cic perspectives 02 2015 english

Economic perspectivesTwo key events took financial markets by surprise at the start of the cur-rent year. Firstly, the SNB unexpectedly abandoned the minimum ex-change rate against the euro. The direct reaction on Swiss financial mar-kets was correspondingly vehement. The strong rise in the value of the Swiss franc is undermining the corporate profit outlook and suggests that the economy will weaken (consumer growth of 0.8% for 2015, previ-ously 1.8%), with some forecasters even pointing to the possibility of a recession (ETH Swiss Economic Institute: -0.5%). Unemployment is also expected to rise in the coming months (consensus rate of 3.3% for 2015), while consumer prices are likely to decline on account of cheaper im-ports.

Timing and scope of central bank measures took market watchers by surprise

The ECB has now presented its billion-strong programme to buy government bonds. This flood of liquidity is designed to promote lending within the real economy, thus boosting business activity within the Eurozone. The weak euro and low oil prices are supporting this objective. Real economic growth is expected to reach 1.2% this year, while inflation may turn negative, at least temporarily.The US economy remains robust (consensus growth of 3.1% for 2015). Because the participation rate and hourly wages have been rising of late, inflation is expected to pick up. However, the strength of the US dollar could dampen the economy and defer the anticipated hike in base rates. (robol)

IMPRINT Editor: Bank CIC (Switzerland) Ltd.,Marketing and communication,Marktplatz 11-13, P.O. Box 2164001 Basel, Switzerland, T 0800 242 124Authors: René Bachmann (rb), John James Bayer ( jb), Jürg Bützer ( jub), Luca Carrozzo (cal), Mario Geniale (mge), Christian Meier (mch), Robert Olloz (robol), Olivia Stählin (ost) Editorial deadline: 16.03.2015

02/2015 QUARTERLY MARKET OUTLOOK

DEAR READER

The Swiss National Bank (SNB) had long defended the euro/franc exchange rate of 1.20 with the aim of protecting the Swiss economy. On 15 January it abandoned this strategy. For over three years, high demand for Swiss francs meant that the central bank was obliged to spend billions intervening on the cur-rency markets. It filled its balance sheet to the brim with purchased euros.

In March the European Central Bank (ECB) launched its quantitative easing programme, modelled on the American programme. Over the coming 20 months this will see it purchase government bonds worth EUR 60 billion each month. The aim is to supply the market with further liquidity. Swiss currency guardians were forced to capitulate under the pressure of the looming euro flood and abandoned their strategic intractability in the face of the ECB measures.

As a consequence, the SNB is now endeavouring to smooth not just the technical exchange rate turbu-lence but also internal unrest. For their part, Swiss companies have been taking measures to ease their cost structures, which in many cases had already been fraught. They are working hard to ameliorate the effects of the bitter pill administered by the SNB. Hopefully the Swiss economy will not be shipwrecked by this decision.

Mario Geniale, Chief Investment Officer

CIC_perspectives_0215_ENv03.indd 1 19.03.15 09:20

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SWISS EQUITIES15 January 2015 will long remain in the memory of Swiss equity investors. The Swiss National Bank’s abandonment of the minimum exchange rate against the euro caused prices to plummet. The leading SMI index lost up to 15% within two days. For many observers, the equity market’s rapid re-covery was just as remarkable. Our view of the Swiss equity market is neutral and we favour large and broadly diversified companies, above all the three heavyweights Nestlé, Roche and Novartis. We also favour dividend-strong stocks such as Zurich or Swiss Re which offer a possible alternative for bond investors. (mch)

EUROPEAN EQUITIESEverything speaks for European equities. With its gigantic government bond purchase programme, the ECB under Mario Draghi has launched a campaign against recession and deflation in Europe. Investors are hoping that the additional liquidity and the low interest environment will further boost the relative attractiveness of equity securities. We share the general stock market euphoria only to a limited extent. On the one hand the EURO STOXX 50 has already gained around 14% since the start of the year while at the same time investors are largely ignoring the latent political and eco-nomic problems. When it comes to stock selection, attention remains fo-cused on strongly capitalised corporations such as Allianz, GDF Suez and Royal Dutch Shell. ( jub)

US EQUITIESCurrent US economic forecasts for 2015 are upbeat: Gross domestic product is set to increase to 3.1% while the unemployment rate declines to 5.4%. In addition, core inflation is moving in the direction of 1.5%. All in all, the indicators suggest robust economic growth. On this basis the positive performance of American equity indices appears only logical and consistent. However, valuations are very high. Possible base rate increases and the Nasdaq, which has broken through the 5,000-point barrier, are encouraging us to remain cautious. For this reason we recommend quality: General Electric, United Technologies and Abbott. ( jb)

BONDSBond markets in Switzerland and Europe came under considerable pressure at the start of 2015. The SNB’s abandonment of the minimum exchange rate pushed Swiss interest rates into negative territory, at times with maturities of up to 10 years. Mario Draghi’s announcement of the bond purchasing programme also put interest rates in the Eurozone under pressure. The past has shown that interest rates come under pressure when quantitative easing is announced. Following the actual launch of the programme, how-ever, they then tend to bounce back. Within an environment of this nature the inclusion of higher interest bonds in the portfolio mix can pay off. This is because these bonds respond less markedly to interest rate changes. (muc)

European equity markets got off to an impressive start. This is not surprising, for the ECB will be stepping on the gas with its huge government bond purchase programme. Yields are rock-bottom, and investors are being attracted by the additional liquidity and appeal of equities. Unsurprisingly, the US market posted a hesitant start to the year. The Fed has long been looking to slow the robust domestic economy by raising interest rates. However, further rises in the value of the USD are discouraging the Fed from imple-menting a more restrictive monetary policy. Equity markets are not bothered by this, and the party can continue for the present. Cheers! ( jub)

The Markets “... the party can continue for the present”

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Perspectives 02/2015 Bank CIC (Switzerland) Ltd.

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DEAR READER

At last my metier as a currency trader has been restored. As most of my clients focus on the euro, the past three years were relatively quiet on the currency trading front. Now everything has changed dramatically. Vola-tility has rocketed since 15 January, not just in terms of the euro and Swiss franc

exchange rate. This is putting some spice back in the lives of currency traders. There are a great many opportunities within broad bandwidths. As the phrase “back to the future” suggests, currency traders are suddenly very much in demand again.

The current situation is ideal in particular for investors with higher risk tolerances. Due to the high volatilities, clients are able to benefit from larger premiums when selling options. For “smaller” investors, tailored structured products are an attractive pros-pect. These generate respectable yields on investments starting from a countervalue of just CHF 50,000.00. The opportunity or risk consists of receiving an alternative currency at an exchange rate that is more favourable than the underlying forward price.

I am currently often being asked whether other currencies exist, apart from the standard currencies euro, dollar or pound, that could be interesting in currency trading terms. In recent years, many emerging economy currencies have exerted a magical attraction on investors. They promised higher yields compared to developed

countries. However, interest rates of 7% to 12% do not come without risk. And this tends to consist of a currency that is susceptible to devaluation. For example, if you had ful-ly subscribed a bond in South African rand (ZAR) in 2009 with an interest rate of 9%, you would have had to buy the ZAR at a price

of 0.1400 against the CHF. Today, six years later, the exchange rate is 0.0820, corre-sponding to a currency loss of 42%. At the same time, the interest rate of 9% per annum has also lost value. At the end of the day, this is a zero-sum game. On average, the extra yield is not enough to offset the higher risk.

the “buy-and-hold” strategy is no longer what is needed

This consequently means that the decision to invest in “unconventional” currencies always depends on the risk tolerance of the investor. For example, if you invest in a so-called commodity currency such as the Norwegian krone (NOK) which correlates strongly with the oil price, you make your investment dependent above all on move-ments in the price of oil. You are then con-fronted by volatile and unpredictable markets. In such cases it is important to keep a close eye on the investments at all times. This is because the “buy-and-hold” strategy is no longer what is needed.

At the same time, there remain questions about the long-term outlook for the euro. I do not think that the euro will survive in its present form. The Maastricht criteria are not being adhered to by the “big players” in Europe. Yet budget reforms are being im-posed upon the “small players”. It therefore

comes as no great surprise that the euro has been suffering from a massive loss of confi-dence for many years. Europe will only be viable if each country regains sovereignty over its own currency and monetary policies and is accordingly able to respond autono-mously to the varying economic develop-ments. The coming generations will be left to pick up the pieces. One day, our grand-children’s history books will relate: “The European Union introduced the so-called euro in the year 1999. Twenty years later the currency was abolished again due to massive social unrest in Europe. This proved to be a successful move: After a relatively short period of time, the economic locomotives regained their momentum and the quality of life in Europe improved massively.”

The column reflects the personal opinion of the author.

René Bachmann is responsible for currency tradingat Banque CIC (Suisse). He has many years’ experiencein this area and has been with the bank for twenty years. René Bachmann is a member of the Management Board.

The Column with René Bachmann, head of foreign exchange trading


Back to the future


3a investment savings plan: Additional returns at a glanceRetirement provision with securities promises better earnings prospects in the long term within the scope of pillar 3a. Banque CIC (Suisse) is the only bank to offer you an open investment savings plan with an individual mix taken from 24 different retirement funds from five providers. Find the retirement fund that best meets your needs: www.wertschriftensparen.ch.

The chart shows the average three-year returns of the different fund categories for the investment savings plan and 3a retirement account. (Reference date: 27.02.2015, basis: 24 retirement funds, sources: Bloomberg, VZ Vermögenszentrum)

Convertible bondsWithin the animal and plant kingdom there are many living things that cannot be clearly classified to a particular species. Convertible bonds in the investment field are similarly difficult to categorise. They represent two different categories: They utilise the upside price potential of equities and are coupled to the defensive characteristics (limiting the loss risk) of bonds. This means that this investment class can be interesting for investors from both perspectives. In historical terms, an attractive risk-return ratio can be expected. The in-house CIC CH - Convert Bond Fund achieved an attractive per-formance of over +9% between the start of the year and the end of February 2015. It is therefore currently topping the list of all European convertible bond funds. Full details of the investment funds offered by Banque CIC (Suisse) can be obtained at www.cic.ch/investment-funds or by arranging a personal discussion with your client advisor. (ost)

Inflation will materialise sooner or later The ECB has been flooding the markets with liquidity since the start of March. The ECB will be buying bonds worth EUR 60 billion every month until September 2016. This is designed to combat deflationary tendencies within the Eurozone while at the same time kick-starting the European economy. With such low inflationary expectations and the ECB’s absolute determination to rekindle inflation, it certainly makes sense to consider products that profit from rising purchasing power. So-called inflation-linked bonds are currently trading at record lows. The opportunity-risk profile of these bonds is at present clearly on the side of opportunities. Talk to your client advisor about this interesting investment oppor-tunity. (cal)

DISCLAIMER The expected returns and estimated risk are not reliable indicators of future profits or future risks. The effective returns can deviate significantly from these values, and past positive perfor-mance is no guarantee of future returns. The conditions contained in this document are purely indicative and subject to amendment at any time. Bank CIC (Switzerland) Ltd. gives no guarantee as to the reliability and completeness of this document and rejects any liability for losses which may result from its use.


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cic perspectives 02 2015 english

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