The Market Navigator N a v i g a t i n g t h r o u g h t h e S e a s o f C h a n g e

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1 April 17, 2018 The Market Navigator N a v i g a t i n g t h r o u g h t h e S e a s o f C h a n g e Systematic tracking of market and macro momentum through highly condensed, objective indicators in the context of the Market Cycle. For professional investors only - please refer to the disclaimer on the last page of this report. Alternative investment solutions with a focus on uncorrelated returns and capital protection Lindenstrasse 14 CH Baar Tel

2 Summary: Macro & Markets Summary: We have entered a late cycle environment in which volatility typically starts to rise. Globalgrowth has likely peaked, but will remain above trend for some time. Stimulus is being reduced, and interest rates have started to rise. Inflation concerns, trade war fears and and slightly slowing growth raise fears of stagflation. The higher volatility regime could roll over into an extended correction. Later during the year, we might see another substantial «late» upleg in risk assets. A global recession seems unlikely to start before late B. Götte Big Picture: Where approximately do we stand in the context of the Market Cycle Model? Inflation Growth De- Reflation Idealized Equity Market Cycle Recovery < Overheat Stagflation USA Europe China USA EU China / EM Asia Growth Good growth, some seasonal weakness. Moderate growth, but more signs of deterioration in leading indicators! Stable but with more signs of decelariotion. Inflation Rising inflation pressures. Are wage increases coming? Decelerating again. Still «behind» the US cycle. Not a big issue yet. Central Bank Stance Fed Balance Sheet reduction will continue. More rate hikes to come. ECB still waiting for inflation pickup, but QE could be phased out earlier than expected. Rate hikes not on the agenda. Cautiously trying to reign into credit excesses while simultaneously providing liquidity Special Notes 5-10yr rates to be watched closely (deficit, inflation surprises) Political turbulence risks from EU cohesion (Italy, etc.) Deleveraging while maintaining growth a key challenge. Monitor closely. Short-Term Tactical Views Stocks Buy only into pronounced weakness (15-20% correction from prior tops), sell again into pronounced strength. Hold, buy into pronounced weakness (15-20% correction from prior tops). Start to accumulate for potential relative strength vs. US. Overextended, heightend correction risk. Buy EM Asia into pronounced correction. Bonds Buy tactically with small amounts, for a trade. Sell again into strength. Yields are bottoming as well, entering into a larger correction for EU bonds Crossbow Market Navigator ww.cb-partners.com 2

3 Quarterly Asset Allocation Views The Market Cycle Regime Assessment consists of three components: a) Current Regime Status according to the market cycle status (which is usually based on lagging data such as GDP growth and inflation). b) Forward Expectations based on our leading indicators and intermarket analysis from which we derive an estimate of the future regime will it continue or change? c) A consideration of Risks to the outlook that are not covered in «Growth and Inflation» and could impair the current regime and current growth outlook (e.g. spillover effects from overextended or extreme market events, geopolitical risks, etc): Market Cycle Regime Assessment Q3/17 Q4/17 Q1/18 Current Regime (lagging data): Growth Rising 1 Rising 1 Rising 1 Inflation Neutral 0 Rising 1 Rising 1 Current Regime: Recovery 2 Overheat 1 Overheat 1 Forward Expectation of Regime Growth Rising 1 Rising 1 Neutral 0 Inflation Neutral 0 Rising 1 Rising 1 Expected Regime next 1-2 quarters Recovery 2 Overheat 1 Overheat 1 Risks to the Outlook Market Risks US Neutral 0 High -1 High -1 Market Risks EU Neutral 0 Neutral 0 Elevated 0 Market Risks Asia Neutral 0 Neutral 0 High -1 Economic Risks USA Low 1 Low 1 Low 1 Economic Risks EU Low 1 Low 1 Low 1 Economic Risks Asia/China Neutral 0 Neutral 0 Neutral 0 Geopolitical Risks Neutral 0 Neutral 0 Elevated 0 Our Allocation Views / Proposals are based on the historical out- or underperformances of asset classes and hedge fund styles during the different phases of the Market Cycle Regimes and our judgement of what the current and near future regime likely would be. The over- and underweights don t have to sum up to 100%, but are thought to be a guideline: Hedge Fund Style Allocation Q3/17 Q4/17 Q1/18 Equity Hedge Overweight 1 Neutral 0 Neutral 0 Credit Event-Driven Underweight -1 Underweight -1 Strong Underweight -2 Relative Value Neutral 0 Neutral 0 Overweight 1 Macro / CTA Neutral 0 Overweight 1 Overweight 1 add-on Specialized HF Strategies to consider Emerging Markets Overweight 1 Overweight 1 Neutral 0 EH Sector Energy/Basic Materials Neutral 0 Overweight 1 Overweight 1 EH Sector Technology/Healthcare Overweight 1 Neutral 0 Neutral 0 ED Distressed/Restructuring Underweight -1 Underweight -1 Strong Underweight -2 Asset Class Allocation Q3/17 Q4/17 Q1/18 US Equities Overweight 1 Neutral 0 Underweight -1 European Equities Overweight 1 Overweight 1 Neutral 0 Emerging Markets Asia Overweight 1 Overweight 1 Overweight 1 Global Bonds (Investment Grade) Neutral 0 Underweight -1 Underweight -1 Commodities Neutral 0 Neutral 0 Overweight 1 Sub-Asset Classes to Consider US High Yield Corporates Neutral 0 Neutral 0 Underweight -1 EU High Yield Corporates Overweight 1 Neutral 0 Neutral 0 Private Debt Overweight 1 Overweight 1 Neutral 0 Infrastructure Assets Overweight 1 Overweight 1 Neutral 0 Insurance Linked Securities Underweight -1 Underweight -1 Overweight 1 3

4 USA & Eurozone: Equity Markets & Macro Momentum (Index Price Return, in USD) Technical Market Strength: Summary of 12 Technical Signals "Nowcasting the Economy": Condensed Summary of several leading economic indicators Financial Stress Indicator Summarizes typical stress indicators like spreads, volatility, etc. (Index Price Return, in ) Technical Market Strength: Summary of 12 Technical Signals "Nowcasting the Economy": Condensed Summary of many leading economic indicators Financial Stress Indicator Summarizes typical stress indicators like spreads, volatility, etc. 4

5 USA & Eurozone: Inflation Monitor USA 10year yield Steepness 10yr-3m Inflation Diffusion Index Economic Surprise Index Inflation Surprise Index CPI Consumer Price Index PPI Producer Price Index Leading PPI Indicator Capacity Utilization Average Weekly Hours worked Rate & Inflation Expectations: 5year-5year- Inflation Swap Fed Fund Futures (3m, 1yr, 2yr fwd) EU German 10year yield German Steepness 10yr-3m Inflation Diffusion Index Economic Surprise Index Inflation Surprise Index CPI Consumer Price Index PPI Producer Price Index Leading PPI Indicator Capacity Utilization Rate & Inflation Expectations: 5year-5year- Inflation Swap Euribor Futures (3m, 1yr, 2yr fwd) 5

6 Macro-Surprises and Global Liquidity Macro-Surprise Indices measure how incoming macro data is developing relative to the consensus of macro analysts (better or worse than expected) The dark blue line shows the rate of change of the equity market indices of each region in comparison. Macro Surprise USA Macro Surprise Switzerland Macro Surprise Eurozone Macro Surprise Japan World Equity Index Global Liquidity Indicator: consists of central bank balance sheets, FX flows, etc Rate of Change Comparison : Global Liquidity Indicator (red) World Equity Index (blue) 6

7 Switzerland: Equities and Bonds Technical Market Strength: Summary of 12 Technical Signals "Nowcasting the Economy": Condensed Summary of many leading economic indicators Financial Stress Indicator Summarizes typical stress indicators like spreads, volatility, etc. Rate-of-Change-Oszillator: 3month and 6 month Momentum of Prices Relative Performance-Composite: Measure relative Performance of this asset against a broad variety of others Internal Market Strength : Measures the market breadth of many different assets within that asset class 7

8 Emerging Markets: Equity Markets & Macro Momentum (Index Total Return, in USD Terms) Technical Market Strength: Summary of 12 Technical Signals "Nowcasting the Economy": Condensed Summary of many leading economic indicators Financial Conditions Indicator Summarizes typical stress indicators like spreads, volatility, etc. (inverted) (Index Total Return, in USD Terms) Technical Market Strength: Summary of 12 Technical Signals "Nowcasting the Economy": Condensed Summary of many leading economic indicators Financial Conditions Indicator Summarizes typical stress indicators like spreads, volatility, etc. (inverted) Crossbow Market Navigator ww.cb-partners.com

9 USA & Eurozone: Bond Markets Technical Market Strength: Summary of 12 Technical Signals "Nowcasting the Economy": Condensed Summary of many leading economic indicators "Nowcasting the Labor Market": Condensed Summary of various labor market indicators Financial Stress Indicator Summarizes typical stress indicators like spreads, volatility, etc. Technical Market Strength: Summary of 12 Technical Signals "Nowcasting the Economy": Condensed Summary of many leading economic indicators Financial Stress Indicator Summarizes typical stress indicators like spreads, volatility, etc. 9

10 USA & Eurozone: Central Banks and Credit Momentum USA: Commercial Credit Creation 6m rate of change USA: Fed Central Bank Balance Sheet USA Fed Central Bank Balance Sheet: Rate of Change. Eurozone Commercial Credit Creation 6m rate of change ECB Central Bank Balance Sheet ECB Central Bank Balance Sheet: Rate of Change. 10

11 China: Industrial and Proxy Indicators for the Economy China: Economic Activity Proprietary Macro Diffusions-Index China Manufacturing Index (Satellite) «Exports to China» - Diffusion-Index Purchasing Manager-Indices: Container EXPORTs from China Growth of Electricity Production Growth of Export Trade Railway Freight Traffice Volume Premium on Copper for Physical Delivery Shanghai China: Consumer-centric Indicators Macro-Diffusion Indicator Consumer-related Activity Outperformance Consumer Cyclicals (relative to broad Chinese Equity Market) China Consumer Confidence Growth of Tertiary Sector % p.a. Retail Sales YoY% Growth Macao Casino-Turnover Jobless Rate 11

12 Gold USD and CHF Gold USD (10 years, weekly chart) Rate-of-Change-Oszillator: 3m- and 6 month Momentum Relative Performance-Comp.: relative Performance of this asset against a broad variety of others Internal Market Strength : Market breadth of different assets within ist asset class Gold in CHF (10 years, Weekly Chart) Rate-of-Change-Oszillator: 3m- and 6 month Momentum Relative Performance-Comp.: relative Performance of this asset against a broad variety of others Internal Market Strength : Market breadth of different assets within ist asset class 12

13 The US Dollar EURUSD Weekly Rate-of-Change: 3m-, 6m-, 12m Momentum Internal Market Strength : Market breadth of FX crosses Market breadth of EUR versus all other currencies Relative Performance EUR vs. All investable assets Interest Rate Differentials Nominal IRD Real IRD Dollar Correlations DXY Futures Positioning 13

14 Developed Market Yields and Spreads US 10yr and 2yr Yield Comparison (Gov + IG) US Yield Curve US 10yr IG Credit Spread 14

15 US Interest Rate Futures Positioning Commercials vs. Speculators 10 Year Note 5 Year Note 3m Fed Fund Eurodollar 15

16 How strong is the World Economy? Notes: PMI = Purchasing Manager Index. These Indices are being polled monthly through Markit via surveys with the purchasing managers in both, industrial and services companies. A PMI of > 50 usually signals expansion, a value of <50 usually a contraction. Interpretation: Usually, PMIs are coincident or slightly lagging with equity indices. Nevertheless, it is worthwhile to track them in their global breadth, as they are often available earlier than many other macro data series. They therefore deliver a good overview of the breadth of the momentum of the world economy and whether certain regions are starting to exhibit some weakness or accelerating growth. 16

17 Rolling Correlations against Key Assets S&P500 Idx DAX Idx US 10yr Bond German 10yr Bond 17

18 Important Disclaimer The material in this presentation has been prepared by Crossbow Partners AG, CH 6340 Baar, Switzerland and is directed exclusively at professional investors. This information is given in summary form, serves as basis for consultations and discussions and does not purport to be complete. Information in this presentation, including forecast financial information, should not be considered as advice or a recommendation to investors or potential investors in relation to holding, purchasing or selling securities or other financial products or instruments and does not take into account your particular investment objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to these matters, any relevant offer document and in particular, you should seek independent financial advice. All securities and financial product or instrument transactions involve risks, which include (among others) the risk of adverse or unanticipated market, financial or political developments and, in international transactions, currency risk. This presentation may contain forward looking statements including statements regarding our belief or current expectations with respect to market conditions, results of operation and financial condition, capital adequacy, specific provisions and risk management practices. Readers are cautioned not to place undue reliance on these forward looking statements. Crossbow does not undertake any obligation to publicly release the result of any revisions to these forward looking statements to reflect events or circumstances after the date hereof to reflect the occurrence of unanticipated events. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Crossbows control. Past performance is not a reliable indication of future performance. Unless otherwise specified, all information is current as of two days before the date published on the front page of the report. 18