Global Investment Strategy and Financial Market Outlook replace …0878ae25-7746-42a2... · 2021....

Banque Cramer | Genève | Lugano | Zürich

Global Market Outlook and Investment StrategyDecember 2020

Banque Cramer | Genève | Lugano | Zürich 2

Goodbye 2020 (at last!)

We made it. We managed to escape 2020 alive, but we had to leave some friends behind.

We made our farewells to our unwanted fellow Covid-19. More than 50 countries have launched their

vaccination campaigns indeed, sometimes at an outstanding pace. Israel has already vaccinated more than 1.1m

people i.e. close to 13% of its total population as we speak. Operation Warp Speed’s goal to produce and

deliver 300mn doses of vaccines in the U.S. is advancing as well, despite some logistical hiccups - the country

is now vaccinating 300k+ people per day. Hopefully, European countries will find their cruising speed soon.

It will be time to say goodbye to @realDonaldTrump and his rage tweets. Last month, the Electoral College

voted to cement Joe Biden’s victory over the incumbent President. The inauguration will be held on

Wednesday January 20. Vaccine deployments, combined with the easing of mobility restrictions, a new balance

of power in the U.S., as well as expansionary government spending and ultra-accommodative monetary

policies around the globe are creating a goldilocks scenario for investors as we enter 2021.

It may be time to say goodbye to your pessimism. The Fed raised its economic outlook slightly last month,

confirming a faster-than-expected recovery. Median projection for real GDP growth in 2021/22 was revised up

0.2pp in both years to 4.2% and 3.2%, respectively. Unemployment rate is expected to fall to 5.0%/4.2% in

2021/22, further below the 5.5%/4.6% previously predicted. Core PCE inflation is expected to come in at

1.8%/1.9% in 2021/22, slightly firmer than September’s projections of 1.7%/1.8%.

Last but not least, you should say goodbye to your fears. With the S&P 500 and Nasdaq-100 up 16.3%/47.6%

respectively last year, it might be tempting to think that much of the risk assets rebound has already taken

place. J. Powell disagrees - the Fed model says that investors should look beyond extravagant P/E metrics (e.g.

S&P forward P/E sitting above 27x), and instead should consider the spread between the S&P 500’s earnings

yield and the 10-year Treasury yield, which hovers at an attractive 2.4% at the moment. This is tempting, too.

In other words, embrace the new reality... and Happy New Year!

Hans Itburrun

Hans Ibturrun

Chief Investment

Officer (CIO), Head

of Asset Management

& Head of External

Asset Managers

(EAM)

CIO SynopsisDecember 2020


« Il faut donner du temps au temps», literally « Give time to Time » by Miguel de Cervantès (Don Quichotte).

We will enter 2021 with two major “roll-over” events, namely Vaccination and Democrats political agenda! We are, humbly, giving Time

for those two campaigns to deploy their effects on the World, Market and Humanity –Yes I am serious, I truly mean Humanity- with

projects such as Low Carbon world , Vaccinations, ESG companies! As we get more clarity, our investment themes will evolved but we

can already see the groundswell of some key developments hatching and we are already positioned on those currents.

Our Global Structural themes:

• From Globalization to Regionalization

• Long Small & Mid Cap

• Beware Platform and Social Media companies

• From Deflation to Reflation (Not Inflation) albeit near term mind Covid risk!

• Long Industrial, Manufacturing, Materials and Energy

• Long Pandemic Victims companies

• Social Healing

• Long Education related companies

• Long «Blue Collar Back to Work» theme though Infrastructure

• Lower Carbon World

• Long New Energy

• Long ESG

3Source: Bloomberg

Our 2021 Investment Themes December 2020

Our Regional Themes:

• USA reconnect to “Enlarged” NAFTA

• Long Emerging Markets and UK

• European Banking Consolidation

• Long AT1 bonds and Bank ETF

• Asian New Partnership Accord

• Long Asian currencies, bonds and

Equities


Market review


Zone Item 2019a 2020e 2021e

US Real GDP (YoY%) 2.3 -3.5 3.9

Industrial Production (YoY%) 0.9 -7.1 4.1

CPI (YoY%) 1.8 1.2 2.0

Unemployment (%) 3.7 8.1 6.0

Current Account (% of GDP) -2.5 -2.9 -3.1

Fiscal Bal. (Budget, % of GDP) -4.6 -15.8 -9.9

China Real GDP (YoY%) 6.1 2.0 8.2

Industrial Production (YoY%) 5.5 2.5 8.8

CPI (YoY%) 2.8 2.6 1.6


Current Account (% of GDP) 1.2 1.7 1.4


EU Real GDP (YoY%) 1.4 -7.6 4.6

CPI (YoY%) 1.5 0.6 1.1


Current Account (% of GDP) 1.9 1.8 2.0


The Fed raised its economic outlook slightly in

December; median projection for real GDP growth in

2021/22 was revised up 0.2pp in both years to 4.2% and

3.2%, resp. Unemployment rate is expected to fall to

5.0%/4.2% in 2021/22, further below the 5.5%/4.6%

previously predicted. Core PCE inflation is expected to

come in at 1.8%/1.9% in 2021/22, slightly firmer than

September’s projections of 1.7%/1.8%.

The ECB projections released in December, on the other

hand, showed a more acute pandemic damage due to the

tightening of containment measures in October and

November. Real GDP growth projections for 2021 was

revised down by 1.1pp to 3.9%. Real GDP is expected to

return to its pre-crisis level only by mid-2022. As for

inflation, HICP ex energy and food is expected to show a

muted recovery as well (only 1.0%/1.2% projected for

2022/23 resp.).

5Source: Bloomberg (a = actual, e = consensus forecasts), as of 31/12/2020

Macro OutlookDecember 2020


Global equities ended the year with a bullish mood as investors took

comfort from a $900bn fiscal stimulus bill passed by U.S. Congress, the

impending deployment of vaccines globally and an historic Brexit deal. This

helped overcome concerns over a new strain of coronavirus detected in the

U.K. and tighter lockdowns across Europe amid a resurgence of cases. The

S&P 500 and Nasdaq-100 rose 3.7% and 5.1% resp. last month, while the

Stoxx Europe 600 index climbed 2.5%. The contrast between the two

regions this year is startling, with the tech-heavy U.S. indices up

16.3%/47.6% resp. while the European gauge ended in the red at -4.0%.

The outperformance of Value vs. Growth has eased (MSCI All-Country

World Value Index up 4.0% in December vs. +5.1% for the Growth

equivalent). The revenge of Tech stocks undoubtedly raises questions about

valuations as we enter 2021. The Cyclically Adjusted Price-to-Earnings

ratio (CAPE, or Shiller P/E) stands at almost 34x vs. a historic median of

16x, and this multiple was exceeded only in 1929 and 2000 – both bubbles.

As for forward valuations, the 2021e P/E for the S&P 500 now stands at

27.0x, the high end of its historical range as well.

But is the P/E ratio still a good metric? The multiple may not be the best

way to assess the attractiveness of U.S. equities at the moment... according

to the Fed model. J. Powell reminded investors during his press conference

last month that relative to risk-free rates of return, the S&P 500 still looks

appealing indeed with an earnings yield sitting at 3.3% vs. a 10-year

Treasury yield at 0.9% only. This 2.4% spread is historically high and is

well above the level that prevailed before the burst of the internet bubble,

when bonds actually yielded more than equities by that measure.

6

EquitiesDecember 2020

Source: Bloomberg

As of

31/12/2020

1-month

perf.

Year-to-date

perf.

S&P 500 3 756.07 3.7% 16.3%

Nasdaq 100 12 888.28 5.1% 47.6%

Euro STOXX 50 3 552.64 1.7% -5.1%

STOXX Europe 600 399.03 2.5% -4.0%

SMI 10 703.51 2.2% 0.8%

DAXK 5 935.22 3.2% 0.4%

CAC 40 5 551.41 0.6% -7.1%

FTSE MIB 22 232.90 0.8% -5.4%

IBEX 35 8 073.70 0.0% -15.5%

Nikkei 225 27 444.17 3.8% 16.0%

MSCI EM 1 291.26 7.2% 15.8%

HSCEI 10 738.40 1.8% -3.8%

IBOVESPA 119 017.20 9.3% 2.9%


Credit spreads tightened last month, esp. on the speculative

category (iTraxx Crossover 5yr -23bps, CDX 5yr -10bps, with

both virtually back to pre-pandemic levels). This confirms the

risk-on tone already observed in Nov., itself fueled by the

combination of vaccines, expansionary government spending

and ultra-accommodative monetary policies around the globe.

Another observation derived from this tone was the 10-year

breakevens in U.S. TIPS closing at new year-to-date wides

(1.99%), while 10-year real yields declined to the lowest levels

since early September. More than the anticipation of higher

inflation in the mid-term, this underlines the need for investors

to find higher (read riskier) carry instruments in the future.

The Fed at its Dec 15-16 meeting left its benchmark interest

rate in a target range of 0% to 0.25% (dot plots showed

officials expect no change in policy next year and borrowing

costs near zero through 2023). It also introduced forward

guidance for its APP by confirming it will continue to increase

its holdings of Treasuries by >$80bn/month and of MBS by

>$40bn/month until further progress has been made toward

maximum employment and price stability goals. The weighted

average maturity of Treasury purchases has not been extended.

The ECB at its Dec 10 meeting left key policy rates unchanged

but decided to increase the size of its pandemic program

(PEPP) by €500bn to €1.85tn and extend it for nine months

through March 2022 in a bid to support the euro-area recovery.

7Source: Bloomberg, Dealogic

As of

31/12/2020

1-month

perf.

Year-to-date

perf.

Eonia -0.47 +1 bp -2 bp

Euribor 3M -0.55 -2 bp -16 bp

Libor USD 3M 0.24 +1 bp -167 bp

Germany 2yr yield -0.70 +4 bp -10 bp

Germany 10yr yield -0.57 unch. -38 bp

US 2yr yield 0.12 -3 bp -145 bp

US 10yr yield 0.91 +7 bp -100 bp

France 10yr spread vs. Germany +23 bp -1 bp -7 bp

Portugal 10yr spread vs. Germany +60 bp -1 bp -3 bp

Spain 10yr spread vs. Germany +62 bp -4 bp -4 bp

Italy 10yr spread vs. Germany +111 bp -8 bp -49 bp

iTraxx Main 5yr +48 bp -1 bp +4 bp

iTraxx Crossover 5yr +242 bp -23 bp +35 bp

iTraxx Financials Senior 5yr +59 bp -2 bp +7 bp

CDX IG 5yr +50 bp unch. +5 bp

CDX HY 5yr +293 bp -10 bp +13 bp

December 2020

Rates & Credit


WTI and Brent futures advanced once again in December and ended

the year at $48.5/bbl and $51.8/bbl resp., thanks to vaccine

deployments, a fresh OPEC+ compromise, a $900bn pandemic relief

bill in the U.S. that may boost near-term demand, as well as rising

tensions in the Middle East. This helped offset the adverse demand

dynamics in Europe caused by the new lockdowns as well as concerns

over a new Covid-19 variant.

OPEC+ debated (Nov 30-Dec 3) whether to ease output cuts from

7.7mbpd to 5.8mbpd on Jan 1. The cartel slashed production by 9.7

mb/d during the pandemic and successfully returned 2 mb/d in August.

It now found a compromise to increase oil production by 500 kb/d

only from January (i.e. substantially less than the 1.9 mb/d feared by

market participants) and agreed on a more flexible approach for

decisions on curbs in the near future.

While precious metals were negatively impacted by a pro-cyclical

rotation in Nov., they eventually found a new support over the past few

weeks, boosted by the second stimulus package in the U.S., a weaker

dollar and inflation concerns. Gold edged higher indeed, rising 6.8% to

$1,898/oz, and capped its performance at +25% this year, its best since

2010. Perhaps more impressive than gold, spot silver was up 16.6%

last month (+48% ytd) as it also benefited from surging demand for

solar energy installations. Within the base metals complex, iron ore

staged a strong rally last month (e.g. Dalian futures up 17.4%),

supported by China’s steel demand and lingering supply concerns

(producers in both Brazil and Australia still facing significant

regulatory and operational challenges).

8Source: Bloomberg

December 2020

Commodities

As of

31/12/2020

1-month

perf.

Year-to-date

perf.

Brent ($/bbl) 51.80 8.0% -14.0%

WTI ($/bbl) 48.52 6.6% -12.8%

Gold ($/toz) 1 898.36 6.8% 25.1%

Silver ($/toz) 26.40 16.6% 47.9%

Platinum ($/toz) 1 079.20 11.2% 10.7%

Palladium ($/toz) 2 453.80 2.0% 30.4%

Copper ($/MT) 7 757.75 2.4% 25.1%

Iron Ore Fines62% ($/MT) 158.41 25.6% 95.8%

Corn (c/bu) 484.00 13.6% 17.7%

Coffee (c/lb) 128.25 4.0% -8.4%

Cocoa ($/mt) 2 603.00 -5.0% 7.0%

Soybean (c/bsh) 1 311.00 12.1% 34.8%


The dollar hit its lowest in two and a half years (e.g. DXY index

below 90), dragged by renewed investors’ risk appetite for riskier

currencies on the back of Joe Biden’s victory in the U.S. presidential

election, Covid-19 vaccine deployments, the continuous erosion of

the currency's carry advantage and hopes for further stimulus.

Although the FOMC did not extend the average maturity of its

Treasury purchases at the Dec. 15-16 meeting, the Committee kept

its accommodative stance due to subdued structural inflation trends.

Officials expect no change in policy next year and borrowing costs

near zero through 2023, thereby paving the way for further USD

weakness. Not surprisingly, CFTC net short non-commercial

positions futures linked to the DXY have surged to their highest

level in almost a decade.

The U.S. Treasury Department labelled Switzerland and Vietnam as

currency manipulators for the first time in its semiannual report,

mostly because of their persistent FX intervention, and kept China

on a watch list. While the designation has no specific or immediate

consequence beyond short-term market impacts, this could provide

leverage in trade negotiations (e.g. penalties including exclusion

from U.S. government contracts).

9Source: Bloomberg

December 2020

Currencies

As of

31/12/2020

1-month

perf.

Year-to-date

perf.

EUR/USD 1.22 2.4% 8.9%

USD/JPY 103.25 -1.0% -4.9%

EUR/GBP 0.90 0.8% 6.7%

USD/CHF 0.88 -3.0% -8.8%

EUR/CHF 1.08 -0.3% -0.4%

GBP/USD 1.37 2.6% 3.1%

USD/CAD 1.28 -1.9% -1.8%

USD/CNY 6.52 -0.8% -6.3%

USD/INR 73.31 -1.0% 2.7%

USD/BRL 5.19 -3.1% 28.8%

USD/TRY 7.44 -4.9% 25.0%

USD/ARS 84.15 3.5% 40.5%

DXY Index 89.94 -2.1% -6.7%


What keeps me up at night


«War against Covid19 : It’s just a simple mathematical solution : Vaccination rate equal to or higher than Contamination rate”

The new technique use to breed COVID19 Vaccine, mRNA, is indeed a moon-step in the Virology field. It’s a gigantic step by its success

rate to cure but also by the speed to modify the vaccine to cope with certain type of mutations of the virus. This technique is new and is

available to the market in a shorter hatching period than traditional vaccine – BUT It does not have room for failure!!!!! Let’s hope all go

smoothly.

Another point on this virus that keeps me awake at night is its mutating capability and the «ease» of crossing the barrier of species . We

saw the virus in Mink in Denmark and France and we had to incinerate the whole herd. Such ability of cross-species-contamination do

foster mutation. Let’s hope this Covid does not reserve any other nasty surprise! Until then the best we could do is to accelerate the

vaccination rate and to restrain the contamination rate, through stricter lowdown, so as to hasten herd immunity in our society. This new

confinement will surely leave deep economic scars in our economic fabric, with inevitable bankruptcies, higher unemployment and

mountainous government deficits – deflationary, at least in the next three months.

In the medium term, as the herd immunity shows its effect, recovery policies will be first in the political agenda and since «Old habits die

Hard» Modern Monetary Theory, MMT, will transcend into Modern Monetary Practice, MMP, draining the Market and Society with

more and cheaper liquidity access. The combo Fed, Yellen and Dems is a just a FAT liquidity Goose – Merry Liquiditymas!

A serious reflationary environment will start to establish – which in turn re-establish the term premium on the yield curve – consequence,

steepening of the curve. With the “Tail starting then to wag the Dog!”, «Proxy-Reserve Assets» such Gold and Crypto, which tend to

thrive in a zero short term rate and zero term premium, will be shaken ! Pockets of bubble will splash ! And we will enter a mean

reversion regime and the end of momentum trades regime!

The art of managing money is to identify such regime changes and position appropriately. A smartest investment style is to accompany the

whole mechanism of a regime change by shorting the momentum markets ,or use it at least as hedge, then bridge a convex strategy to link

into the new environment, which will be mean-reversion.

Given we have been «infected» with the ample and easy liquidity dose for a LONG time , any weaning therapy can only be highly volatile

and painful – But this is a story for this summer !

Long term view I can not see it from where I stand right now it’s quite foggy there ! – simply humility again!

11Source: Bloomberg

Our 2021 Investment Themes December 2020


The economic calendar will be rather light over

the next few weeks. Investors will mostly keep an

eye on the PMI levels in Europe to confirm

whether the rate of expansion has cooled due to

the new lockdown measures. On the other side of

the Atlantic, J. Biden is expected to be sworn in as

the 46th President of the United States on Jan 20.

12

Zone Item Date Survey Prior

CH Caixin Manuf. PMI (Dec) Jan 3 54.8 54.9

FR Markit Manuf. PMI (Dec) Jan 4 51.1 51.1

GE Markit Manuf. PMI (Dec) Jan 4 58.6 58.6

EC Markit Manuf. PMI (Dec) Jan 4 55.5 55.5

US ISM Manuf. PMI (Dec) Jan 5 56.5 57.5

EC Markit Services PMI (Dec) Jan 6 - 47.3

EC CPI (YoY) (Dec) Jan 7 -0.2% -0.3%

US Nonfarm payrolls (Dec) Jan 8 100k 245k

CH Trade Balance (USD) (Dec) Jan 13 - 75.4b

CH GDP (YoY) (Q4) Jan 17 5.2% 4.9%

CH Industrial prod. (YoY) (Dec) Jan 18 - 7.0%

GE ZEW Eco. Sentiment (Jan) Jan 19 45.5 55.0

US Inauguration of J. Biden Jan 20 - -

US Fed Interest rate decision Jan 27 - 0.25%

US GDP (QoQ annual.) (Q4) Jan 28 - 33.4%

Source: Bloomberg

December 2020

The Month Ahead: Economic Calendar


Invest with our Thematics


Solid Balance Sheets in Europe & in the US

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Our proposal is to exploit the well-known Altman Z-Score framework in order to take refuge in the companies currently exhibiting

the most solid balance sheets in Europe and in the US. The latter will resist better in the current environment marked by the

pandemic, stress in the oil market and macro deceleration.

The European Green Deal

Actively Managed Certificates • Participation • Available in EUR, USD, CHF

Climate change and environmental degradation are an existential threat to Europe and the world. To overcome these challenges

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Actively Managed Certificates • Participation • Available in USD

The US only rank 13th globally for the quality of infrastructure (Source: WEF), and Transport infrastructure in particular are

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believe that the time has come for a spectacular modernization. There is a strong bipartisan support around infrastructure spending

in the US indeed. President Trump plans a special investment program of $200 billion in order to trigger up to $1.5 trillion

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December 2020



Apollo Equity Europe

Open end Certificate • Participation • Available in EUR

State interventionism in the economy has become central, especially as the world is preparing for an energy revolution, as the

United States and China have entered into a “Cold War” and a resurgence of societal tensions are felt in many countries. Most of

the great world powers are now committing to multi-year budgetary programs to meet the challenges they face. This is particularly

the case in Europe, through the Green Deal and the Recovery Fund that has just been launched. The old continent (under the

impetus of the Franco-German couple), which has experienced financial underperformance for 10 years, is in the process of

breaking out of its rigorous political line centered on cost competitiveness to avoid further financial downgrading.

This change of strategy in the current environment is reminiscent of the turn made by the United States in the early 1960s

following the election of JF. Kennedy. In a climate of cold war, the 35th American President launched his “new frontier”

budgetary program to revitalize his country’s economy. This initiative led to the Apollo mission and the first man on the moon.

November 2020


Europe Hybrid bonds

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This certificate is made of three main selected components: Hybrids Corporates (combining bonds coupon and capital appreciation

issued by corporates), CoCo Bonds (corresponding to tier 1 bank subordinated debts) and T2 Insurance debts.

The European banking & insurance sectors are stronger, better regulated and much more regulated than before the 2008-09

financial crisis. Bank & insurance capital cushion is now thicker and of better quality. These cushions consist of hard capital,

hybrid capital instruments (Tier 1 and Legacy Tier 1), other subordinated debts (Tier 2, Lower Tier 2, Upper Tier 2) and finally

some structurally junior senior debts to other liabilities (the new Tier 3).


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