INVESTMENT OUTLOOK March 2016

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Austrasse 56 P.O. Box 452 94 Vaduz, Liechtenstein asset@imt.li www.imt.li INVESTMENT OUTLOOK 03.

Also, high yields and emerging market bond spreads tightened considerably.

1 Austrasse 56 P.O. Box Vaduz, Liechtenstein INVESTMENT OUTLOOK March 2016 Since mid-february markets have calmed significantly and risky assets have enjoyed a clear rebound. Emerging markets equities rose about 16% and European equities about 14%. Also, high yields and emerging market bond spreads tightened considerably. In the period since mid-february German 10-year government bond yields remained almost unchanged, rising merely 2 basis points, while US 10-year treasury yields jumped by 20 basis points. The VIX index, a measure for the price of insurance against a fall in the S&P500 equity index, also declined by 14 points from 28 to 14. However, market sentiment remains fragile in our view. It is too early to proclaim a sustained bull market for the rest of the year. Macro risks remain elevated. Still, we remain confident that a recession can be avoided, and slow growth together with massive liquidity supply should prevent equity markets from falling off the cliff. We have to assume that heightened volatility will remain our companion. Thomas Trauth CEO IMT Asset Management AG

2 IS THE WORST OVER? Financial markets In February risky assets produced a V-shaped curve, selling off in the first half of the month and rebounding strongly thereafter. The rally of equity, credit, and commodity markets extended into March, when the rally was further fueled by dovish central banks and somewhat better US macro indicators. But the S&P500 index was still down 0.4% in February, the EuroStoxx50 index 3.3%, and the Nikkei225 index even 8.5%. In general, emerging markets outperformed developed markets and ended February almost flat. Safe-haven assets showed a contrary trend to the movement of risky assets. US and German government bond yields reversed course in mid-february and started to climb. The exception was Gold, which only temporarily sold-off, then resumed its rally and is currently trading around 1,250 USD/oz. The risk-on environment and the recovery of oil and industrial metals prices boosted so-called commodity currencies like the Canadian Dollar (CAD), the Australian Dollar (AUD), and the Norwegian Krona (NOK). The Japanese Yen (JPY) also strengthened. The USD weakened across the board, not least because of a very dovish Fed. Central banks On 10 March and in line with market expectations, the ECB decided to cut rates further and to further increase its bond-buying program. However, the extent of the cut and some of the specific decisions taken clearly exceeded market expectations. For example, the decreases in the ECB s main interest rates included a cut in the interest rate on deposits by 10 basis points to -0.40%. The monthly asset purchase program was increased to EUR 80 bn from EUR 60 bn and will now include investment-grade EUR-denominated bonds of non-bank corporations. Furthermore, the ECB introduced a new series of four targeted longer-term refinancing operations (TLTRO II), which are designed to encourage bank lending. The US Fed also came out with very dovish statements, keeping rates unchanged. The Fed revised its forecast regarding the future path of its policy rates down to only two hikes in This is a clear sign that the Fed will stay accommodative for longer and that it regards downside risks to the economy as more severe than inflation risks. Macroeconomics Leading indicators in February were mixed. However, US data improved by and large. The ISM manufacturing index rose to 49.5 from We would especially highlight the fact that the sub-index for new orders has been climbing for two months, which indicates that order books are becoming fuller. Non-farm payrolls rose by 220,000 and continue to signal that job creation remains robust. In February core inflation in the US picked up, which can be seen as a first sign that inflation is normalizing. Meanwhile, the European PMI fell to 51.2 after This is a clear deterioration, though a level above 50 indicates that Europe is still in the growth area. China s manufacturing PMI declined slightly to 48 from 48.2, while the Japanese PMI deteriorated significantly to 50.1 after

3 Outlook On the one hand the rebound in risky assets seems to confirm our view of last month that market moves have been exaggerated and suggested too high a recession risk. However, what is not clear to us, and remains the most important question for asset allocators right now, is whether the rebound of risky assets is rather technical and thus will prove to be shortlived or the beginning of a sustained positive market trend. Given that macro and political risks remain elevated, we certainly expect choppy and volatile markets for the remainder of the year and depressed returns overall. We remain cautiously optimistic that equity markets will deliver a positive return this year and we retain our neutral weighting of equity exposure in our portfolios. While the US market has outperformed other developed markets since the beginning of the year, we are keeping our underweight position in US stocks, since earnings are deteriorating in the US, the USD will remain strong, and there is a likelihood of further Fed rate hikes. We are carefully observing European growth indicators. While absolute levels of those indicators still point to robust growth, they have been deteriorating in recent months. The recent improvement of market sentiment towards emerging markets is encouraging for us and we may consider increasing our exposure to emerging markets equity. While the USD has weakened, the recent pick-up of US inflation may warrant a next Fed rate hike in the course of the year, potentially in June. This may lead to a re-strengthening of the USD later this year. We remain skeptical that the oil price will move up much further, but we see current levels, around USD 40, as more sustainable than levels around USD 30 or even below. Supply overhang, however, remains structural and will continue to depress oil prices in our view. 3

4 ECONOMICS Leading indicators in February were mixed. US data improved. The ISM manufacturing index rose to 49.5 from 48.2 and non-farm payrolls rose by 220,000, indicating continued robust job creation. Meanwhile, the European PMI fell to 51.2 after This is clear deterioration, though a level above 50 indicates that Europe is still in the growth area. China s manufacturing PMI declined slightly to 48 from 48.2, while the Japanese PMI deteriorated significantly to 50.1 after Fig. 1: PMIs 60 Fig. 2: PMIs US EMU Switzerland 45 12/ / /2015 Fig 3: Consumer price inflation, in % YoY US EMU Switzerland / / / / /2015 Fig 5: Unemployment rates, in % US EMU Switzerland 0 12/ / / /2014 Japan China 45 12/ / /2015 Fig. 4: Consumer price inflation, in % YoY Japan China 12/ / / / /2015 Fig 6: US labor market Avg. hourly earnings, % YoY, lhs Chg. US non-farm payrolls, '000, rhs / / / / /

5 FIXED INCOME Government bond yields fell until mid-february and rose thereafter, when the flight to quality environment ended. Also, Fixed Income volatility, which spiked in tandem with equity volatility during the selloff, retreated. In accordance with with the re-emerging risk appetite, high-yield and emerging-market bond spreads tightened significantly in the second half of February. Fig.7: 2Y government bond yields US Treasury Bund Swiss -1.5 Fig 9: 10Y break-even inflation Fig. 8: 10Y government bond yields 4.0 US Treasury Bund Swiss Fig. 10: Credit spreads, 5Y credit default swaps High Grade High Yield US German 0 12/ / / /2015 Fig 11: Money market spreads (3M-2Y) Fig 12: Merrill Lynch volatility index FI volatility US Euro Swiss 40 5

6 EQUITIES The recovery of equity markets in mid-february was broad based. Year-to-date the S&P500 index outperformed other developed markets, while the Swiss SMI and the Japanese Nikkei index clearly underperformed. Among emerging markets the Brazilian Ibovespa and the Russian Micex index outperformed, while the Indian Nifty and the Chinese CSI300 disappointed. Interestingly, we observed a sector rotation with the energy sector and materials outperforming and especially the financials and health sectors suffering. Fig. 13: MSCI equity indices major regions Fig.14: Equity indices major developed markets 110 Developed markets Emerging markets Frontier markets 110 S&P500 Nikkei EuroStoxx50 SMI / / / / /2016 Fig 15: Equity indices major emerging markets Fig. 16: Sector performance, MSCI Europe, CSI 300 Nifty 50 Ibovespa Micex 70 12/ /2016 Cons. disc. Cons. stables Energy Finance Health Industrials Inf. techn. Material Telco Utilities Fig 17: Price-earnings ratios Fig 18: Equity volatility S&P500 VIX index 40 MSCI US MSCI EU VIX Index 0 6

7 ALTERNATIVE INVESTMENTS Gold held up well even when other safe-haven assets sold off. Energy prices especially recovered from their lows in February. Brent oil prices rose from USD 29 per barrel to about USD 40 per barrel. Industrial metals also enjoyed a sharp rebound after the Chinese government announced measures to boost the domestic economy. Fig. 19: Gold price, USD/oz Gold 0 Fig 21: Bloomberg commodity indices Composite Industrial Metals Agriculture 40 Fig.20: Oil price, USD/bl Oil - Brent 20 Fig. 22: HFRI hedge fund indices Composite - Fund Weighted Global Macro Quant Directional 12/ / / / /2015 Fig 23: FTSE EPRA/NAREIT global index Fig 24: LPX global listed private equity 2500 Global REITS 2000 Global listed private equity

8 CURRENCIES The risk-on market move and rising commodity prices led to significant gains for major commodities currencies, like CAD, AUD, and NOK. The EUR strengthened across the board, even after the ECB announced lower rates and more quantitative easing measures. The CNY and the JPY strengthened as well. The CHF stayed on a very slow depreciation path vis-à-vis the EUR. Fig. 25: EUR-USD exchange rate EUR-USD 1.00 Fig 27: USD-JPY exchange rate Fig. 26: GBP-USD exchange rate GBP-USD 1.30 Fig. 28: USD-CNY exchange rate 130 USD-JPY 6.80 USD-CNY Fig 29: EUR-CHF exchange rate EUR-CHF 0. Fig 30: USD-CHF exchange rate USD-CHF

9 Investment Outlook ASSET ALLOCATION Gold and the JPY have been the largest performers year-to-date, while Asian equity markets have been the largest negative performance contributors. As per end of February, fixed income assets have been mostly positive and equities mostly negative. Fig. 31: Performance of major asset classes, based on our EUR portfolio strategy -20% -15% -10% -5% 0% 5% 10% 15% 20% Fixed Income Cash, EUR Europ. Government, EUR Investment grade, EUR High yield, LC Emerging markets, USD Emerging markets, LC Inflation-linked, EUR Insurance-linked, USD Convertibles, EUR Equities MSCI Europe, LC MSCI US, USD MSCI Japan, JPY MSCI Asia Pacific, ex JP, LC Alternatives Hedge Funds Index (HFRX) Bloomberg Commodities, USD Gold, EUR REITS, developed markets, LC Currencies vs EUR USD GBP JPY NOK SEK CHF YTD February 9

10 Investment Outlook DISCLAIMER This document is for information purposes only and is not a solicitation of an offer or a recommendation to buy or sell any investment instruments or to engage in other transactions. This document contains data and information which are prepared by IMT Asset Management AG. Although IMT Asset Management AG takes care to ensure that the information in this document is correct at the time it was collected, IMT Asset Management AG neither explicitly nor implicitly provides any assurance or guarantee of accuracy, reliability or completeness, and assumes no liability or responsibility for either its own or for thirdparty publications. IMT Asset Management AG is not liable for any direct, indirect or incidental loss incurred on the basis of the information in this document and/or on the risks inherent in financial markets. Investment in financial products should be done only after carefully reading the relevant legal requirements, including sales restrictions or any other risk factors. Any opinions represented in this document solely reflect those of IMT Asset Management AG or specified third-party authors at the time of publication (subject to modifications). The services mentioned in this document are addressed exclusively to clients of IMT Asset Management AG. Source for all graphs: Bloomberg, IMT Asset Management AG. 10

IMT Asset Management AG Austrasse 56 P.O. Box Vaduz, Liechtenstein

IMT Asset Management AG Austrasse 56 P.O. Box Vaduz, Liechtenstein Austrasse 56 P.O. Box 452 9490 Vaduz, Liechtenstein asset@imt.li www.imt.li INVESTMENT OUTLOOK 04.2017 20 April 2017 In March, equity markets continued to rally. Emerging markets outperformed developed