaker corporate figures, which are starting to show up by 10

Monthly Market Monitor - November 2022 | Kaiser Partner Privatbank AG

now in the third-quarter reporting season. Some companies have succeeded in countering the downturn in economic activity and soaring inflation and have been able to defend their profit margins. At the same time, though, there is a growing number of corporations that have presented disappointing revenue and earnings figures and a bleak outlook. Analysts’ earnings estimates for the quarters ahead accordingly have been gradually revised downward lately. Aggregate profit growth in the USA could stagnate or even contract slightly in the first half of 2023, but an earnings recession is not in sight Scorecard -

+

Macro Monetary/fiscal policy Corporate earnings Valuation Trend Investor sentiment

yet. If one does come to pass (caused by an economic recession), one could expect stock prices to drop back to lower levels again on the markets.

Fixed income: Insurance-linked bonds present opportunities • Yields on 10-year government bonds intermittently rose to as high as 4.3% in the USA and 2.5% in Germany in October. At those levels, yields were already close to what the fixed-income market is currently projecting

will be the “final” respective policy-rate plateaus for the US Federal Reserve and the European Central Bank. The risk of further rises in yields (and corresponding price declines) thus appears limited. In fact, opportunities on the bond market are predominating by now, not just in the government bond space, but also in the investment- and speculative-grade corporate bond sectors.

However, investments particularly in the high-yield segment should be spread widely primarily across defensive sectors with low cyclicality.

• The market for insurance-linked bonds (cat bonds) registered massive price declines in September in the aftermath of Hurricane Ian – the nearly 10% drop in the Swiss Re Cat Bond Index marked the sharpest correction since the Harvey/Irma/Maria storm sequence in 2017. Current estimates put the damage caused by Ian in the USD 30 to 50 billion range. In the past, such catastrophe events have always presented good buying opportunities for investors. Since there is a fundamental shortage of available capacity (i.e. interested buyers for new cat bond issues), the cat bond market at present is a buyer’s market with an attractive risk/ reward profile. We recently have upped our positions in cat bonds in our mandates.

Alternative assets: Resilient private markets • In the alternative assets space, gold and exchangetraded real estate funds are lagging well behind in the loser’s lane this year, mainly as a result of the increase in (real) interest rates. However, the recent dip in bond yields has at least stabilized their performance lately, but it’s still too soon for a comeback in both asset classes. We are positioned neutrally and continue to recommend adding portfolio exposure to gold and real estate ETFs only in small doses.

• Unlisted private-market assets, in contrast, have proven to be robust portfolio components thus far in 2022. In fact, private-market real estate and infrastructure assets even generated solidly positive returns over the first three quarters of this year. The private equity sec-

Brand new indices are being churned out these days just like off an assembly line. New benchmarks join the scene every day, and the creativity knows no bounds. The name of an index alone does not always reveal the true contents of the package, so it’s advisable to read the accompanying user information leaflet. However, at least in the case of the MSCI World Index, the best-known gauge of the global equity market, one wouldn’t expect to encounter any surprises, but rather a representative depiction of the economic power of the world’s industrialized nations. But since the index is calculated on the basis of the market capitalizations of its constituent stocks, US companies are now heavily overweighted these days, accounting for almost 70% of the total index weight. This has been caused in part by the superior growth of US (tech) companies in recent years and by the overvaluation of the US dollar implicit in their market cap figures. Investors should be aware of this clustered risk when reviewing the composition of their portfolios.

tor was also comparatively stable with the exception of the venture capital investment segment. However, valuation corrections look set to occur here with a time lag in the quarters ahead. This should open up very attractive investment opportunities on the secondary market, which you can participate in through corresponding investment vehicles.

Currencies: A respite for the euro, or is it more than that?

• EUR/USD: Indications of an impending Fed pivot were enough to give the euro an extended respite from its downward trend in October, enabling the currency to claw its way back to parity against the US dollar. Interest-rate differentials could in fact turn back in favor of the euro in the medium term. Given the euro’s low valuation, there could then be room for a substantial recovery of the euro’s exchange rate against other currencies in 2023. Before that happens, though, the euro would first have to break out of some downtrend channels. A drawn-out bottoming pattern is likelier than a V-shaped turnaround.

• GBP/USD: The British pound was recently shaken to the core by the political chaos at 10 Downing Street, but the installation of Rishi Sunak as new prime minister, the almost entire rollback of Liz Truss’s economic program and the return to a path of (more) sustainable finances have enabled sterling to stabilize lately. US interest-rate policy is also crucial to the pound. A discernable end to Fed rate-hiking would make it possible for the pound to post further advances.

• EUR/CHF: The euro climbed sharply in October also against the Swiss franc. This is likely attributable in part to the further increase in the Eurozone interest-rate level – the Swiss National Bank lags a bit behind here because it holds a rate-setting meeting only once every quarter. But from a technical analysis perspective, the euro is unlikely to succeed in entrenching itself above parity right away. On the contrary, we expect CHF strength to resume. Since inflation remains elevated, the SNB has an interest in the franc staying strong.

Chart in the Spotlight Deceptive labeling | More USA than expected?!

MSCI World Index weightings 100%

80%

60%

40%

20%

0% 1996

1998

2000

2002

2004

2006

2008 World ex US

2010

2012

2014

2016

2018

2020

2022

US

Sources: Bloomberg, Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - November 2022

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Better than the benchmark Kaiser Partner Privatbank AG 2022 PERFORMANCE-PROJECT 7 P R I VAT 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 01.10.2021 to 30.09.2022

fuchsrichter.de

Investing is a marathon, not a sprint. That also goes for the five-year Performance Project 7 competition being conducted by independent testing firm FUCHS|Richter Prüfinstanz. For a year now, Kaiser Partner Privatbank together with 42 other banks and asset managers in the German-speaking world have been engaged in the challenge of managing a fictional private client’s assets in a discretionary mandate with the goal of beating a benchmark composed of six ETFs. The fictional client’s ambitions are not trivial. She would like to invest 2 million euros and to withdraw EUR 20,000 annually for personal spending purposes. She would like to at least preserve her wealth over the long term. She is willing to take a certain amount of risk to grow the value of her assets, but

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Monthly Market Monitor - November 2022 | Kaiser Partner Privatbank AG

is unwilling to tolerate more than a 20% temporary drawdown from the last high-water mark.

The hurdle for the participants in Performance Project 7 to clear is exceptionally high especially in 2022, which has been a turbulent year for investors as nearly every asset class has sustained heavy losses. One year into the project, only eight participating institutions have beaten the benchmark thus far. This small pack of frontrunners includes Kaiser Partner Privatbank.

With a rigorous active strategy and solid returns, we have succeeded in ranking among the very best in every single quarter thus far. For the remainder of the competition, our focus will stay on pursuing a robust investment strategy and a forward-looking tactical asset allocation.

The bears are in the ascendant this year.

Stocks and bonds aren’t the only asset categories currently in a bear market. Cryptocurrencies also have lost a massive amount of value over the last 12 months.

Institutional investors, however, are not turning their backs on Bitcoin and the like, but are instead increasingly viewing “cryptos” as a distinct asset class of their own.

The slump on the financial markets (including a second crypto winter) gives crypto optimists an opportunity to rethink their investment strategy and broaden their portfolios’ diversification.

Theme in Focus Crypto winter 2.0?

No place to hide The wrenching turnaround in monetary policy by central banks, coupled with mounting downside risks to economic activity and ongoing geopolitical tensions, has taken a heavy toll on financial markets since the start of this year. Stocks and bonds have simultaneously lost a massive amount of value. A 60/40 portfolio (60% stocks, 40% bonds) is currently down more than 20% year-to-date. The commodities complex is the only relevant liquid asset class that is up for 2022 thus far, but commodities are unlikely to make up a position worth speaking of in the asset portfolios of most investors. So, in this sense, Bitcoin, which has plummeted by almost 60% year-to-date, is in good company. While the synchronous selloff on equity and fixed-income markets marks uncharted territory for “classical” investors and is thus especially painful for them, crypto enthusiasts are already accustomed to digital currencies’ wild volatility.

In contrast to traditional asset classes, Bitcoin’s actual volatility has not increased this year. As for the length of the crypto correction, though, the current episode, as measured by Bitcoin’s price performance, is the longest one in the young history of cryptocurrencies. Its duration by now has already exceeded the length of the “crypto winter” of 2017/2018.

Beloved, loathed and (in)dispensable But those declared dead live longer… A lot has happened in the crypto world since we published our blog post titled “Bitcoin – beloved, loathed and (in)dispensable(?)”, in which we examined the benefits and drawbacks of digital currencies. For example, Ethereum, the second-largest cryptocurrency by market cap, successfully completed “the Merge” in September, shifting from a proof-of-work to a proof-of-stake architecture. The Ethereum blockchain should now become not just faster and more secure, but most notably also more sustainable. The Ethereum Foundation calculates that the update will reduce the blockchain’s energy consumption by 99.95%. That may take some wind out of the sails of crypto critics from a sustainability standpoint at least, particularly if Ethereum’s example catches on and prompts even the Bitcoin community to undertake efforts to switch to a more environmentally friendly tack. Meanwhile, the institutionalization of cryptocurrencies continues apace in spite of the deep bear market as they further entrench themselves as a distinct asset class of their own. The flood of news about cryptocurrencies thus hasn’t let up lately: the Nasdaq exchange in the USA plans to set up its own crypto unit, asset man-

agement colossus BlackRock intends to launch a Bitcoin trust, and Fidelity announced that it will soon be bringing access to Bitcoin trading to its 34 million brokerage clients.

Wall Street banks like Citibank and Morgan Stanley are also (aggressively) rolling out a variety of projects in the crypto and blockchain space. So, against this backdrop, there really is no burst cryptocurrency bubble to speak of at the moment. It’s more like a “crypto winter 2.0” that will flush weak crypto projects out of the market, but will also lay fertile ground for further innovations and new applications, technological advancements, and new business models – all thanks in large part to continued vibrant investor interest and an unrelenting flow of risk capital.

Losses across a broad front | Bitcoin is no exception Year-to-date performance 120 110 100 90 80 70 60 50 40 Jan Nasdaq

Mar S&P500

May

Gold

Jul

US government bonds 7-10 years

Sep

US government bonds 20+ years

Bitcoin

Sources: Bloomberg, Kaiser Partner Privatbank

Down in the abyss | Just an ordinary drawdown?

Bear markets in Bitcoin 0

-20

-40

-60

-80

-100 0

50

100

150

December 2017

April 2021

200

250

300

November 2021

Sources: Bloomberg, Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - November 2022

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Constantly high volatility | But the volatility differential versus stocks and bonds is narrowing Annualized volatility (6-month rolling average) 120 100 80

60 40 20 0 2018 Nasdaq

2019 S&P500

2020 Gold

2021

US government bonds 7-10 years

2022

US government bonds 20+ years

Bitcoin

Sources: Bloomberg, Kaiser Partner Privatbank

In our model calculations, we derive our five-year return expectation of 25% p.a. for Bitcoin (which seems optimistic at first blush) from the adoption trajectory of previous pathbreaking, disruptive technologies like the internet or mobile phones. Although this expected return is still very high compared to that for other asset classes, it is significantly lower than the historical return since 2014. Our estimate of expected volatility is also conservative; despite the substantially lower performance expectation, we estimate expected volatility to be “only” around one-third lower than actual past volatility (68%). This puts the future expected Sharpe ratio at 0.58, which is much lower (and less attractive) than the Sharpe ratio for the period since 2014 (0.84), presenting another good reason for investors with current elevated exposure to cryptocurrencies to strive to better diversify their portfolios.

Buy the dip? | A buying opportunity for optimists Bull and bear markets in Bitcoin

Sources: Bloomberg, Kaiser Partner Privatbank

An (objective) retrospection | Bitcoin as a performance booster 60/40 portfolio with (and without) Bitcoin 350 300 250 200 150 100 50 0 2014

2015

2016

2017 60/40

2018 60/40 & 5% Bitcoin

2019

2020

60/40 & 10% Bitcoin

Sources: Bloomberg, Kaiser Partner Privatbank

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A good entry point, but enter crypto in a diversified way So, it would be inappropriate to sound the death knell for digital coins. Early members of the ardent cryptocurrency fan base (who may still be sitting on sizable price gains) are unlikely to be particularly perturbed by the poor performance this year anyway. Nevertheless, such crypto optimists should use the current broad market correction and the resulting cheaper valuations and increased return expectations in nearly every asset class as an occasion to carefully review their portfolios and to reduce or entirely eliminate any clustered risks there that may exist. In recent years, blending a 5% or 10% allocation to cryptocurrencies into a 60/40 portfolio would already have been enough to substantially enhance its performance. According to our model calculations, such an “enrichment” with crypto exposure is likely to notably improve the risk/ return profile of a portfolio also in the future.

Monthly Market Monitor - November 2022 | Kaiser Partner Privatbank AG

2021

2022

An optimal portfolio with Bitcoin But to obtain a model optimal portfolio, our way of constructing it goes well beyond blending Bitcoin into a “simple” 60/40 portfolio because the performance correlation between Bitcoin and the equity market has further increased in recent months and may stay elevated, and because there are various complementary asset classes with similarly attractive risk/return profiles and comparatively low performance correlations.

We accordingly enlarge the field of asset classes to include corporate bonds (investment-grade and highyield), emerging-market bonds, microfinance bonds and insurance-linked bonds (cat bonds), as well as convertible bonds and market-neutral strategies. A portfolio optimized by including these ingredients (let’s call it an “optimal balanced” portfolio) gives grounds to anticipate an excess return (alpha) of 1.9 percentage points (with a 5% allocation to Bitcoin blended in) or 2.7 percentage points (with 10% Bitcoin) over the expected return on a 60/40 portfolio (5.9% p.a.) over the next five years at the same level of risk. With an expected Sharpe ratio of 0.81, the optimized portfolio

with a 10% allocation to Bitcoin blended in is particularly likely to still be attractive to longstanding crypto investors (who are used to being pampered with high Sharpe ratios). At the same time, its much lower volatility (expectation: 10.6%) should allow them to sleep easier at night.

Practical implementation – more than just Bitcoin However, when implementing our model portfolio in actual real-world practice, exposure to cryptocurrencies should be built up with more than just the help of Bitcoin because broader diversification has added value also in the crypto space. Only time will tell whether Bitcoin will retain its status as the leading digital currency by market cap or will lose relevance to competitors named Ethereum, Solana, Polkadot and others due to sustainability concerns and their more future-proof technologies. That’s why it makes sense to invest the 10% allocation earmarked for crypto assets in a broadly diversified basket of the most promising crypto projects. But diversification doesn’t have to end there. Whoever believes in the future of the crypto sector has a wide array of other investment possibilities (and risk profiles) to choose from by now besides simply participating in the price performance of individual cryptocurrencies. The spectrum stretches from income-generating yield strategies to factor and hedge-fund strategies and all the way to venture capital investments. Crypto optimists who additionally would like to help themselves to these asset buckets can build out the crypto share of their portfolios to even more than 10% with a clear conscience.

An increasing performance correlation between Bitcoin and stocks… | …makes broader diversification all the more imperative Korrelation zwischen Bitcoin und S&P500-Index 0.80

0.60

0.40

0.20

0

-0.20

-0.40 2016

2017

2018

2019 6 months rolling

2020

2021

2022

2 years rolling

Sources: Bloomberg, Kaiser Partner Privatbank

An (optimistic) outlook | More efficient portfolios with crypto Risk/return profiles of different portfolios

Sources: Bloomberg, Kaiser Partner Privatbank

Kaiser Partner Privatbank AG | Monthly Market Monitor - November 2022

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Monthly Market Monitor - November 2022 | Kaiser Partner Privatbank AG

Drawdown: All about private banking

Private markets – new investment prospects for individual investors

Private (more and more preferably) for longer and longer What do ByteDance, SpaceX, Klarna and Revolut have in common? Investors value all of those companies in the billions of dollars even though they are not listed (yet) on a stock exchange. They all are also referred to as “unicorns” even though there are hundreds of such companies by now and they thus no longer are truly a rarity because compared to before, growth companies are staying privately held longer and longer these days. Whereas Amazon was just three years old when it went public in 1997, Facebook waited eight years before launching its IPO (2012). Uber (2019) and Airbnb (2020), in contrast, were teenagers when they debuted on the stock market. Individual investors thus were unable to participate in their business stories until very late in the game while the bulk of the companies’ equity value appreciation went to those investors that had been able to invest in them at an early stage on the private market (via venture capital funds).

Investors who (have to) concentrate solely on publicly traded companies miss out on interesting investment opportunities that are frequently more profitable than average, not just in the realm of startups and growth companies, but also in the sphere of established enterprises. A single statistic illustrates just how big the opportunities are and just how large the private markets investment universe is: almost 90% of all businesses in the USA with annual revenue above USD 100 million are privately held companies not listed on a stock exchange. Europe presents a similar picture. Fewer regulations and disclosure requirements and less pressure from shareholders to reach short-term targets contribute to motivating companies to stay privately held for longer and longer or to even delist from the stock market. An increasing number of companies are owned by private equity firms.

Premiums to be earned On paper, private equity is a relatively simple concept. Private equity managers raise capital (commitments) from (wholesale) investors and invest the funds in a number of different companies for a period of three to five years. In each of those deals, the managers seek to create added value by means of growth strategies and operational improvements and by tweaking other adjustment screws (valuation expansion, capital structure optimization) and to afterwards resell the company, usually after a term of three to six years. Handsome fees (frequently a 2% an-

nual management fee plus a 20% performance fee on returns above a defined hurdle rate) generally make this model a lucrative business for private equity firms. But private equity managers do more than just rake in fees – they also put up a significant part of the investment capital and thus take on risk themselves. Their interest in a value-enhancing investment is thus aligned with investors’ desire for a good return. Hence, private equity has indeed paid off for investors as well in the past. Depending on the precise definition and the specific time frame, during the last two decades this asset class has generated an excess return of 3 to 5 percentage points versus the world equity market over lengthy periods and, seemingly at least, with less volatility.

Rising interest rates, rampant inflation, geopolitical instability and merely mediocre return outlooks on equity markets – it sure feels as though investors have known simpler times than the present. Private-market assets help to overcome these current challenges.

They enlarge the investment universe, protect against inflation, motivate adherence to a disciplined investment strategy and improve a portfolio’s risk-return profile.

Kaiser Partner Privatbank is now making the benefits of private markets accessible also to individual investors.

Enlarged investment universe (1) | Companies are staying privately held for longer and longer Age of company at time of IPO

IPO Year 1997

2004

2012

2019

2020

Sources: HarbourVest, Kaiser Partner Privatbank

Enlarged investment universe (2) | Opportunities in private markets are constantly expanding Number of companies in North America and Europe (privately held vs. publicly traded) 18,000

privately held

16,000

14,000

12,000

publicly traded 10,000

8,000 2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Sources: Pitchbook, World Federation of Exchanges, Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - November 2022

17

Illiquidity premium (1) | Private equity has the edge in the long run Growth of one US dollar $12

$11.71

$10

$8

$6

$4

$3.16 $2

0

2000

2004

2008

2012

Private Equity

2016

2020

Public Equities

This excess return seems particularly valuable especially in today’s challenging investment climate. That’s because bonds currently bring neither a (real) yield nor stability to a portfolio. And although stocks are no longer completely overpriced in the wake of the recent correction, their expected returns for the next five and ten years are only in the mid-single-digit range. Private markets historically have delivered a handsome excess return precisely during such uninspiring times on public markets. The private markets asset class is also at a relative advantage in light of the elevated inflation rates today (and potentially also in the future) because returns on real assets and private equity have a much higher correlation to the rate of inflation than bonds and stocks do. Private-market assets have thus meant effective protection in past periods of rampant inflation.

Sources: Hamilton Lane, Kaiser Partner Privatbank

More Outperformance

Illiquidity premium (2) | Private equity outperforms in times of weak stock markets Excess return on private equity (annualized over three years)

+793 bps

+782 bps

+659 bps

Less Outperformance

+484 bps

+150 bps

Less than -5%

-5% to 5%

5% to 10%

10% to 15%

Lower Public Market Return

Greater than 15%

Higher Public Market Return

Sources: Hamilton Lane, Kaiser Partner Privatbank

Protection against inflation | Elevated inflation brings tailwinds Average returns at different inflation rates (1999–2019) 20% 17.7%

17.7%

18.2%

15% 12.4% 10%

9.3% 8.3% 7.2%

5%

7.2%

6.8% 5.8%

5.8% 4.2%

0 Low Infla on (≤2.00%)

Average Infla on (2.01% – 3.00%) Real Assets

Private Equity

Aktien

Sources: Bloomberg, Hamilton Lane, Kaiser Partner Privatbank 18

Monthly Market Monitor - November 2022 | Kaiser Partner Privatbank AG

High Infla on (3.01% – 6.00%) Anleihen

That extra return stems from the use of the instruments in the private equity toolbox described above, but also from information asymmetries, from a certain degree of complexity and, above all, from an illiquidity premium.

That’s because the bulk of the committed investor capital in private-market investments is typically locked in for many years. Selling during this period normally can only be done at a (usually substantial) discount to nominal value.

The private equity asset class thus appears to many an investor to potentially entail higher risk. On the other hand, though, the illiquid, long-term nature of private-market assets helps investors to avoid panic selling during periods of stress and to refrain from wanting to time the market. This inherent disciplining attribute of private markets increases the chances of realizing the targeted extra return.

Challenge and (your) chance Investors who wish to profit from the many benefits of private markets are confronted with various challenges, however. Carefully selecting the right investment funds, for instance, is a crucial key to success particularly in the private equity sector because there is a huge performance differential there between “good” and “bad” managers (in contrast to public equity markets). Only those investors who consistently select funds that generate above-average returns (ideally ranking in the first or second performance quartile) number among the winners in the long run. Accomplishing that requires not only the ability to gain access to the best managers, but also considerable capacity to perform due diligence. Moreover, a private markets portfolio geared to the long term should be diversified across different dimensions (strategies, sectors, geography, investment duration). Capital commitments must be made for multi-year terms, and capital calls and commitments by and to different private equity funds must constantly be managed. All of that requires professional expertise and entails a lot of administrative work. But arguably the biggest investment obstacle to date – even for wealthy private clients – has been the very high minimum investment volume needed to participate in the performance potential of private equity and the like because top-tier managers normally charge an admission of USD 10 million or more when they take new investors on board.

The good ones go into the pot, the bad ones go into your crop | Wide performance dispersion between private equity managers Performance quartiles of buyout funds by investment year

Sources: Hamilton Lane, Kaiser Partner Privatbank

More return… | …for less risk Return and risk for mixed portfolios (1995–2020) 10.0% 9.5% 9.0% 8.5%

42% Public Equity 28% Bonds

Return

The possibilities created by digitalization enable the barriers to investment described above to be lowered nowadays. It’s not for nothing that there’s lots of talk about the “democratization” of private markets these days. Kaiser Partner Privatbank has developed an innovative offering that enables clients to gain diversified exposure to private markets with a low minimum investment amount. This offering gives our clients more than just access to the best managers. In addition to taking over all of the administrative tasks as a matter of course, our private markets mandate comprises a customized solution that also includes financing or monetization of the investment. Last but not least, our offering also includes access to a secondary market. Our service therefore makes private markets not just accessible, but also (semi-)liquid for existing and new clients. More return for less risk – Kaiser Partner Privatbank opens this performance prospect to existing and new clients through its private markets mandate.

8.0%

18% Private Equity 12% Private Credit

7.5%

48% Public Equity 32% Bonds 12% Private Equity 8% Private Credit

7.0%

54% Public Equity 36% Bonds 6% Private Equity

6.5%

4% Private Credit

6.0% 6.00%

6.05%

6.10%

6.15%

6.20%

6.25%

60% Public Equity 40% Bonds

6.30%

6.35%

Observed Volatility

Sources: Hamilton Lane, Kaiser Partner Privatbank

Kaiser Partner Privatbank AG | Monthly Market Monitor - November 2022

19

The Back Page Asset classes & agenda

Performance as of 31 October 2022 Asset class

YTD

Cash

-0.2% -0.2% -0.2% -0.2% -0.2%

CHF

0.0% 0.0% 0.0% 0.0% 0.0%

EUR

1.5% 1.5% 1.5% 1.5% 1.5%

USD

00 0 00

Fixed Income

-12.6% -12.6% -12.6% -12.6% -12.6%

Sovereign bonds

-21.3% -21.3% -21.3% -21.3% -21.3%

Corporate bonds

1.7% 1.7% 1.7% 1.7% 1.7%

Microfinance -17.0% -17.0% -17.0% -17.0% -17.0%

Inflation-linked bonds

-11.7% -11.7% -11.7% -11.7% -11.7%

High-yield bonds -24.5% -24.5% -24.5% -24.5% -24.5%

Emerging-market bonds

-5.5% -5.5% -5.5% -5.5% -5.5%

Insurance-linked bonds -19.7% -19.7% -19.7% -19.7% -19.7%

Convertible bonds Equities

1 Month

1 Year

3 Years

0.0%

-0.3%

-1.7%

0.1%

-0.1%

-1.0%

0.3%

1.6%

2.7%

-0.4%

-12.4%

-11.5%

-0.3%

-21.7%

-15.2%

0.3%

2.3%

7.6%

0.3%

-16.0%

-4.7%

3.1%

-10.8%

-1.2%

0.2%

-24.7%

-20.4%

2.4%

-4.7%

5.5%

2.2%

-22.7%

19.2%

00 0 00

Global

-16.3% -16.3% -16.3% -16.3% -16.3%

7.1%

-14.2%

24.4%

Switzerland

-16.2% -16.2% -16.2% -16.2% -16.2%

4.8%

-11.3%

8.9%

Europa

-16.2% -16.2% -16.2% -16.2% -16.2%

7.9%

-15.0%

5.2%

2.8%

4.3%

10.0%

UK

1.5% 1.5% 1.5% 1.5% 1.5%

USA

-19.2% -19.2% -19.2% -19.2% -19.2%

Emerging markets

-31.2% -31.2% -31.2% -31.2% -31.2%

Alternative assets

14.3% 14.3% 14.3% 14.3% 14.3%

Gold

-10.7% -10.7% -10.7% -10.7% -10.7%

Hedge funds

-17.7% -17.7% -17.7% -17.7% -17.7% -4.5% -4.5% -4.5% -4.5% -4.5%

Currencies EUR/USD EUR/CHF GBP/USD

-16.9%

31.7%

-32.9%

-18.6%

00 0 00

Commodities Real estate Switzerland

7.9% -3.2%

00 000 -13.1% -13.1% -13.1% -13.1% -13.1% -4.6% -4.6% -4.6% -4.6% -4.6% -15.2% -15.2% -15.2% -15.2% -15.2%

1.7%

9.7%

43.1%

-1.6%

-8.4%

8.0%

-1.1%

-13.8%

0.2%

0.1%

-5.3%

8.1%

0.8%

-14.5%

-11.4%

2.3%

-6.5%

-10.0%

2.7%

-16.2%

-11.4%

On our Agenda November 8: US midterm elections A lame duck, or not? After making a small comeback in public approval polls since summer, Joe Biden has lost some momentum again lately. If the Democrats lose their majority control of both chambers of the US Congress in the midterm elections, two years of political gridlock will loom in the United States.

November 15 & 16: G20 meeting in Bali The conflict in Ukraine as a tactical focal point and rivalry with China as a strategic challenge – that sums up the big geopolitical picture from the USA’s perspective. Critical eyes will be watching to see whether G20 summit host Indonesia will succeed in brokering bilateral talks between Presidents Biden and Putin or between Presidents Biden and Xi. November 20 to December 18: FIFA Football World Cup in Qatar The 22nd edition of the tournament will be held in a desert country for the first time – at a pleasant temperature thanks to air conditioning. Once the ball gets rolling, the inglorious World Cup host awarding process is likely to quickly be forgotten, but some media outlets (hopefully) will also do some reporting away from the football pitches.

20

Monthly Market Monitor - November 2022 | Kaiser Partner Privatbank AG

Kaiser Partner Privatbank AG | Monthly Market Monitor - November 2022

21

This document constitutes neither a financial analysis nor an advertisement. It is intended solely for informational purposes. None of the information contained herein constitutes a solicitation or recommendation by Kaiser Partner Privatbank AG to purchase or sell a financial instrument or to take any other actions regarding any financial instruments.

Furthermore, the information contained herein does not constitute investment advice. Any references in this document to past performance are no guarantee of a positive future performance. Kaiser Partner Privatbank AG assumes no liability for the completeness, correctness or currentness of the information contained herein or for any losses or damages arising from any actions taken on the basis of the information in this document. All contents of this document are protected by intellectual property law, particularly by copyright law. The reprinting or reproduction of all or any parts of this document in any way or form for public or commercial purposes is expressly prohibited unless prior written consent has been explicitly granted by Kaiser Partner Privatbank AG. 22

Monthly Market Monitor - November 2022 | Kaiser Partner Privatbank AG

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