Monthly Market Monitor
January 2022
Table of contents Greetings from the CEO Venturing forth into the post-postpandemic year
04
In a Nutshell Our view on the markets
Macro Radar Taking the pulse of economic activity
06 08
Satellite View Geopolitical heat map
09
Theme in Focus
Asset Allocation Notes from the Investment Committee
The Back Page
10
Emerging-market stocks: When will the turnaround come?
12
Asset classes & agenda
ESG: Sustainability corner
16
“Green” trends in 2022
14 Kaiser Partner Privatbank AG | Monthly Market Monitor - January 2022
3
Greetings from the CEO
Venturing forth into the post-post-pandemic year
Dear Clients,
Christian Reich CEO
4
I sincerely hope that you had a happy and healthy start to the new year and made the best of the strange holiday circumstances caused by the pandemic for the second straight year. The changing of the year perhaps gave you a bit more leisure time than usual to read a good book, to get out and exercise in the fresh air or to enjoy lively conversations in intimate circles so that you can now get started into 2022 reinvigorated and recharged with positive energy. But before casting our sights forward, let’s first take a look in the rearview mirror. What lingers (in memory) from 2021? Ships bearing names like Ever Given that are too big for the waterways through which they are supposed to pass. Real estate companies with names like Evergrande that are too large to be allowed to go bankrupt. Billionaires in space. An insurrectionist mob in the US Capitol building. Working from home in sweatpants. And, of course, the farewell of James Bond. But last year, above all, gave us a crash course on virology and epidemiology. We now understand a lot about antigens, antibodies and reproduction rates. We know that a virus gets transmitted as an aerosol in enclosed unventilated spaces and that such aerosols particularly get expelled by singing and shouting. We also know that vaccinations against RNA viruses have a limited period of effectiveness and do not prevent reinfection, and that superspreader events can occur. Last but not least, we have all learned the Greek alphabet by now (Omicron is followed by Pi, by the way). With such a thorough (advanced) education, we also ultimately know, though, that the latest (fourth) wave of COVID-19 in central Europe really couldn’t have come as a surprise. Experts last summer were already warning about the scenarios that came true in the end. Will the coronavirus pandemic ever leave us in peace? A return to normalcy is unlikely to proceed so swiftly, but where there is darkness, there is also light. Fortunately, the past two years of pandemic have also shown what impressive feats medical research is capable of achieving these days. Vaccines adapted to the Omicron variant may already become available in a few weeks’ time. And with a bit of luck, it may soon turn out that the pathogenic potential
Monthly Market Monitor - January 2022 | Kaiser Partner Privatbank AG
of the latest (or future) mutations is fading. This wouldn’t be unusual in the evolution of pandemics and in the way that viruses work and could pave the way to COVID-19 becoming endemic. We then would continue to have to live with the coronavirus, but we would surely be able to cope with that. But enough about the pandemic. Besides COVID-19, there will be no shortage of additional challenges in 2022. China is rattling its saber at Taiwan, Russia is doing the same on its border with Ukraine, and Iran may soon acquire the ability to build atomic weapons – only North Korea has been a little less in the news lately. The fact that the (former) world power called the USA could potentially see itself compelled to confront challenges on three fronts this year likewise cannot come as a surprise, at least not to observers of geopolitics. America looks weak in the aftermath of its chaotic withdrawal from Afghanistan last summer. This heightens the temptation for Russia, China and Iran to try to redress old grievances or push forward with long-held ambitions. Xi Jinping and Vladimir Putin admittedly seem unlikely to talk directly about coordinated military action, and the
We can contribute to halting climate change not just through our daily actions, but also via our assets.
idea of a three-way conference also involving Iranian President Ebrahim Raisi is surely the stuff of fiction. But even if there is no unified plan that connects the aims of Beijing, Moscow and Tehran, there is at least a certain degree of shared analysis and vigilance. The Biden administration will not explicitly take the military option off the table in any of these three conflicts, but most likely will employ economic and diplomatic weapons as a means of first resort. We thus hopefully should be spared from major armed conflicts in 2022. However, geopolitical developments look set to further the trend toward deglobalization.
fears about the debasement of money pale in the face of a much bigger threat: that of ever accelerating climate change. Be it hurricanes and tornados in the USA, droughts in South America or floods in Germany, there were plenty of object lessons in the dangers of climate change again last year. The Intergovernmental Panel on Climate Change just recently made it clear in black and white that global warming is caused by humans. The effects of climate change are exponential: they increasingly worsen as the Earth warms. They pose not “only” a threat of rising temperatures and melting icecaps, but also of water scarcity, mass migration, food shortage crises and a loss of prosperity. The time to take action is now. The present decade presumably gives us a brief remaining window of opportunity to hurry to restrain temperatures from rising by more than 1.5 degrees Celsius. Private investment capital will have a key role to play in achieving this. Enormous investments in renewable energy, electromobility, infrastructure and new technologies are needed to bring about the necessary greenhouse gas reductions. Responsibility and opportunity roll into one here for investors. We can contribute to halting climate change not just through our daily actions, but also via our assets – be it in dialogue with companies or through dedicated impact investments. Kaiser Partner Privatbank, in its role as a sustainability pioneer in Liechtenstein, will continue to assist you in this area this year by, for example, further expanding our private markets offerings. I look forward to joining you on the challenging but exciting journey ahead of us. Yours sincerely, Christian Reich
While most of us are merely idle observers in the realm of geopolitics, other issues have been hitting closer to home lately. One of them is cyberattacks, which not only affect governments and corporations, but can also harm us as private individuals. And let’s not forget inflation. This more or less abstract, extremely complex statistic that can have a wide range of causes, does not progress linearly and is hard even for central banks to predict – thus truly possessing an element of surprise – has made a comeback for the first time in over a generation. But even Kaiser Partner Privatbank AG | Monthly Market Monitor - January 2022
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In a Nutshell
Our view on the markets
Year-end rally and new all-time high After getting off to a volatile start, the month of December delivered the oft-cited year-end or Christmas rally as well as new all-time highs posted, for example, by the S&P 500 US blue-chip index and Switzerland’s SMI. However, the narrow breadth of the equity bull market, particularly in the USA, has been a fly in the ointment lately. Does this development portend a weak stock-market performance in 2022? Not necessarily…
prosperity for all” has had a notable impact on Chinese tech and real estate stocks and other equity sectors. The Middle Kingdom will continue to figure prominently on our geopolitical heat map in 2022. The geopolitical theaters in Iran and Ukraine, the upcoming election in France and the issue of cybersecurity are also on our watch list. Emerging-market stocks under close scrutiny There were only a few asset classes last year that didn’t deliver gains for investors. Emerging-market stocks ranked among them – they actually even posted a deeply negative performance in some instances. The climate for emerging markets looks set to improve somewhat in 2022, and their performance should at least stabilize. Maintaining strategic investment exposure to emerging economies continues to make sense, in our opinion, because the growth and return potential that exists there is more than just anecdotal.
Monetary policy is tightening The US Federal Reserve is speeding up tapering and may already give the interest-rate screw a first turn a few months from now. The Bank of England already took this step in December and looks set to make another readjustment soon. Even the European Central Bank is slowly but surely embarking on a path toward returning monetary policy to normal. But despite the tightening on both sides of the Atlantic, real interest rates appear destined to stay negative for quite some time to come, keeping the environment for “Green” trends in 2022 riskier assets favorable for the time being. The three letters E, S and G have long since gone mainstream in the investment world, but the susGeopolitics remain relevant tainable investing space remains a dynamic (growth) Last year once again demonstrated that investors market that is constantly further evolving. We shed cannot just simply ignore (geo)political develop- light on some “green” trends that look set to conments. For example, China’s new focus on “common tinue this year.
Chart of the Month Little buffer left before inversion | Markets see scant rate-hiking potential US yield curve (spread between 10-year and 2-year Treasury yields)
Sources: Bloomberg, Kaiser Partner Privatbank 6
Monthly Market Monitor - January 2022 | Kaiser Partner Privatbank AG
The US yield curve – the spread between 10-year and 2-year Treasury yields – is considered a key leading economic indicator. In the past, whenever this yield differential has dropped into negative territory, it has consistently been a reliable (warning) sign of an impending recession. The last inversion of the yield curve was observable in August 2019 – the coronavirus recession followed a half year later. The yield curve is back under close observation at the moment because it has never been flatter in the face of forthcoming interest-rate hikes by the US Federal Reserve. This leaves the Fed relatively little leeway to raise rates – if it overtightens the interest-rate screw, a yield-curve inversion and the next economic downturn loom. The Fed’s last rate-hiking cycle (2015– 2018) ended at 2.5%. There’s a lot suggesting that the forthcoming cycle will already come to a stop at a level below 2%.
Kaiser Partner Privatbank AG | Monthly Market Monitor - January 2022
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Macro Radar
Taking the pulse of economic activity
The second winter pandemic wave has once again deferred part of the forthcoming economic growth to subsequent quarters. Central banks, meanwhile, have to face up to the economic facts on the ground and are shifting more or less quickly to a more restrictive course.
The recovery continues despite risks on the time axis On the heels of the world economy’s sharp recovery last year from the pandemic shock, the growth outlook (for industrialized countries) remains pointed upward for 2022. Supply bottlenecks should gradually ease, employment looks set to increase further, consumers have ample money in their pocketbooks, and corporations and governments would like to engage in more investment spending. The Omicron variant admittedly poses a veritable risk to the healthcare system and critical infrastructure in the winter weeks ahead and could lead to weak growth (or even a GDP contraction in individual countries) for the first quarter of 2022. On the bottom line, though, Omicron is likely to affect “only” the timing, but not the magnitude of the economic expansion. The Fed accelerates tapering The US Federal Reserve has been trying in recent weeks to regain its credibility, which it lost at times last year. Fed officials now consider the US labor market close to full employment and no longer view the elevated inflation in the USA as being merely transitory. So, the Fed’s exit from its ultra-accommodative monetary policy is now set to take place more quickly than recently projected. From January onward, the Fed will scale back its bond-buying program by USD 30 billion each month so that it is completely wound down by the end of March. An initial interest-rate hike could be implemented shortly afterwards because the Fed’s dot plot currently
Near full employment | The US job market is humming US unemployment rate
forecasts three quarter-point rate hikes for 2022. Back in September, Fed officials were divided about whether there would be a rate hike at all this year. The ECB is also (slowly) stirring to action Compared to the Fed, the European Central Bank continues to putter along in the slow lane with regard to returning its monetary policy to normal. In December, the ECB announced a gradual phaseout of its PEPP bondbuying program, as expected, but left the question of when it will end all securities purchases and raise interest rates unanswered. In contrast to the Fed, the ECB continues to view Eurozone inflation as being only temporarily elevated. It drastically corrected its 2022 inflation projection from 1.7% to 3.2%, but expects inflation to pull back to 1.8% for 2023 and 2024. That, however, wouldn’t be far from the ECB’s 2% target, so a major upside inflation surprise isn’t needed to justify an interest-rate hike before 2024. Consensus estimates 2021
2022
2023
GDP growth (in %) Switzerland
3.5
2.9
1.7
Eurozone
5.1
4.2
2.5
UK
6.9
4.8
2.2
USA
5.6
3.9
2.5
China
8.0
5.2
5.3
Inflation (in %) Switzerland
0.5
0.7
0.6
Eurozone
2.5
2.5
1.5
UK
2.5
4.0
2.1
USA
4.7
4.4
2.4
China
1.0
2.2
2.2
Kaiser Partner Privatbank interest rates view Last
3M
12M
Key interest rates (in %) Switzerland
-0.75
→
→
Eurozone
-0.50
→
→
UK
0.25
↗
↗
USA
0.25
→
↗
China
2.95
↘
↘
Switzerland
-0.12
→
↗
Eurozone
-0.15
→
↗
UK
0.97
→
↗
USA
1.58
→
↗
China
2.78
→
→
10-year yields (in %)
Sources: Bloomberg, Kaiser Partner Privatbank 8
Monthly Market Monitor - January 2022 | Kaiser Partner Privatbank AG
Sources: Bloomberg, Kaiser Partner Privatbank
Satellite View Geopolitical heat map
Mounting cyber risks Cyber risks today already rank among the biggest threats facing businesses and governments and thus also the financial markets. Cyberattacks are striking ever more frequently and ever closer to home (even for private individuals). The security vulnerability in a popular Java logging tool that was disclosed in December made half the internet assailable and was used by criminals and spies to launch numerous attacks. The arms race between aggressors and defenders in cyberspace appears destined to continue this year. Military hotspots Taiwan, Ukraine, Iran – there’s an increasing probability that a military escalation could flare up in those hotspots sooner or later. If Iran doesn’t agree to revive the nuclear accord soon, an attack on that country’s nuclear facilities by Israel (and the USA) seems almost inevitable. A potential retaliation by Iran could then cause turmoil on the oil market at short notice. An aggravation of the confrontation between Russia and Ukraine (and NATO) could also cause price fluctuations on the (European) energy market.
and far right (Marine Le Pen). This time, however, the populists have smaller chances of winning than they did in the “fateful presidential election” of 2017. The election will probably have only a limited effect on financial markets. The most likely impact to be expected is a temporary widening of credit spreads on French government bonds (in connection with the end of the European Central Bank’s pandemic emergency bondbuying program). Upcoming US mid-term elections Passage of the Democrats’ Build Back Better bill is not a done deal yet, but if US President Joe Biden succeeds in getting it enacted, he will have definitively exhausted his political capital. Other items on his (domestic) policy agenda will probably be blocked by the Republicans in light of the upcoming mid-term elections in November, in which they currently have good prospects of capturing majority control of both chambers of Congress. This would limit President Biden’s scope of action for the time being to governing by executive order and attending to foreign policy.
Geopolitical developments do not stop at the gates of the financial markets. On the contrary, they have become an increasingly important influencing variable in recent years. China’s relapse into autocracy and the Communist Party’s balancing act between instituting reforms and maintaining stability figure prominently on our geopolitical heat map again in 2022, but there are also other weighty geopolitical issues in the new investment year.
Presidential election in France The April election in France could turn into a three-way race between incumbent president Manuel Macron and candidates from the center-right (Valérie Pécresse)
Kaiser Partner Privatbank AG | Monthly Market Monitor - January 2022
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Asset Allocation
Notes from the Investment Committee
The Christmas rally was the proverbial cherry on the top of an already extremely gratifying year on the stock markets in 2021. Equity return expectations for 2022 may now have to be set lower, but the environment for stocks is still constructive in the new year.
Asset Allocation Monitor -
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-
Cash
Equities
Fixed Income
Global
Sovereign bonds
Switzerland
Corporate bonds
Europe
Microfinance
UK
Inflation-linked bonds
USA
High-yield bonds
Emerging markets
Emerging-market bonds
Alternative Assets
Insurance-linked bonds
Gold
Convertible bonds
Real estate
Duration
Hedge funds
Currencies
Structured products
US dollar
Private equity
+
Swiss franc Euro British pound
Equities: Year-end rally and new all-time high Scorecard • After getting off to a volatile start, the month of De+ cember delivered the oft-cited year-end or Christ- Macro mas rally as well as isolated new all-time highs Monetary/fiscal policy posted, for example, by the S&P 500 US blue-chip Corporate earnings index and Switzerland’s SMI. US technology stocks Valuation and small caps and the major European markets Trend didn’t duplicate this feat, however. This symbol- Investor sentiment izes how narrowly based the equity bull market has been lately (particularly in the USA). Looking at the erage toward the end of the year, so their market ten largest US stocks, we see significant share-price exposure is on the low side at the moment. Meancorrections and valuation compression over the while, corporate stock buyback programs look set to course of 2021. Although the broad Russell 3000 continue fueling sustained buying demand in 2022. index and the Nasdaq index corrected by only 4% and 7%, respectively, in the fourth quarter, the av- Fixed income: Credit spreads provide little buffer erage drawdown for the stocks contained in those • Bond investors ended 2021 having to settle for price indices amounted to 28% (Russell 3000) and 38% losses for the year. The prospects and risk/reward (Nasdaq). Does this development presage a weak tradeoff for traditional bonds unfortunately aren’t stock-market performance in 2022? much better for 2022. Market interest rates look set • Not necessarily – narrow market breadth at least to climb higher, particularly in the USA. This expechas not been a good timing tool in the past. Moreotation applies the most to short-tenor bonds in view ver, the environment for stocks remains construcof the anticipated interest-rate hikes by the US Fedtive in the new year on the back of persistent low eral Reserve. Our estimate of the upward potential real interest rates (despite somewhat tighter monat the long end of the yield curve carries a little less etary conditions), above-average economic growth conviction due to the uncertainty surrounding the and solid corporate earnings. Furthermore, investor variables inflation and economic growth, but there positioning could also buttress the markets in the too we expect yields to tend to rise (and bond prices near term. The year 2021 was a challenging one for to correspondingly decline). Intermediate-maturity many (hedge) fund managers – some of them were corporate bonds offer the best yield/duration risk forced to liquidate positions and reduce debt levtradeoff in the months ahead, in our opinion, but in 10
Monthly Market Monitor - January 2022 | Kaiser Partner Privatbank AG
should be capable of earning attractive returns even this segment as well, the tight credit spreads (even in this climate. Picking the right managers is crucial. for high-yield bonds) provide only a limited buffer against rising interest rates. • Since (surprisingly) high inflation rates remain more Currencies: Bank of England raises interest rates than just a negligible residual risk again this year, al- • EUR/USD: The euro stabilized and trended rangebound against the US dollar in December. In the best locating investment assets to inflation-linked bonds case this marks the start of a floor forming, and in a remains advisable. The circumstances also continue worse case it merely marks a pause in the existing to call for interest-bearing alternatives. Microfidowntrend. The further widening interest-rate gap nance loans and investments in peer-to-peer lendbetween the USA and Europe is the main argument ing are comparatively unspectacular, but deliver in favor of the downtrend extending to prices bevery solid returns and have a low performance corlow USD 1.10. However, since this monetary policy relation with other assets – investors should seek divergence is no longer entirely new and market thrills somewhere else. Insurance-linked bonds sufparticipants are accordingly positioned for this by fered setbacks last year due to a number of adverse now, a major rebound from lower levels is becoming weather events in the USA, but in a diversified form increasingly likely. they remain a beneficial portfolio component for • GBP/USD: The Bank of England is turning more and 2022 in a fixed-income strategy. more into a fickle friend for the currency markets because after the no-show in November, its DecemAlternative assets: Sights lowered for private equity ber rate hike (by 15 basis points to 0.25%) was ultias well mately another small surprise. The move had been • Private equity last year once again lived up to its put in limbo by the rapid increase in Omicron infecreputation of delivering above-average returns. tions. The 8-to-1 vote in favor of hiking made the The final performance figures for 2021 aren’t out decision all the more blunt. The next rate hike may yet, but it’s already foreseeable that private-market follow by as soon as February. The British pound investments surpassed even the excellent perforshould now be able to stabilize somewhat on the mance of the public stock markets. However, the back of revived interest-rate speculation. new year now looks set to become more challenging for private equity managers as well. In the wake • EUR/CHF: There is little left over from the Swiss franc’s 4% (nominal) appreciation against the euro of the industry having raised oodles of cash over last year once the inflation differential is factored in the last twelve months, including 31 mega-funds – in real terms, the franc actually even depreciated with an asset volume of more than USD 5 billion, a slightly. Since the Swiss National Bank traditionally whole lot of money is now waiting on the sidelines has low tolerance for inflation, it may stand back to be invested in an environment in which valuaand watch the franc appreciate further over the tions have climbed higher. The fact that many valucourse of this year without intervening in a big way ations by now are overambitious is evidenced not as long as the franc’s exchange value doesn’t rise least by the poor performance of growth company too quickly. In the nearer term, though, the euro IPOs last year – more than half of the newly listed is in oversold condition, so a consolidation phase is companies ended 2021 trading below their respeclikely at first for the moment. tive IPO prices. But good private equity managers
Last year was smooth sailing compared to the wild rollercoaster ride in 2020, the first year of the pandemic, when the S&P 500 index plummeted by a third in a span of five weeks. Despite an array of uncertainties in light of new virus variants, inflation fears and accelerating tapering by the Fed, the US blue-chip index’s maximum drawdown in 2021 amounted to just 5.9% (intraday). The only year with lower volatility in the bull market underway since 2009 was in 2017, when the rally fueled by Donald Trump’s tax cuts kept the market from undergoing even a 5% correction. Volatility, however, is cyclical. After a calm 2017, “Volmageddon” hit on February 5, 2018, when the VIX index spiked by more than 100% in a single day, triggering the crash of the popular XIV volatility ETF. (Stock-market) history doesn’t repeat itself, but it often rhymes. Higher volatility looks very likely to make a comeback in 2022.
Chart in the Spotlight Is the leisurely excursion over? | This year looks set to become a bit more volatile again Drawdown from all-time high for S&P 500 index
Sources: Bloomberg, Kaiser Partner Privatbank
Kaiser Partner Privatbank AG | Monthly Market Monitor - January 2022
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Theme in Focus
Emerging-market stocks: When will the turnaround come?
There were only a few asset classes last year that didn’t deliver gains for investors. Emergingmarket stocks ranked among them – they actually even posted a significantly negative performance. Has the time now come for a trend reversal?
A year to forget Anyone who was (too) heavily invested in emergingmarket stocks in 2021 had to swallow the proverbial bitter pill for once in both absolute and relative terms. Not only was the performance of the MSCI Emerging Markets index negative for the year (-4.6%), but at the same time, that emerging-market equity barometer lagged more than 20 percentage points behind developed markets, posting its worst underperformance since 2013 (–29%). In fact, the macroeconomic climate for emerging markets in 2021 came very close to resembling a perfect storm. The economic upturn after the initial coronavirus shock fizzled out relatively quickly, partly because in contrast to industrialized countries, there wasn’t any comparable monetary or fiscal policy support. At the same time, the coronavirus exerted a stronger brake on economic growth due to the much lower vaccination rates in some emerging-market countries. Inflation, however, rose much more sharply than in developed markets, which forced central banks in many emerging economies to raise interest rates. An additional headwind was created by the strong US dollar. Finally, a big factor weighing down emerging markets was China, the superheavyweight in the EM benchmark index, accounting for around one-third of its market capitalization. The government of China’s crackdown on domestic internet companies, the turmoil in China’s real estate market and general uncertainty about President Xi’s “common prosperity for all” slogan depressed economic growth and sentiment and pushed down stock prices. Consequently, China last year was the caboose among the major emerging markets. What matters is the delta So much for retrospection, but what lies ahead now? Since markets look into the future, what matters most of all is how the variables described above will evolve in the quarters ahead. The expected change, or delta, is positive in many respects. For example, the growth differential between emerging economies and industrialized countries looks set to widen again in the future after having contracted to a minimum in 2021. Emerging-market countries also look set to catch up in the area of COVID-19 vaccinations. The improvement in economic growth dynamics should also ultimately translate into a relatively
12
Monthly Market Monitor - January 2022 | Kaiser Partner Privatbank AG
stronger corporate earnings growth trend, which has been one of the main drivers of emerging-market stocks’ out- or underperformance in the past. One element of uncertainty and a neutral to a lingering mild negative driver for the time being is the US dollar, which could further appreciate a bit. China, however, could become a booster, contrary to current market sentiment, because the uncertainty and (side) effects regarding the country’s tightening regulatory screws are largely priced in by now and there is good reason to expect a positive delta in China as well. China’s politburo in December indicated that (economic) “stability” will be extremely stable in the months ahead. Targeted support and easing measures have already been discernible lately in China’s real estate sector. There was also already some easing on the monetary policy front as well at the end of last year as minimum reserve requirement ratios for banks were lowered. China’s credit impulse – a key indicator of economic growth dynamics and for markets – could soon turn upward again.
An attractive asset class? So, does this mean that emerging-market stocks are a “buy” for 2022? There’s a tactical answer to this question as well as a strategic consideration to take into account. From a tactical standpoint, it makes sense to take at least a neutral position in emerging markets. The potential for a direct continuation of their underperformance in the recent past appears constrained, and there is a good possibility for a catch-up rally because in addition to the “delta potential”, emergingmarket stocks have seldom been as cheap as they are today and are trading at a 30%-plus price-to-earnings valuation discount to developed-market equities. Moreover, emerging-market stocks are not particularly in favor with investors at the moment, which is a positive factor from a contrarian perspective. But is tactical maneuvering worthwhile at all, and are emerging markets (still) a sensible strategic component of an asset allocation? After all, one can confidently call the last ten years a “lost decade.” While the MSCI World index posted an average annual return above +12% over that period, the MSCI Emerging Markets index performed less than half as well at +5.2%, and with much higher volatility (13.2% vs. 16.4%). But as is so often the case, the devil lies in the details. Zooming in on a somewhat shorter timeframe and paying attention to which benchmark we are using to make comparisons puts the “performance problem” into somewhat better perspective. Because then it becomes evident that emerging markets have really only strikingly underperformed the USA. They have kept pace with the other developed markets relatively well since 2014. Strategic investment exposure to emerging economies still makes sense, in our opinion. The growth and return potential that exists there is more than just anecdotal. However, since the MSCI Emerging Markets benchmark index is a (regionally) heterogeneous but poorly diversified construct (China, South Korea and Taiwan combined account for more than 60% of the index), it is recommendable to manage exposure to emerging economies as actively as possible. Compared to developed markets, emerging markets exhibit more inefficiencies and a certain complexity premium. For those who are able to take advantage of this with the help of support from a professional asset manager, emerging-market stocks can be enriching.
A heavy weight | China dragged down performance in 2021 MSCI indices
Sources: Bloomberg, Kaiser Partner Privatbank
A tactical buy? | On the trendline MSCI China vs. MSCI Emerging Markets
Sources: Bloomberg, Kaiser Partner Privatbank
Emerging markets have “kept pace” since 2014… | …just not with the USA Relative performance of MSCI indices
Sources: Bloomberg, Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - January 2022
13
ESG: Sustainability corner “Green” trends in 2022
Carrot and stick gone mainstream, a fact that was reflected again in Sustainable investing continued to gain popularity in 2021 by the many new signatories to the Principles 2021. Morningstar calculates that total assets under for Responsible Investments (PRI) initiative. management in investment funds and ETFs categorized as sustainable more than doubled over the first Peak greenwashing? three quarters of 2021 alone to a worldwide volume The rapid growth of ESG investing in 2021 was acof USD 3.9 trillion. Almost 90% of those assets are companied by discord because although there was a domiciled in Europe. The torrid growth momentum lot of successful tub-thumping of green investment (and heavy regional skew) in 2021 was particularly vehicles in the media, critics of the sustainability caused by the wielding of a regulatory stick called trend were also allowed to get a word in more often the Sustainable Finance Disclosure Regulation than in previous years, and many of their admoni(SFDR), which since March classifies investment vehi- tions warned against greenwashing. It thus far really cles in the EU into a “conventional”, “light green”, or has been easy to put a green stamp on an investment “dark green” category. The introduction of the SFDR product because the alphabet soup of ESG regulaprompted many investment funds to “adjust” their tions, terminologies and labels is hard to decipher. stated objective so that they can now be deemed If you ask ten portfolio managers to define what a sustainable. This adjustment procedure looks set to “green investment” means, you will still get ten differcontinue in 2022 because around half of all assets ent answers today. However, it is gradually becoming under management in European mutual funds basi- foreseeable that a common vocabulary will evolve cally qualified for inclusion in the green categories. that will foster transparency and above all will likely However, the fact that ESG investments appear des- make it easier to select green investment products. tined to continue outgrowing conventional invest- The US Securities and Exchange Commission (SEC) ments does not owe solely to the stick, but also to has already called the investment industry’s attena carrot. According to a study by investment consul- tion to shortcomings in ESG data disclosure and tancy Bfinance, around 80% of the investors surveyed verification practices, and further steps are likely to expect sustainably managed strategies to (continue follow. In Europe, meanwhile, the SFDR cited above to) outperform over the next three years. This bull- already represents a major advancement. According ish expectation is also bound to give “green” assets to a study by MSCI, (climate) funds that are marfurther buoyancy in the quarters ahead and shows, keted as sustainable investment vehicles pursuant to last but not least, that ESG investing has long since Article 8 or Article 9 of the SFDR are better aligned with a 1.5°C or 2°C global warming scenario than conventional mutual funds are. Moreover, their ecoUnabated momentum | Continually growing investor community logical footprint is generally smaller, with statistical Assets under management and number of signatories to PRI initiative significance. The SDFR thus makes it altogether more difficult for an investment fund to engage in greenwashing and, conversely, makes it easier for investors to comprehend the green nature of an investment and to pursue personal sustainability objectives. The EU Taxonomy Regulation that took effect on January 1, 2022, should also provide a clearer answer to the question of what truly qualifies as being sustainable. The taxonomy spells out which economic activities are considered “green” and sets reporting requirements for (European) companies. It could contribute to creating an international standard for defining sustainability issues. There are already signs that the EU taxonomy looks destined to develop into a set of guidelines that other countries will use to define The three letters E, S and G have long since gone mainstream in the investment world, but the sustainable investing space remains a dynamic (growth) market. We shed light on some “green” trends that look set to continue this year.
Source: UNPRI, Kaiser Partner Privatbank 14
Monthly Market Monitor - January 2022 | Kaiser Partner Privatbank AG
“Private” emissions under close scrutiny Just how intense the pressure on publicly traded companies – particularly those operating in “brown” industries like the basic materials and energy sectors – has become in the meantime was demonstrated last year by events that included small activist investor Engine No. 1’s surprise victory in its dispute with oil giant Exxon Mobil. Many a corporate leader might very well imagine here that life is much calmer away from the financial markets – tucked in the bosom of a private equity firm, for example. And in fact, even the giants among publicly traded private equity firms have at most heretofore reported only on their own ecological footprint. Apart from Sweden-based EQT, none of them disclose information about their portfolio companies’ emissions. Their (marketing) focus instead is (still) on playing up the success stories of select companies or highlighting investments in renewable energy in general. Over the last ten years, publicly traded corporations have learned the hard way – quite painfully in some cases – that this “tactic” of citing anecdotes instead of referencing systematic, quantitative reporting no longer satisfies investors, regulators and other stakeholders. Private equity firms likewise won’t be able to duck out on improvtheir own frameworks and which investors can use to ing their communication practices for much longer. Investors also on private markets will likely soon start implement their sustainability strategies. to demand stepped-up disclosure of standardized metrics that cover the entire spectrum of climate Net zero across the supply chain “Net zero” was one of the key catchwords in the risks and detail the alignment of portfolio companies ESG world in 2021. Many governments vowed to with a 1.5°C global warming scenario. cut their countries’ greenhouse gas emissions to an even greater extent than previously planned. Many companies again rushed to disclose CO2 emission reduction roadmaps to the public, not least due to pressure from their shareholders. The US internet giants Amazon, Microsoft and Alphabet have long ranked among the trailblazers on the road to “net zero.” Their market clout has increasingly made them the target of criticism lately. But when it comes to achieving their very ambitious climate goals, size could prove to be a huge blessing for once because (Dark) green funds… | …really are somewhat greener there is enormous potential to cut the CO2 emis- Implied temperature rise in climate fund portfolios sions of cloud data centers, a market that is almost completely dominated by those three companies and which requires billions of dollars of capex each year. If Amazon and cohorts wish to improve both their direct as well as indirect ecological footprints, they will have to put corresponding pressure on their suppliers of technology equipment (hardware, semiconductors, etc.) in the future. They are more than likely to do that sooner or later. IT equipment manufacturers like Lenovo and Hewlett Packard and chipmakers like Intel and TSMC, which heretofore haven’t disclosed official net-zero targets yet, could soon see themselves forced to do so. We can expect to see similar greening effects across the supply chain in other industries as well in the years ahead. Sources: MSCI, Kaiser Partner Privatbank Kaiser Partner Privatbank AG | Monthly Market Monitor - January 2022
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The Back Page Asset classes & agenda
Performance as of 31 December 2021 Asset class
YTD
1 Month
1 Year
3 Years
Cash CHF
-0.1%
-0.7%
-2.0%
EUR
0.0%
-0.5%
-1.3%
USD
0.0%
0.2%
3.2%
Fixed Income Sovereign bonds
-0.9%
-2.4%
7.2%
Corporate bonds
0.2%
-3.0%
19.3%
Microfinance
0.3%
3.5%
9.8%
Inflation-linked bonds
-1.4%
5.5%
25.5%
High-yield bonds
2.1%
4.5%
25.4%
Emerging-market bonds
1.6%
-2.1%
20.3%
0.4%
4.9%
15.9%
-0.3%
2.4%
66.6%
Insurance-linked bonds Convertible bonds Equities Global
4.0%
24.2%
79.4%
Switzerland
6.1%
23.0%
62.9%
Europa
4.9%
22.2%
51.7%
UK
4.8%
19.6%
20.8%
USA
3.9%
26.5%
99.8%
Emerging markets
1.6%
-4.6%
27.6%
Commodities
3.5%
27.1%
29.3%
Gold
3.1%
-3.6%
42.6%
Real estate Switzerland
3.9%
7.3%
43.5%
Hedge funds
0.5%
3.7%
20.3%
Alternative assets
Currencies EUR/USD
0.3%
-6.9%
-0.8%
EUR/CHF
-0.4%
-4.0%
-7.8%
GBP/USD
1.8%
-1.0%
6.1%
On our Agenda January 7 & 12: Eurozone & US inflation data The December inflation data for the Eurozone and the USA may hit new highs again and accordingly make headlines, but will mark the end of the flagpole in all likelihood. Inflationary pressure looks set to subside over the course of this year. January 17–21: World Economic Forum (WEF) The annual meeting of leading figures from the spheres of business, politics and civil society at the World Economic Forum (WEF) in Davos has been called off again this year on account of the coronavirus pandemic. The 52nd edition has been rescheduled to take place this summer. February 4–20: Winter Olympic Games In the end, Beijing and Almaty were the only cities in 2015 that submitted bids to host the 24th Winter Olympiad. China’s capital city won out by a vote of 44 to 40. However, the sporting event will be taking place under less-than-ideal auspices. Many countries – including the USA, the UK and Canada – have announced a “diplomatic boycott” of the games.
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Monthly Market Monitor - January 2022 | Kaiser Partner Privatbank AG
Kaiser Partner Privatbank AG | Monthly Market Monitor - January 2022
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This document constitutes neither a financial analysis nor an advertisement. It is intended solely for informational purposes. None of the information contained herein constitutes a solicitation or recommendation by Kaiser Partner Privatbank AG to purchase or sell a financial instrument or to take any other actions regarding any financial instruments. Furthermore, the information contained herein does not constitute investment advice. Any references in this document to past performance are no guarantee of a positive future performance. Kaiser Partner Privatbank AG assumes no liability for the completeness, correctness or currentness of the information contained herein or for any losses or damages arising from any actions taken on the basis of the information in this document. All contents of this document are protected by intellectual property law, particularly by copyright law. The reprinting or reproduction of all or any parts of this document in any way or form for public or commercial purposes is expressly prohibited unless prior written consent has been explicitly granted by Kaiser Partner Privatbank AG.
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Monthly Market Monitor - January 2022 | Kaiser Partner Privatbank AG
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