global snapshot monthly · 2014. 7. 11. · analysis shows that defensive equity sectors tend to...

Global SnapshotMonthly

March 2014

Contents

Asset Allocation 3 Rollercoaster ride should continue 3

Investment Policy Private Banking 5

Macroeconomic Outlook 6 Bad weather and negative sentiment 6

Fixed Income Strategy 7 ECB faces challenges this spring 7

Forex Strategy 8 Commodity currencies: Select fallen angels 8

Equity Strategy 9 Avoid emerging market equities 9

Equity Top Picks 10 Top Picks outperformance goes from strength to strength 10

Credit Strategy 11 The hunt-for-yield is no longer blind 11

Market & Forecast Overview 12

Abbreviations 13

Contacts 14

Asset Allocation

3

Asset Allocation

Rollercoaster ride should continue

Recent weeks have seen equities recover quickly from their setback at the end of January, nonetheless the roller-coaster ride is likely to continue in the coming months. Investor sentiment is on an even keel, but positive econom-ic surprises have decreased significantly. Weaker economic data will inject momentum into bonds, which have a neutral weighting. We continue to underweight emerging market equities and our overall view on equities is also cautious.

Review: Round trip is over The brief but powerful setback in the equity markets at the end of January was followed by a swift recovery at the beginning of February. We are now back where we started at the beginning of the year. The only difference is inves-tor sentiment, which is now much more subdued. The en-thusiasm in the markets has evaporated owing to the emerging markets risks. We appear to be in a consolida-tion phase. However, this phase will probably continue to be characterized by major fluctuations in the coming months. USA: Investor optimism is subdued

Source: Datastream, J. Safra Sarasin

Macro outlook: USA passes its peak Bad weather in the USA and negative sentiment in emerg-ing markets have dominated economic activity in Febru-ary. If the downturn in sentiment is not solely weather-related, we could see the US economy cool after several quarters of robust growth. This is evident from the waning momentum of the US Purchasing Managers’ Index (ISM), shown in the following chart. The US economy has proba-bly passed its peak, even without the weather-related ef-fect, due to the high build in inventories in the second half of 2013. This cyclical downturn is likely to spread to

Euroland after a time lag. The slowdown in China should continue, given the government’s plans to dampen credit growth further. In light of the global slowdown, we expect to see a recovery in the second half of the year at the earliest. Mixed global cyclical indicators


Equity strategy: Avoid emerging market equities Our strategy of underweighting emerging markets in an equity portfolio has paid off in recent months. Although sentiment has hit a low, a sustained recovery appears unlikely. Emerging market valuations have not yet reached extremely low levels, reductions in earnings es-timates continue and cyclical momentum remains weak. We therefore continue to favor developed regions. In par-ticular, defensive markets that offer high dividend yields are likely to be more popular with investors. Historical analysis shows that defensive equity sectors tend to out-perform in an environment characterized by falling leading economic indicators. This explains our continuing prefer-ence for the healthcare sector. Further, the insurance sector should demonstrate its defensive qualities with a high dividend yield and stable cash flows. The IT sector has defensive qualities because its largest segment is

J F M A M J J A S O N D J F-40

-30

-20

-10

0

10

20

30

40

1400

1450

1500

1550

1600

1650

1700

1750

1800

1850

1900

US Bulllish - Bearish Indiv idual Inv estorsS&P 500 COMPOSITE - PRICE INDEX(R.H.SCALE)

Source: Thomson Reuters Datastream

2011 2012 2013-6

-5

-4

-3

-2

-1

0

1

2

3

4

US PMI Manuf . MomentumEuroland PMI Manuf . MomentumChina PMI Manuf . Momentum

-6

-5

-4

-3

-2

-1

0

1

2

3

4

Asset Allocation

4

software & services, which continues to grow. We would avoid cyclical sectors which rely heavily on emerging mar-ket growth. USA: Latest macro data signal a drop in interest rates


Bond strategy: Uplift in bond markets The turbulences in emerging market currencies have put a damper on investor risk appetite and led to a decline in interest rates in industrialized countries. The above chart shows the correlation between US economic surprises and US interest rates. The weaker data is unlikely to per-suade the US Fed to alter its monetary policy stance, but it could lead to lower interest rate expectations. In Eu-rope, the economic downturn expected by us and further measures by the European Central Bank (ECB) should al-so support the bond market. We see the latest weakness in the credit markets as a correction after a strong rally. High-yield bonds remain attractive amid high demand. We maintain our cautious stance towards emerging market bonds and favor developed countries. European corporate bonds look particularly attractive relative to US corporate bonds, despite their demanding valuations. Currencies: Swiss franc still expensive On the currency front, the US dollar quickly depreciated after the financial market turbulences at the end of Janu-ary. The weak economic data in the USA increases the risk that the US Federal Reserve will start to ease its monetary policy. But this seems unlikely. Rather, the ECB might implement further measures that could weaken the euro. We therefore see another opportunity to back a stronger dollar. The US dollar looks inexpensive against the Swiss franc. The latest rise in commodity prices is likely to push up commodity currencies. Pessimism is strong, and even small positive surprises could lead to a powerful rally. But it is important to be selective.

Gold price supported by a lower real interest rate


The gold price profits from the drop in real interest rates in the USA and has posted strong gains recently. Howev-er, this is likely to be just a temporary phenomenon in line with the weaker dollar. Asset allocation: We stay on track We still expect to see the equity markets deteriorate in the first half of the year. After an initial correction at the end of January, new record highs are possible, but upside potential appears limited. Leading cyclical indicators sug-gest a slowdown, which will also be reflected in earnings expectations. We therefore confirm our underweight allo-cation to equities. In the area of bonds, we continue to favor European high-yield paper and avoid emerging mar-ket bonds in local currencies. Convertible bonds remain an interesting alternative investment. Also, we have set aside a portion of our cash reserves for alternative strat-egies, which have the lowest possible correlation to the equity markets. [email protected]

F M A M J J A S O N D J F-40

-20

0

20

40

60

80

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

3.20

US Economic Surprises (Citi)US 10Y Yield(R.H.SCALE)


2009 2010 2011 2012 2013600

800

1000

1200

1400

1600

1800

2000 -2

-1

0

1

2

3

4

5

6

US 10y real interest rate(R.H.SCALE)Gold price


Investment Policy Private Banking

5

Investment Policy Private Banking Asset Allocation <defensive> CHF EUR USD GBPCash 9.0 9.0 9.0 9.0Bonds 60.0 60.0 60.0 60.0Home Currency 46.0 46.0 46.0 46.0Emerging Markets 6.0 6.0 6.0 6.0High Yield 8.0 8.0 8.0 8.0Equities 21.0 21.0 21.0 21.0Home 15.0 15.0 15.0 15.0World/Developed Markets 4.0 4.0 4.0 4.0Emerging Markets 2.0 2.0 2.0 2.0Alternative Assets 10.0 10.0 10.0 10.0Convertibles 7.5 7.5 7.5 7.5Others 2.5 2.5 2.5 2.5Return of SAA (1993-2013) 5.7% 7.1% 7.1% 7.7%Risk of SAA (1993-2013) 5.3% 5.6% 5.4% 5.7%

TAA SAA Cash 9.0 5.0 Bonds 60.0 60.0 Equities 21.0 25.0 Alternative 10.0 10.0

Asset Class <balanced> CHF EUR USD GBPCash 10.0 10.0 10.0 10.0Bonds 40.0 40.0 40.0 40.0Home Currency 27.0 27.0 27.0 27.0Emerging Markets 5.0 5.0 5.0 5.0High Yield 8.0 8.0 8.0 8.0Equities 40.0 40.0 40.0 40.0Home 27.0 27.0 27.0 27.0World/Developed Markets 8.5 8.5 8.5 8.5Emerging Markets 4.5 4.5 4.5 4.5Alternative Assets 10.0 10.0 10.0 10.0Convertibles 7.5 7.5 7.5 7.5Others 2.5 2.5 2.5 2.5Return of SAA (1993-2013) 6.4% 7.6% 7.8% 7.9%Risk of SAA (1993-2013) 8.1% 8.7% 8.1% 7.9%


Asset Class <dynamic> CHF EUR USD GBPCash 11.0 11.0 11.0 11.0Bonds 20.0 20.0 20.0 20.0Home Currency 8.0 8.0 8.0 8.0Emerging Markets 4.0 4.0 4.0 4.0High Yield 8.0 8.0 8.0 8.0Equities 59.0 59.0 59.0 59.0Home 39.0 39.0 39.0 39.0World/Developed Markets 13.0 13.0 13.0 13.0Emerging Markets 7.0 7.0 7.0 7.0Alternative Assets 10.0 10.0 10.0 10.0Convertibles 7.5 7.5 7.5 7.5Others 2.5 2.5 2.5 2.5Return of SAA (1993-2013) 7.1% 8.0% 8.4% 8.0%Risk of SAA (1993-2013) 11.2% 12.0% 11.1% 10.5%


TAA = Tactical Asset Allocation; short term strategy based on return/risk expectations SAA = Strategic Asset Allocation; long term strategy based on investment profiles

Macroeconomic Outlook

6

Macroeconomic Outlook

Bad weather and negative sentiment

Bad weather in the USA and negative sentiment in emerging markets have dominated economic activity in Febru-ary. As we believe that the downturn is not solely weather-related, we could see the US economy cool after a strong second half in 2013. This is likely to spread to the Euroland after a time lag.

Weather and currencies Two themes have dominated the markets in February: se-vere weather in the USA and negative sentiment in emerging markets. Key US indicators have proved disap-pointing. The US employment report for January shows a second straight month of weak jobs growth, and the ISM Manufacturing Index plunged from 56.5 at the end of 2013 to just 51.3 in January. However, the poor US fig-ures are deeply ambiguous: are they a result of the ex-treme cold weather in the USA or is an «actual» cooling down of the economy on the horizon? On the other hand, it is not hard to find the reason for the negative senti-ment in emerging markets. The tumble in the Argentine peso and disappointing leading indicators in China showed investors how susceptible the economic situation in emerging markets is at the moment. The result was a sharp depreciation of their currencies. Central banks in Brazil, Turkey and South Africa responded with interest rate hikes. The banks are concerned that any further de-preciation will heat up the already high rate of inflation. The situation in the Euroland appears calm, with senti-ment indicators on a robust level. On the other hand, in-flation continued to decline and amounted to just 0.7% lately. This has sparked renewed deflation fears on the Euroland periphery. Diverging inflation trends The deflation fears on the Euroland periphery represent a small part of a very heterogeneous global inflation pic-ture. Deflation fears on the periphery are juxtaposed by concerns in Germany that the monetary policy of the Eu-ropean Central Bank (ECB) has become too accommoda-tive and will fuel inflation expectations in the medium term. In Japan - on the other hand - the Bank of Japan encourages inflation expectations and has adopted an explicit inflation target with a view to ending Japan’s long-standing deflation. Emerging markets add their share to this mixed inflation picture. Whereas in economies like

Brazil and India, currency depreciations and already high rates of inflation fuel fears that inflation could get out of control, the situation in China is the opposite. The high excess capacity created in recent years is a deflationary risk. And finally, there is the USA. Here, the inflation trend largely depends on whether last year’s robust eco-nomic recovery continues and, if so, whether the labor market will recover sooner than the US Federal Reserve’s (Fed) cautious estimates suggest. Mixed start to spring This leads us back to the question posed at the begin-ning: Is the slowdown in the USA solely weather related? Probably not – the level of US sentiment indicators rec-orded at the end of 2013 is unsustainable in the long term. Therefore, the US economy is likely to cool after a strong second half in 2013. This will spread to the Euro-land after a time lag. It will put the inflation theme in the USA on the back-burner in the short term, whereas it will help the deflation debate on Europe’s periphery to inten-sify in the next months. [email protected] Diverging inflation trends in Brazil, Spain and Japan


2012 2013-1

0

1

2

3

4

5

6

7

Brazil CPI inf lation y oySpain CPI inf lation y oyJapan CPI inf lation y oy

Fixed Income Strategy

7

Fixed Income Strategy

ECB faces challenges this spring

The turbulences in emerging market currencies have put a damper on investor risk appetite and led to a decline in interest rates in industrialized countries. The slowdown in the economy expected by us and additional measures by the European Central Bank (ECB) should continue to support the bond market.

Emerging markets are the driving force Ten-year government bond yields for the major industrial-ized countries are currently 5 to 10 basis points lower than they were a month ago. This is mainly due to an in-terim rise in risk aversion. Turbulences in emerging mar-ket currencies have put a damper on investor risk appe-tite at the beginning of February and thereby pushed yields on government bonds to their lowest level since October 2013. In the meantime, the situation in emerging markets has quietened down somewhat, which means government bonds have also had to give up some of their former gains. No impulses from the central banks For once, central banks have not given the bond markets any major impulses. The US Federal Reserve (Fed) has continued to wind back its quantitative easing program, announcing another USD 10 billion taper at its January meeting, but the Fed’s economic outlook changed little from December. At its meeting at the beginning of Febru-ary, the ECB highlighted the improvement in economic da-ta in Euroland, but it also mentioned the low inflation rate, especially on the periphery. Although ECB President Mario Draghi discussed the issue of the risk of an out-right deflation for the periphery intensively, the ECB could not make up its mind on easing monetary policy in March already. Mr. Draghi plans to wait for more data before taking further monetary measures. ECB: What and when? Postponed is not abandoned. The ECB’s concern may soon lead to additional monetary measures. It is just a question of what the ECB plans to do and when it will do it. As a first measure, it could reduce the main refinanc-ing rate further from 0.25% currently to 0.1%. Taking such a step would be more a symbolic gesture because the significance of the main refinancing rate has reduced no-ticeably in the wake of the LTRO programs. A second – but less likely – option is for the ECB to take the deposit

rate from the current level of 0% into negative territory. The ECB has opposed the idea of negative interest rates for some time, but in recent months it has dropped its critical stance. The general hope is that negative interest rates will weaken the euro. New measures are most likely to be announced in March since this is also when the ECB publishes its biannual staff forecasts on inflation, which may indicate deflationary risks. But if the Euroland economic data continues to recover, we cannot rule out a surprise. The ECB may decide in that case to wait until the second quarter before it decides to cut interest rates further. No reason for higher yields At the moment, we see very few reasons for a rise in bond yields. The ECB’s measures should help to keep in-terest rates low for the time being. Also, the global eco-nomic downturn expected by us should give the bond markets some support. With a weaker economy, the Fed will become more cautious with regard to its economic outlook. [email protected] ECB has some leeway to cut the main refinancing rate and the deposit rate (currently at 0%)


2009 2010 2011 2012 20130

0.50

1.00

1.50

2.00

2.50

EURO deposit rateEURO ref i rateEURIBOR 3M

0

0.50

1.00

1.50

2.00

2.50

Forex Strategy

8

Forex Strategy

Commodity currencies: Select fallen angels

Weakness in China, US tapering and the subsidence of the euro crisis are weighing on commodity currencies. But the extremely negative sentiment has the potential to surprise. Commodity currencies with solid fundamentals, an appropriate regional focus and an attractive valuation present opportunities. The Norwegian krone, the Malaysian ringgit and the Mexican peso are among the fallen angels. We take a cautious view on the South African rand, the Russian ruble, the Canadian dollar and the Australian dollar.

Powerful headwind for commodity currencies A stiff wind is blowing in the general direction of commod-ity currencies. Some currencies have depreciated by more than 20% over the past 12 months. This correction was mainly triggered by a sharp economic cooling in China. Also, fears that the US Federal Reserve would quickly tighten liquidity reinforced the downtrend in commodity currencies. The expectation of a US interest rate hike has taken the shine off high-yield investment currencies in carry trade strategies. Also, the subsidence of the euro crisis has undermined a number of currencies. Countries with AAA ratings like Norway, Australia and Canada profit-ed from the massive capital inflows at the height of the euro crisis. Beware of excessive pessimism Despite the negative factors, investors should watch out for excessive pessimism towards commodity currencies. The future currency performance is also determined by current expectations. The net currency positions of inves-tors show that investor sentiment toward commodity cur-rencies is extremely negative. Positive surprises could lead to a powerful recovery in several currencies. Which currencies are fallen angels? Regional focus: MXN profits, AUD suffers The regional focus of the export industry plays an im-portant role for the prospects of individual commodity countries. Whereas structural economic growth in China is expected to decrease further in the coming years, we might even see a re-industrialisation of the USA as a re-sult of the shale gas revolution. Hence, the omens for the Aussie dollar are not good, given that roughly 30% of Aus-tralian exports go to China. But with a US export share of more than 75%, the Mexican peso should profit from stronger US demand.

Solid fundamentals for NOK, MYR & MXN The fundamentals of commodity countries also differ. Sol-id fundamental data should support their currencies in the longer term. Based on our risk score, the macro envi-ronment in Norway, Malaysia and Mexico is in balance. On the other hand, macroeconomic imbalances exist in South Africa, Brazil, Russia, Canada and Australia, which exposes their currencies to a greater downside risk. Norway, Malaysia and Mexico in equilibrium


Undemanding valuation for MYR and MXN The valuation can also tell us whether the respective risks are worth taking. We use the results of an Interna-tional Monetary Fund study for this purpose. According to these analyses, commodity currencies with deteriorating fundamentals are not especially cheap. The South African rand, the Brazilian real as well as the Canadian dollar and the Australian dollar are still slightly overvalued. The Rus-sian ruble looks cheap based on current exchange rates, but the high rate of inflation quickly reduces the under-valuation. On the other hand, the Malaysian ringgit and the Mexican peso look inexpensive. [email protected]

Equity Strategy

9

Equity Strategy

Avoid emerging market equities

The volatile equity market performance is likely to continue also in March. This is mainly due to declining economic indicators and ongoing problems in emerging market economies. On this basis, we eschew emerging market equi-ties and focus on equities from Switzerland and the UK. Our sector strategy is also defensive with an overweight al-location to healthcare, insurance and information technology (IT).

High volatility could continue also in March Several sentiment indicators in mid-January suggested the risks in the equity markets were elevated. By the end of January, the equity markets had declined by more than 5% on the back of emerging market (EmMa) currency tur-bulences and disappointing US economic data. Equities subsequently recovered in February and are back to where they were before the setbacks. Has the equity market situation changed again? Although the problems highlighted by sentiment indicators have subsided slight-ly, many leading economic indicators (see chart) still point to falling equity markets. In addition, we do not see any signs of an improvement in the EmMa situation. Con-sequently, the high level of volatility in the equity markets is likely to continue in March as well. Fundamental problems in emerging markets Besides weak growth in China, the uncertainties in emerging markets (EmMas) are fuelled by the US Federal Reserve’s (Fed) measures to taper quantitative easing. Due to tapering, long-term interest rate expectations in-crease in the medium term. This means that high-yielding investments in EmMas lose their relative appeal and in-vestors withdraw their money. This causes currencies in various emerging countries to depreciate, which drives up inflation. Central banks raise key interest rates in an ef-fort to tackle higher inflation. The negative consequence of a higher key interest rate is a tighter money supply, which puts the brake on economic growth. A slowdown in economic growth means lower corporate earnings and, hence, falling equity prices. It creates a vicious circle: the more the EmMa economies deteriorate, the greater the capital outflows are. Furthermore, the drop in exports caused by waning economic momentum in industrialized countries will drag on these economies in the coming months. Therefore, we continue to avoid EmMa equities and favour equities from Switzerland and the UK.

Defensive sector allocation recommended In an environment characterized by falling leading eco-nomic indicators such as the US Purchasing Managers’ Index (ISM Manufacturing), historical analysis shows that defensive equity sectors tend to outperform. Based on this, we continue to favor the healthcare sector. The in-surance sector should also demonstrate its defensive qualities with a high dividend yields and stable cash flows. The IT sector has defensive qualities because of its largest segment software & services, which is still growing. We would avoid cyclical sectors which rely on EmMa performance. [email protected] ISM Manufacturing indicates falling equity prices


2011 2012 2013-4

-3

-2

-1

0

1

2

3

4

1000

1100

1200

1300

1400

1500

1600

1700

US ISM manuf . momentumMSCI World(R.H.SCALE)

Equity Top Picks

10

Equity Top Picks

Top Picks outperformance goes from strength to strength

The Top Picks Portfolio is a selection of the best global Buy recommendations compiled by the Equity Research Team at Bank J. Safra Sarasin. The portfolio comprises twenty to thirty equities, which are regularly monitored and adjusted. In particular, financial and consumer discretionary stocks were instrumental in boosting the portfolio’s performance last month. The outperformance since the beginning of February is 0.7 percentage points.

Changes to the Top Picks Portfolio Due to the portfolio’s strong performance since the last publication in January 2014, we have made only one change to the portfolio. The following security was re-moved from the Top Picks Portfolio: ADT Corporation The company published some surprisingly soft figures for the first quarter of fiscal year 2014 (October-December 2013). In particular, customer additions, which were al-most 10% lower than last year’s figure and led to a con-traction in its customer base, disappointed investor ex-pectations. This has fanned fears that ADT might be forced out of the market by telecommunications and ca-ble companies. The price subsequently came under strong downward pressure, and ADT was removed from the portfolio as part of our risk management system. Thanks to its unique position in the area of electronic se-curity systems – ADT is the outright leader in North Amer-ica with 25% market share and offers a broad range of services with «ADT Pulse» – we consider concerns about the viability of its business model unfounded and we maintain our «Buy» rating on ADT. But given the an-nouncement of higher advertising expenditure, the com-pany faces a lean period in the short term.

Performance of the Top Picks Portfolio The Top Picks Portfolio recorded a total return in Swiss francs of 24.7% and a relative outperformance of 4.1 percentage points against the benchmark index (Euro Stoxx 50, S&P 500, SMI and MSCI World weighted ac-cording to the bank’s research universe) since its launch in February 2013. [email protected] Outperformance of Top Picks since launch (in %)

Source: Bloomberg, J. Safra Sarasin

Current Composition of the Top Picks Portfolio

Source: Bloomberg, J. Safra Sarasin

0

5

10

15

20

25

30

Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14

Benchmark index Top Picks

Consumer Discretionary Adidas Daimler Chrysler Richemont Swatch

Consumer Staples Ahold Estee-Lauder Henkel Reckitt Benckiser

Energy Schlumberger

Information Technology Microsoft SAP

Materials Clariant Praxair

Financials Allianz Axa Swiss Re UBS

Health Care Basilea Bayer Novartis Roche

Industrials Adecco Bucher Caterpillar Møller-Maersk

Credit Strategy

11

Credit Strategy

The hunt-for-yield is no longer blind

The reversal of the QE technicals and richness of credit spreads mean that the global hunt-for-yield is becoming less indiscriminate. In this context, we think EM credit spreads need to adjust wider before being attractive rela-tive to DM. In the meantime, European high-beta credits still offer the best risk-adjusted return prospects.

The deterioration of EM corporate credit metrics… The two latest episodes of EM-driven weaknesses (May/June 2013 and January 2014) suggest that EM are now suffering from the same problems that Europe had three years ago, i.e. public and private debt overhangs, combined with capital outflows. In particular, indebted-ness of EM companies has risen dramatically since 2008, with the amount of outstanding corporate bonds surging from $1.3tr to $3.3tr. Over the same period, the weak macro-economic backdrop has exerted continued pressure on top and bottom lines, resulting in a substan-tial deterioration in credit metrics, such as net leverage, cash-to-debt ratio or interest coverage. The output-to-capital ratio of EM corporates has also plunged to histor-ically low levels in many countries, indicating that the ef-ficiency of capital expenditures has been very poor, something no longer likely to please EM creditors. …has been overshadowed by the QE inflows Until very recently, markets have largely ignored this dete-rioration in EM corporate fundamentals. This is essential-ly because EM bonds have benefited from the Fed QE programs and the ensuing global search for yield, which has blindly pushed many investors out of US Treasuries into anything high yielding. Yet, the start of the QE taper-ing in early 2014 might have triggered a turning point where foreign investors realize the actual vulnerability of EM corporate debt to the ongoing challenges of subdued nominal growth, continued FX pressures and potentially higher central bank rates - a combination that could in-deed generate a negative feedback loop and further un-dermine EM companies’ ability to service their debt. But risk appetite for EM credit might fade… Against this backdrop, investors will likely start scaling back credit to EM at a time when EM corporates are ex-pected to issue record-high levels of new debt. Moreover, despite the strong sell-off in May/June last year, asset al-

location data show that EM bonds are still over-owned by global investors, leaving ample room for more outflows (cf. Chart). Given this unfavorable, rising imbalance be-tween supply and demand, we think EM credit markets will come under more selling pressure in the course of 2014 and we doubt that the superior carry will be enough to prevent further underperformance relative to developed markets (DM). Global asset allocation (rebased to 25% in Jan 2009)

Sources: EPRF, RBS

…as the search-for-yield becomes less blind In short, we expect the hunt-for-yield to continue globally, but we believe it will become less indiscriminate than in the previous years, with investors paying increasingly at-tention to the fundamental and technical picture as well as risk-adjusted return prospects. With this in mind, we think Asia offers the best value within EM credits. In DM, we continue to favor Europe over the US. Within European credits, we still see further outperformance of High Yield, peripheral credit and subordinated debt. Yet, the need of greater selectivity means that within corporate subordi-nated, we prefer low cash price, vintage issues. In bank subordinated, we prefer old-style Tier 2 and only selected contingent convertible or Additional Tier 1 instruments. [email protected]

10%

15%

20%

25%

30%

35%

40%

1Q09 1Q10 1Q11 1Q12 1Q13 1Q14EM FI EM Equities DM FI DM Equities

Market & Forecast Overview

12



Macroeconomic outlook in % Indicator Unit 2013f 2014f

USA Economic growth ch an. 1.9 2.8

Inflation (CPI) ch av. 1.5 1.7

Euroland Economic growth ch an. -0.4 1.3


Japan Economic growth ch an. 1.6 1.3


UK Economic growth ch an. 1.8 2.1


Switzerland Economic growth ch an. 1.9 1.9

Inflation (CPI) ch av. -0.2 0.3

China Economic growth ch yoy 7.7 7.2

Global Economic growth ch yoy 2.7 3.3

EM Economic growth ch yoy 4.3 4.5

Interest rates 20 Feb 2Q14 4Q14

USD Fed Funds 0.25 0.25 0.25

2y Bond 0.33 0.35 0.60

10y Bond 2.75 2.60 2.90

EUR Repo 0.25 0.10 0.10

2y Bond 0.11 0.15 0.30

10y Bond 1.70 1.70 1.90

JPY O/N call 0.09 0.05 0.05

2y Bond 0.06 0.10 0.10

10y Bond 0.60 0.70 0.80

GBP Base Rate 0.50 0.50 0.50

2y Bond 0.55 0.45 0.60

10y Bond 2.80 2.70 2.90

CHF 3m Target 0.00 0.00 0.00

2y Bond -0.07 0.00 0.10

10y Bond 0.97 1.00 1.30

Foreign exchange rates 20 Feb 2Q14 4Q14

CHF USD - CHF 0.89 0.90 0.94

EUR - CHF 1.22 1.22 1.24

GBP - CHF 1.48 1.45 1.46

USD EUR - USD 1.37 1.36 1.32

USD - JPY 102 100 105

USD - CNY 6.08 6.07 6.03

EUR EUR - GBP 0.82 0.84 0.85

EUR - SEK 8.78 8.95 8.80

Equities Index 20 Feb June 14 Dec 14

US S&P 500 1840 1700 1850

JP Nikkei 225 14449 14400 16000

MSCI EM$ 951 900 1050

UK FTSE 100 6813 6100 7000

Euroland DJ E Stoxx 319 270 310

DE DAX 9619 8500 9200

CH SMI 8383 7600 8400

Equity Sector Allocation

Asset Allocation Asset class Weight Relative attractiveness within the categories

Equities – Ind. countries Emerging markets Large caps Small caps

+ – + –

Bonds = Gov. bonds Corporate bonds High-yield bonds Emerging markets

– – = ++ =

Alternative assets + Money market Convertible bonds Other alternatives

= + –

Source: J. Safra Sarasin

Health CareInformation TechnologyInsurance

BanksConsumer StaplesEnergyReal EstateTelecommunication ServicesUtilities

Consumer DiscretionaryIndustrialsMaterials

Overweight

Neutral

Underweight

Abbreviations

13

Abbreviations

A actual value abs.ch absolute change ASW asset swap spread avg. average bn billion bp basis points corp. corporate CPI Consumer Price Index Div. yield or DY dividend yield E estimate EBIT earnings before interest and taxes EPS earnings per share EV/EBITDA enterprise value to earnings before interest, taxes,

depreciation and amortisation excl. excluding FY financial year GAAP Generally Accepted Accounting Principles GDP gross domestic product GNP gross national product gov. government m million M&A Mergers & Acquisitions mavg moving average N.A. not available OAS Option Adjusted Spread. Risk premium to government bond curve (in EUR: German

Bunds) adjusted for eventual embedded optionalities. p.a. per annum P/B price-to-book ratio P/E price-to-earnings ratio P/NAV price/net asset value R&D Research & Development R.H. Scale right hand scale ROE return on equity SAA Strategic Asset Allocation, long term strategy based on investment profiles TAA Tactical Asset Allocation; short term strategy based on return/risk expectations vs. versus yoy year over year

Contacts

Authors

Philipp Bärtschi, CFA Tel. +41 (0)58 317 35 72

CIO Private Clients [email protected]

Dr. Alessandro Bee Tel. +41 (0)58 317 32 83

Fixed Income Strategist [email protected]

Ursina Kubli Tel. +41 (0)58 317 32 80

Forex Strategist [email protected]

Gabriel Bartholdi, CIIA Tel. +41 (0)58 317 32 54

Equity Strategist [email protected]

Benoît Robaux Tel. +41 (0)58 317 37 91

Head Credit Research [email protected]

Dr. Michael Studer Tel. +41 (0)58 317 37 45

Equity Research [email protected]

General disclosure information: The detailed disclosure information for companies mentioned in this publication can be found in our publications "Eq-uity Note", as well as in the "Fact Sheet" of the "Equity Research". Important information This publication, issued by Bank J. Safra Sarasin Ltd (“Bank”) is based on publicly available information, information sources and data (“the information”) whose reliability is beyond question. Nonetheless, the Bank accepts no respon-sibility, either express or implied, for errors or incompleteness of the information provided. Possible errors in this in-formation do not constitute grounds for liability, either directly or indirectly. In particular, neither the Bank nor its shareholders or employees are responsible for the accuracy or continuing accuracy of the opinions, appraisals, con-clusions, plans or details of investment funds, their investment strategies, the economic environment, the market, competitive or regulatory environment, etc. Even if this publication has been issued in the context of an existing con-tractual relationship, the Bank’s liability is restricted to gross negligence or wilful misconduct. Furthermore, the Bank accepts no liability for minor errors of fact. In any case, the liability of the Bank is limited to typical expectable damag-es, and liability for any indirect damages is expressly excluded. Insofar as factual information and the opinions of third parties (interpretations and estimates) are presented, the rele-vant sources are indicated. Our own value judgements (projections and forecasts) which reflect the outcome of work undertaken by the Bank's Research department, are not expressly marked or indicated. The substantive principles and benchmarks underlying our own value judgements are set down in our research methodology principles. In producing the research, the following valuation principles and methods were applied: The analysts’ investment de-cisions are based on an analysis of the business model of the company concerned, the market in which the company is active, and general market characteristics (Porter analysis: barriers to market entry, bargaining power of suppliers, bargaining power of customers, threat of substitute products, level of competition). The analysts compare their results with current market expectations and the corresponding data for the company’s peer group. Different valuation models are used depending on the industry. Among the most important of these are the price/earnings (P/E) ratio, price-to-book (P/B) ratio, enterprise value-to-sales (EV/sales), enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA), enterprise value to earnings before interest and tax (EV/EBIT) and dividend yield (ratio of dividend to current share price). We do not set any share price targets for companies covered by our Equity Re-search. The present financial analysis hast been prepared in compliance with the «Directives on the independence of financial research» published by the Swiss Bankers Association in January 2008. This publication is a marketing communication from the Bank, which is purely for information purposes and which does not claim to represent a comprehensive portrayal of product characteristics. This publication does not constitute a quotation, an offer or a solicitation of an offer for the purchase or sale of an investment or other specific product, and is not a substitute for obtaining advice and a risk appraisal from your personal advisor – which we expressly rec-ommend before making any investment decision. The Bank may at any time perform services to buy, sell, subscribe to or redeem funds which are mentioned in this publication, or act as a client or authorised representative. It is possible that the Bank may receive sales commissions for portfolio management fees in respect of certain funds referred to in this publication. Such fees are for the use of the Bank sales channel and do not generally accrue to the investors. Where future price trends are presented in the context of this publication, these trends and/or the recommendations derived from them are based, amongst other things, on forecasts of future trends on the financial markets and corre-sponding simulations. These forecasts and simulations are in turn based primarily on past experience and concrete historical performance data. We would like to explicitly remind you that historical performance data, forecast calcula-tions and other simulations are not a reliable indicator of future trends. We can therefore give no guarantee that the forecast values from the calculation models will actually be reflected in fact. Fees and costs are not taken into ac-count in the performance calculation.

Although the Bank has taken steps to avoid or disclose conflicts of interest, the Bank can give no guarantees in this regard. Therefore the Bank accepts no liability for damages arising from such conflicts of interest. If the organisational or administrative measures taken by the Bank should, on the basis of reasonable judgement, be deemed to be insuf-ficient to guarantee the avoidance of a risk of damage to client interests, then the Bank will unambiguously clarify the type and/or cause of the conflicts of interest to the client. It impossible to rule out the possibility that a business connection may exist between a company which is the subject of research and a company within the J. Safra Sarasin Group, from which a potential conflict of interest could result. As a client, you will be informed of any relevant potential conflicts of interest in financial research distributed by the Bank. Discrepancies may emerge in respect of our own financial researches from the twelve months preceding publication, relating to the same financial instruments or issuers. The Bank is regulated by the Swiss Financial Market Supervisory Authority (FINMA). Investment Before you make an investment, we recommend that you obtain detailed information about the product in question. Investments should only be made on the basis of the current prospectus. This document must not be transferred to persons in a country other than the country where you received said document. If persons resident in other countries receive this report, then they must observe the applicable sales restrictions for the products in question. The financial analyses/research findings presented in this report were not disclosed to the stock issuer prior to its distribution or publication. Unless specified otherwise, the stock issuer’s most recent financial statements and publi-cally accessible information such as press releases, etc., serve as the data sources for the financial analyses pre-sented in this report. This publication first appeared on 21st February 2014. Updates are not envisaged. Opinions expressed in the publica-tion and prices quoted can be changed at any time without prior notice. The entire content of this publication is protected by copyright law (all rights reserved). The use, modification or dupli-cation in whole or part of this document is only permitted for private, non-commercial purposes by the interested party. When doing so, copyright notices and branding must neither be altered nor removed. Any usage over and above this requires the prior written approval of the Bank. The same applies to the circulation of this publication. The prices cited in this publication are the closing prices on the corresponding markets. The detailed rating infor-mation for companies mentioned in this publication can be found in our publications "Equity Note", as well as in the "Fact Sheet" of the "Equity Research" Bank J. Safra Sarasin Ltd

J. Safra Sarasin Research

Löwenstrasse 11

P.O. Box

CH-8022 Zürich

Switzerland

T: +41 (0)58 317 34 76

F: +41 (0)58 317 32 66

[email protected] © Copyright Bank J. Safra Sarasin Ltd. All rights reserved.

Distribution in UAE:

Limited is duly authorized and regulated by Dubai Financial Services Authority (DFSA). Distribution in Qatar:This information has been distributed by Bank Sarasin-Alpen (Qatar) LLC. Bank Sarasin-Alpen (Qatar) LLC is authorized by Qatar Financial Centre Regulatory Authority (QFCRA). Related �nancial products or services are only available to Business Customers as de�ned by the Qatar Financial Centre Regulatory Authority.

global snapshot monthly · 2014. 7. 11. · analysis shows that defensive equity sectors tend to...

Documents