markets review investment outlook...march 2016 markets review & investment outlook rue du...

March 2016

Markets Review

&

Investment Outlook

Rue du Conseil-Général 3-5 • CH - 1205 Geneva • [email protected] • Tel + 41 22 316 01 01 • Fax + 41 22 316 01 02 • www.infinum-partners.com

INFINUM PARTNERS

2

Index

I. Markets Review

• 2015: A disappointing year with few green spots

• 2016: Starting on a roller-coaster ride

II. Key Issues

• A world in a subdued economic growth environment

• Driven by central bankers experimenting unconventional measures

• Under pressure by adverse deflationary forces

• Exposed to a deteriorating corporate health

• Mired in delicate political situations

III. Macro conclusions

IV. Markets Perspectives

• Equities

• Bonds

• Currencies

• Commodities

V. Asset Allocation in Review

3

I. Markets Review


• 2016: starting on a roller-coaster ride

Asset Classes

4

Source: MarketMap, as of 31.12.2015

In 2015, only a few asset classes were able to deliver positive performances Equities outperformed, while the long run appreciations of bonds has halted

• Japanese & European Equities,

were the only asset class to deliver positive returns, while still supported by accommodative central bank policies.

• US Equities delivered their worst performance since the financial crisis in 2008, as the Fed started tightening its monetary policy

• Oil lost a third of its value, hit by the global supply-demand imbalance. US crude oil inventories reached 486.5 mbrls, a record level not seen in January in at least 80 years.

• Commodity prices continued to slide on China weakness. China’s imports fell 13.2% in 2015, sparking fears of a deepening slowdown in the world’s largest consumer of raw materials.

• Emerging Markets, most of them, raw materials exporters, were hit hard by lower prices.

9.1%

3.8%

-0.4%-0.7%-0.8%-1.2%-1.4%

-5.2%

-10.3%

-18.1%

-26.6%

-36.3%-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Equities by geographic zone…

5

Source: MarketMap, MSCI sectors as of 31.12.2015

The Eurozone markets outperformed thanks to central banks interventions

• Japanese & European Equities, were among the best performers still supported by accommodative central bank policies:

• Europe performed strongly supported by the ECB’s Quantitative Easing, as well as more attractive valuations than in the US.

• Likewise, Japan outperformance was driven by Abe’s commitment to pursue QE.

• US Equities delivered their worst performance since the financial crisis in 2008, as the Fed started tightening its monetary policy. Also to blame rather rich valuations across most sectors but the depressed energy and materials sectors.

• Emerging markets were sharply down essentially impacted by the Chinese slow down and a stronger USD.

• China equity bubble burst in the summer after an unsustainable surge in stock prices fuelled by retail investors and excessive leverage.

10.2%

9.6%

9.1%

3.8%

-0.7%

-1.4%

-4.9%

-18.1%

-25% -15% -5% 5% 15%

SHANGHAI Comp

DAX

NIKKEI 225

EURO Stoxx 50

SP 500

MSCI WORLD

FTSE 100

MSCI EM

by sector

6

Source: MarketMap, MSCI sectors as of 31.12.2015

Sector Performance was mixed, as investors search for a catalyst

Technology outperformed pushed namely by the so-called FANG stocks

Healthcare saw a continued increase in valuation led by the strength of the M&A cycle and Biotechs which account for 20% of the sector.

Consumer Staples & Discretionary,

confirmed their resilience with a solid performance supported by improvements in US labour market and consumer confidence index that stands now, at 101.4 (vs hist. avg 91.3)

Utilities, Financial and Real Estate

underperformed, dragged down by Fed’s move toward a rate-tightening, that has historically affected high-dividend-yielding sectors, bank revenues and R.E. developments.

Energy & Materials have significantly underperformed, due the weak oil and commodity prices, which have sunk on oversupply for oil and much lower than anticipated Chinese demand for commodities.

6.1%5.4%4.9%4.7%

0.5%

-1.2%

-3.2%-4.8%

-8.4%

-16.6%

-25.0%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

and by currency

7


The currency war still very much in place. U.S. Dollar standing tall against global currencies

• EUR has weakened further

against all major currencies du to the ECB Quantitative Easing and Greek exit fears.

• While the USD resumed its

charge against most currencies. In particular against emerging market currencies (the Real was down 48%) and commodity currencies such as AUD and NOK.

• The Yen kept surprisingly stable as the Bank of Japan did not announce an additional QE yet.

• CHF strengthened against all major currencies after the BNS dropped its peg policy in Q1.

48.6%

19.0%

12.4%11.4%

6.7%5.7%5.5%

0.4%

-5.1%

-9.6%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

USD/BRLUSD/NOKUSD/AUDUSD/EURUSD/SGDUSD/GBPUSD/RMBUSD/JPYEUR/GBPEUR/CHF

8

I. Markets Review


• 2016: starting on a roller-coaster ride

Beginning of 2016

9


Extreme movements within only two months or so… Clearly the markets are clueless on the future outlook.

• Markets are confused with their interpretation of future economic outlook.

• Balanced between deflationary pressures and a recession or a modest growing cycle and a reflationary process…

• Four extreme movements in about two months only.

• It sets a worrying pattern for the year ahead.

1800

1850

1900

1950

2000

2050

2100

2150

30-Oct-15 30-Nov-15 31-Dec-15 31-Jan-16 29-Feb-16

S&P 500

-11.57%

+4.35%

-5.73%

+12.07%

Beginning of 2016

10


One of the worst starts of the year on financial markets

• After of a strong recovery following last August dip, markets turned negative at the beginning of January pricing of full recession following Mrs Yellen’s interest rate hike.

• Equities lost ground before finally ending at par at the end of March.

• Bond and treasuries move up in a safe heaven reflex.

• Gold the best performer YTD, almost up 20%.

17.9%

13.3%

6.0%4.0%3.6%

2.4%1.6%0.3%

-2.5%

-6.3%

-12.1%

-24.3%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Asset Class : 2016 (YTD)

Beginning of 2016

11


Correction across all countries and sectors…

• Financials hit hard in particular with potential stress on the energy market and renewed concerned about profitability in a NIRP environment

• Profit taking and rotation in the best two sectors over the past years: healthcare and technology

• Even the telecom sector suffered losses although minor.

6.7%

5.6%5.2%

4.1%

2.4%2.3%1.9%

-2.5%-2.6%

-6.4%

-9.9%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

MSCI WORLD % returns - 2016 (YTD)

12

II. Key Issues



• Driven by central bankers experimenting unconventional

measures, whose relevance is in doubt



Subdued top-line growth…

13

A world of slower top-line growth.

• A synchronised slowdown across all regions after the V shape recovery post 2008 financial crisis.

• China and other EM saturating after an exuberant growth over the past two decades (overcapacity following overinvestments)

• DM in a mature cycle with an aging population and a continued deterioration in productivity

• Developed markets are growing between 0.5% to 2.5% while average growth over past 30 years have been around 3.5%

• No catalyst to stimulate growth. No major crisis / war in DM since World War II. No significant expansionary fiscal policy.

Subdued top-line growth…

14

But a strong labour market supporting consumption and improving household financials

• US unemployment rate falling below 5% supporting consumption.

• But a sharp decrease in productivity due to a collapse in investments by corporates.

• The US probably close to full employment.

• Significant improvement in household balance sheet:

• Household debt to disposable income ratio is at a 13Y low.

• The housing market is also solid with residential vacancies at its 25y low.

• Clearly wages are under pressure and inflation will start picking up.

• FED most likely pushed to increase rates.

• The US economy is an advanced stage of the economic cycle: recession looming ahead?

15

II. Key Issues







Deflationary pressures

16

Falling oil price decreased the value of proven reserves by $135.- tr. i.e. 140% of world GDP.

• WTI falling over -75% from peak (June 2014, $107.65/brl.) to trough (Feb. 2016, $26.03/brl.)

• The reason is straight forward: excess supply boosted namely by US shale oil production, which added over 4 mbd to world production.

• Oil prices might have found a bottom now in the frame of discussions between OPEC (circa 40% of supply of which 13% from the Saudis) and non-OPEC members (60% of supply of which the US accounts for 22%) to curb excessive supply.

• Oil demand remains very resilient: 1%-2% annual growth since 2012

Oil price bottoming out

17

• Qataris, Saudis, Russians & Venezuelan have agreed to freeze their output , to curb excessive supply, although Russian and Saudi production is already at peak levels.

• US production is finally declining: -500k bpd and US rig count is down by over 70%.

But :

• U.S. shale producers have increased productivity dramatically.

• Inventories remain very high with stockpiles at record high of 532m brls.

• Iran plans to ramp up production adding 1m bpd.

We expect oil prices to stabilise around 30-40 $pb in the next twelve months, then gradually moving up towards the 50 level.

Oil price expected to bottom out but remain very volatile as dependent on political factors

Oil weights on the economy

18

Oil prices have been driving stock markets lately: correlation picking up

• Sharp decrease in capex and opex from major oil producers and energy and material players who contribute to about 37% of global capex. This is affecting world growth. The market is initially pricing the negative.

• At a later stage, low commodity prices should however benefit to consumers: in DM consumption accounts for ~ 70% of GDP

• 70% of EM are oil-importing countries and low oil prices are supporting trade surplus.

• In the long run, lower oil prices should be supportive to global growth. Therefore we expect the correlation between oil and stocks to fade in the future.

China Slowdown

19

Chinese economic slowdown, growth expectation were revised down to 5-6%

• China is now the third largest economy in the world ($12.5 tr GDP) behind the EU and the US and one cannot expect it to grow at double digit as in the past.

• It is going through a fundamental transition from an industrial power to a service oriented economy.

• Although Chinese growth is expected to slow down to about 5%-6%, China accounts for 40% of world growth,15% of world GDP and 25% of global capex.

• It is facing though structural constrains:• Decrease in the active population /

aging population => increase in labour cost;

• Over investment and overcapacities• Decrease in the rural exodus• Decrease in productivity• Environmental issues and change in its

model

• No expectation of a hard landing at moment. The real estate sector (15% of GDP) is strengthening again, but…

China Debt Level

20

China debt level at a worrying level: 270% of GDP

• China has been fuelling its economy by using the credit pump intensively.

• NPL have therefore increased significantly. Credit quality is deteriorating, as default rate rises.

• And the Loan-to-Deposit Ratio continues to grow

• Increasing shadow banking not subject to the same rules as the banking sector.

Chinese Monetary Policy

21

PBoC facing the impossible trinity: currency, capital control, interest rate

• PBoC used its currency to stimulate export by letting the RMB weakening (-15% sincemid-april)

• It is exacerbating capital outflow ($1 trn in 2015) and further putting downwardpressure on the RMB.

• PBoC position challenged to control the fall of the RMB, capital outflow and keepstimulating the economy.

• It had to tap into its reserve to control the fall of the RMB, pushing currency reserves close to the IMF lower requirements.

• We do not expect the PBoC to use extreme devaluation to boost its economy. It would create further capital flee and tarnish its credibility internationally in a move to become a more open economy.

• The central bank can still use other tools to bolster its economy (interest rates, reserve requirements, fiscal policies,…)

China’s Growing Importance

22

It is interesting to note the growing relevance of China on world stock markets.

See below the striking correlation between the World MSCI and the RMB:

23

II. Key Issues







The Central Bank Experiment

24

Monetary policies and the key role of Central Bankers

• Central banks seem again the last resort backer to support the economy. They have trimmed down interest rates: ZIRP (zero interest rate policy)…

• …and they have injected significant amount of liquidities in the economy with the view to stimulate growth: quantitative easing.

• The FED is now ahead of the cycle and has started tightening monetary conditions: first rate hike since 2006 (+0.25%), when rates were at 5.25% before staying at zero for the past seven years.

• Most other countries are lagging and are now using NIRP: negative interest rate policy. Denmark (2012), EU, Sweden, CH (2014) and Japan (2016).

• How effective are those policies?


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• Lower interest rates have been effective to weaken national currencies to a certain point. But with most developed and main trading countries such as JP, US, EU and China trying to weaken their currency, its effect has neutralised. This is ultimately a zero sum game and can only be a temporary cure.

• In Japan, the JPY has strengthen sharply despite the BOJ announcement of negative interest rate.

• The strong USD fuelled by tightening expectations from the FED has been clearly hurting exports in the US. A strong USD is equivalent to a tightening environment by increasing interest rate.

Difficult to establish the true impact of monetary policies on the economy…


26

… and probably easier to assess its impact on financial markets.

• Credit stimulus is reaching its limit, as low or negative interest rate can give the wrong signal and turn into a deflationary indicator?

• Inflation anticipations are at their lowest levels ever both in the US and EU.

• Liquidities acting as the financial market “dope”. If the analogy stands the wake up is usually a hangover and one keep asking for more. Interestingly this is what happened in December when the FED hiked rates by 25bps and the markets collapsed and subsequently Mrs Yellen has retracted back in March promoting a much more dovish tone.


27

A quick zoom on ZIRP: zero interest rate policy

• The initial goal is to stimulate credit, investments, and household consumption in order to reflate risky assets and eventually prevent deflation. While at the same time, it is aiming at weakening the national currency to revive exports.

• But it can have some adverse consequences:

• Deter investors to keep their liquidities with banks, although this is unlikely above interest rate of -1% due to the cost of holding and manipulating cash,

• Put pressure on the banks’ profitability: shrinking net interest margins with banks hesitating to transfer the negative rates to their clients deposits;

• Solvency issues for pension funds and insurance companies, which are structurally unable to serve their liabilities if returns are below a certain level.

• It seems negative interest have a marginal long term effect on credit after an initial positive short term effect. It certainly pushes LT rates down. There has not been any significant impact on investment as yet.

• As we have seen earlier, currency impact is mitigated as the interest rate differential is not the only factor influencing currencies.

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II. Key Issues







Corporate Health

29

A deteriorating corporate health: the high yield debt issue / leverage

• Low rates and cheap credit have pushed leverage back to its high.

• Net debt to total assets is back to its peak close to 30%,

• Debt to equity is over 100% in the US

• This is not limited to the energy sector, affected by the falling oil prices.

• Operating margins are at its highs,

• Return on capital is decreasing

Corporate Health

30

The energy credit bubble should be contained though

• Credit spread generally have spiked up over 400bps in the energy sector but also about 300bps across the high yield spectrum.

• And default rate is rising.

• However, the oil and gas sector contributes to about 11% of profits on the S&P500, as opposed to 35% from consumer related services and 40% of the share of profits coming from foreign source (watch the USD strength!).

• Energy loans represents only about 11% of the high yield benchmark.

Corporate Health

31

But banks are globally in a much better shape than 2007

• Bank solvency ratio has increase sharply above 12% now compared to below 8% generally before the financial crisis in 2007

• Only about 6% of the high yield instruments are held by the banks.

• The key worry for banks at present is not on their balance sheet but more on their P&L/profitability due to falling interest rates and now negative rates across Europe and Japan. If this is not reverberated onto its clients, bank net margin accounts are being squeezed triggering potentially losses, which would then deplete bank reserves.

• If that was to happen in the US, it would have massive repercussions on the overall profitability of banks. This has been already discounted by the market looking at current valuations which are getting back to its lows:

32

II. Key Issues







Political Issues

33

A number of political issues can affect the economy and the markets over the coming months.

� U.S. presidential primary elections

The US will elect a new president in November and a personality such as Mr Trump could potentially change the environment and create some uncertainty on the markets although he might be blocked by the congress.

� Brexit

British will vote on their referendum to leave the EU on June 23rd. We will discuss this issue in more detail in a separate paper shortly. A potential Brexit could weaken the pound and the British economy in the short term, but also impact the EU zone generally.

� European migrants crisis

Another European issue, which is potentially very sensitive is the migrant problems from Syria and other regions in the world. This is causing a surge in nationalism and protectionism across Europe. It has already recently weaken the undisputed popularity of Mrs Merkel and could further weaken European unity.

34

III. Macro conclusions

Macro conclusions

35

High economic uncertainty has brought extremely erratic market movements

� Where do we stand in the current economic cycle globally and in each main economic region (US, EU, JP, China, EM)?

• The markets do not seem to have any clue if we look at their patterns characterised by extreme and erratic movements in only two months in January and February.

• Central bankers do not seem totally confident either with Yellen changing its position in a few months, turning much more dovish in March than her initial hawkish stance in December.

� Where does this leave us?

• The US seems indeed on a strong footing with a solid labour market, but it is increasingly dependent on external world and namely China. The recent increase in the USD is the equivalent of 150bps rate tightening according to some analysts.

• It is difficult to assess what is the current position in China. It is obvious that China cannot grow at the past decade pace, but it is a substantial contributor of world GDP now in absolute terms (est. 2016 GDP at US$12.2 trn). It is clear that Chinese economy is slowing down, but it is hard to assess if the government can control its transition from a manufacturing/ industrial economy to a service oriented economy. As any transition, we should expect some turbulence. But we are confident that China has the mean and the tools to emerge as a more stable and strong actor in a forthcoming future.

• Europe is gradually improving but it is behind the US in terms of economic cycle and is facing a number of political issues. Also credit remain constrained and one expect the latest ECB measures to bring more concrete effects.

Macro conclusions

36

• Japan has important structural issues: aging demographic factors, large public deficit (250% of GDP), significant exposure to EM markets for its exports.

• EM markets generally are mired with high level of debt and are exposed to the current US tightening, which could derail any meaningful recovery, but their valuations are cheap and a positive outcome in the US could ease tension and fuel financial markets.

� In that context we reckon that we will remain in an attentive short sighted market environment with stop and go or risk on / risk off pattern characterised by a continued volatility and potentially erratic movements in the financial markets until the outcome becomes clearly in the US and China predominantly. If the US can avoid a recession, it is hard to envisage a strong growth development in the medium term as there is no catalyst for that. With such a strong labour market, we can reasonably anticipate some inflation kicking in and stagflation at sight. That will cause further challenges to central banks…

37

IV. Market Perspectives

• Equities

• Bonds

• Currencies

• Commodities

Equities

38

A cause for concern: globally earning revisions are down…

While US equities are posting record high profit margins

• Earning growth at 7% seems illusory under the current environment if one includes financials and energy sector. Expectations closer to 3%, which cannot justify current valuation level:

• Margin at their highs, a falling productivity and increasing labour cost are most likely putting further pressure on earning growth, which is a threat to equity markets predominantly in the US.

• A further strengthening USD will not help.

Equities

39

US equities valuations look stretched, while supports are running out of steam.

• Rich valuations in the US: trading at 15.8x PE i.e. 5%-10% above its long term average

• Share Buybacks are running out of steam

• But with slow growth and margin squeeze due to increased labour cost, M&A activity should remain strong.

• FED turned more dovish lately following January collapse in financial markets. But expect this to be only temporary.

Equities

40

An interesting longer term view

Market valuations are above their 2007 peak

Equities

41

European and Emerging Markets valuations are less demanding

• European equities trading at 13.2x PE, i.e. 5% below their LT avg.

• EM trading around 11x PE, i.e. circa 15% below its long term average

Equities

42

Japan equities, despite their recent collapse, could find some support

• Strong earning revisions and cheap valuations

• Positive fund flows and expected government pension fund purchases

• Further accommodative monetary policy

But key risks are :

• A stronger JPY

• Japan’s dependence to China and EM (exports).

Equities

43

China and Hong Kong listed shares are particularly undervalued.

• China is long term value play

• Undemanding valuation and strong growth potential in a still underdeveloped financial market compared to its GDP.

• We have built a long term portfolio focusing on high quality blue chip stocks centred around the middle class growing needs:

• Dongfeng (automobile)

• Alibaba (e-commerce)

• Ping An (insurance)

• Shimao (real estate)

• Beijing Water (environmental utility)

• Samsonite (leisure)

• Sinopharma (pharma)

• Expect high volatility (20%-30%) due to its small size, retail investor influence and unsophisticated rules.

Equities

44

Financial stocks have been particularly hit lately

• Financials trading back to its lows: P/E close to 10x and PB close to 1x

• Balance sheets are in a much better shape than pre-crisis level.

• Profitability remains a key concern due to historically low interest rate.

• Interesting to note the strong correlation between banking stocks and the US 10y yield. If the wage pressure keeps up and the FED increase rates further, we should see a rebound in banking stocks.

45


• Equities

• Bonds

• Currencies

• Commodities

Bonds

46

Bonds are extremely expensive relative to equities… pricing a secular stagnation…

• Bonds trading at bottom level after a more than 20 year rally.

• Since the financial crisis in 2007, the only financial assets having a year on year positive return every year is the Japanese 10 year bond!

• The current bond risk / return profile is not rewarding: Shiller’s CAPE to 10y treasury rate ratio is at an all-time high around 14. The last time the ratio was above 9 was during the Great Depression in 1929…

Bonds

47

But structurally long term rates should move up… at some stage. We would focus on long dated IG bonds and European HY bonds to offset equity risk

• Bonds are pricing a stagnation and that might well be the case. But with the current tight labour market in the US and pressure on wages, we would expect interest rates to gradually appreciate despite a sluggish growth.

• Interest rates are due to move back up structurally due to:1. Weak productivity growth: no revolution as yet. Digital

one in play? But in the meantime time economies to bump up against supply side constraints

2. Aging population: excess saving to fall3. Low commodity prices to start being supportive to the

economy4. Stronger fiscal policies to kick in

• Recent widening of spreads to about 800bps are making high yield bonds attractive again.

• Excluding the increasing defaults expected in the energy sector, bonds returns at current should compensate for their risks.

• The key drawback with high yield bonds, and bonds generally, is their lack of liquidity. Any chock could trigger a serious squeeze on the credit markets causing important pricing dislocations as we have seen recently with banking issuers.

48


• Equities

• Bonds

• Currencies

• Commodities

Currencies

49

On the currencies front, the Fed’s recent dovish stance has stopped the USD rally.

• US interest rates are expected to further appreciate, although at a more subdued pace. Recent dovish comments from the FED have put the USD rally on hold.

• No incentive to let the USD appreciate too much, as it is hurting US trade balance and profits.

• On a PPP basis the USD is still largely overvalued.

• No directional view but simply hedging foreign currencies if the USD resumes its appreciation. Hedge the EUR below 1.10 and the GBP below 1.40

• Commodity currencies, such as the AUD, CAD and NOK might appreciate in line with improving oil and commodities prices, but:

• High volatility could prevail along oil price

• None of the CAD or AUD are currently undervalued on a PPP basis.

• The JPY is overvalued and should depreciate again gradually supported:

• By a more aggressive monetary policy by the BOJ

• A possible change in the relative safety perception of the Japanese currency.

50


• Equities across the US, Europe, Japan and EM

• Bonds

• Currencies

• Commodities

Commodities

51

Gold remains a refuge value and a natural hedge against inflation.

• Despite its strong performance lately: +20% since its recent lows in December 2015, gold is not expensive based on the gold inventories to US market capitalisation ratio, which is close to zero percent currently.

Generally commodity prices should gradually reflate

• Despite an environment dominated by oversupply and suffering from low growth and the Chinese slowdown:

• No hard landing expected in China, which still account for a substantial contribution to world GDP

• Profitability concerns at current depressed pricing despite improving productivity.

• Default and consolidation in the energy and material sector gradually pressuring supply.

• But volatile process to find a bottom and difficult to time it.

52

V. Asset Allocation in Review

Asset Allocation

53

Overall cautious in the ST. Unclear direction. Erratic and violent movements

• Key market drivers:

• Earning growth to support demanding valuations in the US

• China controlled slowdown and US growth

• Gradually reflating oil and commodity prices

• US tightening monetary policy (wage pressure?) and more accommodating in Japan and EU (deflationary forces?).

• Credit bubble

• Political outcome: US presidential elections, Brexit, migrants, Greece.

• Unclear macro picture, although clearly wage pressure is picking up.

• Overall cautious and opportunistic stance: take profits and keep cash to add on weakness. Underweight equities and bonds and accumulate risk again on weakness.

• Prefer idiosyncratic risk and uncorrelated strategies

Asset Allocation

54

• Equities: Reduce equities generally by taking some profits in the short term (underweight). Prefer Europe and Japan (overweight) to add on weakness, due to much less demanding valuations and better earning outlook. Underweight the US. Emerging markets perspectives improving with cheap valuations (neutral), but influenced by FED tightening and overall commodity recovery. Long term positioning on China and India. Brazil and Russia to recover along oil prices. Accumulate on next weakness.

• Sectors: Overexposure to financials, considering current excessively depressed valuation; health care, whose correction has been essentially driven by biotech; and technologies. Looking to build some exposure to Energy & Materials but cautiously as we need to confirm bottoming process in the oil price, which will remain volatile in the short term.

• Bonds: Neutral. Move longer durations on IG bonds and focus on HY bonds predominantly in Europe and EM. Avoid energy sector for now but for risk takers.

• Commodities: Keep gold exposure as a refuge value.

• Alternative Strategies: Overweight market neutral segment and add new position to merger arbitrage.

• Currencies: Careful on one way stronger USD trade. Hedge foreign currency risk if we break 1.10 against EUR and 1.40 against GBP.

Asset Allocation

55

Lower returns and higher volatility to be expected in the future…

• With interest rates at historically low level across all developed markets and in the current low growth environment, it is hard to achieve past levels of performance without incurring much greater level of risk.

• One should review return expectations and accept greater volatility to achieve superior performance either by using leverage or by taking more concentrated idiosyncratic risk.

• Goldman Sachs expects future equity returns (2015-2025)around 4.5% compared to 11.2% (1982-2015).

• Past performances have varied greatly depending on the period selected. Bonds have been the best performers looking back 15 years or so. Equities remain the best asset class looking at 50 years or more.

• As indicated earlier, the risk reward ratio is not in favour of bonds but that could take some time to materialise.

56

This report is issued and distributed by Infinum Partners SA based in Geneva, Switzerland. It is not directed to, or intended to be used by, any person or entity that is a citizen

or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Infotec Gl Trade/OECD data and charts unless otherwise specified. The information and material contained herein are provided for information purposes only and are not

to be used or considered as an offer or solicitation to subscribe any securities or other financial instruments. Furthermore, the information and estimates expressed herein

reflect a judgment as at the original date of publication and are subject to change without notice. The value and income of any of the securities or financial instruments

mentioned in this document can go up as well as down. The market value may be affected by changes in economic, financial or political factors, time to maturity, market

conditions and volatility, or the credit quality of any issuer or reference issuer. Furthermore, foreign currency rates may have a positive or adverse effect on the value, price

or income of any security or related investment mentioned in this report.

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