1GLOBALANCE investment outlook

The interaction of these factors is

making us increasingly defensive in how

we manage our portfolios.

US ECONOMY SOUND – THANKS

TO TRUMP’S TAX REFORMS

The fiscal policy boost is primarily

reflected in increasing corporate profits

and share buyback programmes.

Nevertheless, the package is taking

After nine years of global economic

growth we’re approaching the peak –

which makes it increasingly likely

that there will be an economic slow-

down in 2019. At the same time,

investors have to deal with renewed

volatility in the equity markets. Both

of which are reasons to structure

the portfolio more defensively.

A POSITIVE – BUT DECREASING –

RATE OF GROWTH

The window of opportunity for equity

investments is narrowing, and we detect

increasing stress factors in the financial

markets. The global economic cycle has

therefore gone past its peak, as shown

by the tail-off in economic growth. In

addition, the supportive stimulus for the

global economy pro vided by the large

central banks is reducing further. And

finally, the con trolled slowing of the rate

of growth in China will have a negative

impact on the rest of the world – in

2017 the Middle Kingdom accounted for

50 percent of global economic growth.

effect at a time of almost full employ-

ment in the US labour market anyway.

This produces upwards pressure

on wages, and it’s pushing inflation over

the three percent mark – giving scope

for further increases in interest rates.

We anti cipate that higher interest rates

and a tightening of monetary policy

in the USA will dampen growth from

2019 onwards.

= Evaluation of the previous quarter

negative neutral positive

signifi- slightly 0 slightly signifi- cantly cantly

Economic data

Monetary environment

Market technical analysis

Risk assessment

Still a sound environment (USA, EMU, China); moderate inflation, low interest rates; BUT loss of momentum in 2018.

Interest rate rises continue in the USA; central bank policies in the EU and China are becoming increasingly restrictive.

Return of volatility; late phase of cycle leads to decreasing momentum (e.g. corporate profitability).

Trump’s foreign policy still potentially risky; renewed euro crisis triggered by Italy.

CHALLENGING – BUT NOT IMPOSSIBLE

Influencing factorComments

positive neutral negative Source: Globalance Bank AG

July 2018

Investmentoutlook

GLOBALANCE

Investment strategy for the 2nd half of 2018

2

CHINA UNDERGOING A CONTROLLED

SLOW-DOWN

The forecast at the start of the year:

excessive indebtedness of (state)

companies, the development of a real

estate bubble, and the tightening

of monetary policy. This slow-down has

now turned into reality and, over

the coming months it is also expected

to have a negative impact on growth in

the global economy. A trade war with

the USA would have major adverse

consequences for China. We therefore

expect that China will do everything

possible to avoid an escalation.

EUROPE WITH POTENTIAL FOR

RENEWED EURO CRISIS

The political situation in Italy, the

eurozone’s third largest economy, is a

cause for concern. Electoral promises

made by the League and Five Star coali-

tion parties, such as a basic income

and tax reliefs, are not economically

viable. The country’s euro-sceptic

stance also gives rise to justified con-

cerns that the disintegration of the EU

may continue. These fears sent the euro

tumbling, and the slide isn’t expec ted to

end even in the second half of the year.

EMERGING MARKETS HIT BY THE

STRENGTH OF THE DOLLAR

The rise in the value of the dollar is

depriving the global economy of liqui-

dity: many companies in the newly

industrialising countries took on debts

when the dollar was weak and US

inte rest rates were low. The global

total is estimated to be as much as USD

300 billion. With rising US interest rates

and a stronger dollar, the companies

are being forced to put an end to their

borrowings. The graph makes it clear

that equities in the newly industrialising

countries are closely linked to the

USD exchange rate: the stronger the US

dollar is, the worse is the performance

of equities in newly industrialising

countries (inverted representation).

Conclusion:There’s no crash, but the invest-

ment environment is becoming

increasingly difficult

There’s a slow-down in positive

fundamental data. A euro exit

and a debt write-off in Italy

remain an issue. The late phase

of the cycle means that heavily

indebted states and companies

are penalised, both in relation

to equities and borrowings. So

what’s important is to adapt the

portfolio to this environment.

During the second quarter we

have already reduced our equity

holdings and further increased

the quality of the investments.

Partial profit-taking combined

with improvements in quality

An abrupt withdrawal from risky

investments such as equities

is not advisable. Nevertheless,

inves tors are well advised to

increase the security of their port-

folios. The active management

of the portfolios and the invest-

ment selection are be coming a

critical success factor. The era of

simply buying and holding equities

via inexpensive ETFs is over.

What this means for the structure

of the portfolio is that quality

is indispensable. Key criteria are

healthy balance sheets, low levels

of debt, and stable profits. Bonds

are unattractive in view of

in creasing interest rates and credit

default premiums. We recommend

a redeployment into low correla-

ted investments and defensive

real assets.

Source: FERI®

92 94 96 98 00 02 04 06 08 10 12 14 16 18

0

50

100

150

200

250

90

A STRONG US DOLLAR HAS A NEGATIVE EFFECT ON THE PERFORMANCEOF EMERGING MARKETSA long-term comparison from 1990 – 2018

Changes in equity prices in emerging markets

Starting point in 1990with 100 numerators

USD inverted

USD spot rateSource: FERI®

92 94 96 98 00 02 04 06 08 10 12 14 16 18

0

50

100

150

200

250

90

A STRONG US DOLLAR HAS A NEGATIVE EFFECT ON THE PERFORMANCEOF EMERGING MARKETSA long-term comparison from 1990 – 2018

Changes in equity prices in emerging markets

Starting point in 1990with 100 numerators

USD inverted

USD spot rate

3GLOBALANCE investment outlook

CURRENT POSITIONINGMore defensive going into the 2nd half of 2018

attrac tive than that of bonds. The

selec tion of investments should be

based on quality, both for fixed income

and real assets. A broad spread of

risk across several categories of

invest ment is recommended, with a

gold position as a hedge against crises.

Low correlated investments make up

an important part of our portfolio and

increase its stability during periods

when capital markets are volatile.

Due to political and economic impon-

derables, volatility must be anti cipated

in the financial markets. That’s why

the equity exposure was already

redu ced in the second quarter. But the

performance of equities is still more

CURRENT MODEL PORTFOLIO (BALANCED INVESTMENT STRATEGY)

Assessment

1 expected annual returns over the coming 12 to 24 months; no guarantee

Weighting Asset class Recommended components of the portfolio Return1

11 % Liquidity Current account; cash and cash equivalents held with secure 0 % counterparties

19 % Bonds - inflation-linked high-quality bonds 0 – 2 %- mortgage-backed securities- convertible bonds

16 % Low correlated - microfinance funds, wind farm funds, bonus strategies, 2 – 4 %investments insurance-linked securities

37.5 % Equities - financially sound, attractively valued global large caps 3 – 6 %- megatrend thematic funds and innovation equities

16.5 % Real assets - primary infrastructure, private equity 3 – 5 %- small holdings of physical gold and real estate

100 % 1.9 – 4.1 %

Source: Globalance Bank AGattractive risk-reward ratioless attractive risk-reward ratio

OverviewLIQUIDITY

We are increasing liquidity at the expense of equities (indirectly via the use of future contracts for hedging).

BONDS

It makes sense to have a low weighting of government and corporate bonds: the continuing rise in interest rates

and the historically low default risk premiums are factors against holding bonds. Within the remaining portfolio,

our bond holdings in emerging markets are being reduced in favour of government bonds.

LOW CORRELATED INVESTMENTS

These are an attractive alternative to interest rate-sensitive bonds and are suitable as a protection against market

turbulence. An overweight holding is still justified.

EQUITIES

Primarily investments are made in high-quality assets with a positive footprint. In rising markets, initial positions

have been reduced and profits have been taken. We are maintaining liquidity in order to top up our position again

if prices become more favourable for making purchases.

REAL ASSETS

These include holdings in infrastructure, private equity and physical gold. By contrast, Swiss real estate and

commodities do not seem to us to be attractive.

4

BETTER PERFORMANCE THANKS TO POSITIVE FOOTPRINTMany investors are not aware that

they have significant hidden risks in

their securities portfolios. In parti cular

investors who spread their investments

very widely or invest them passively

via ETFs end up with an indiscriminate

mixture of good and bad firms in the

portfolio. This may reduce returns.

HIDDEN FOOTPRINT RISKS

A majority of the companies in today’s

stock market indexes have their

origins in the “old” world. The equity

prices of these firms are based on

the assump tion that the past levels of

profits will continue. This ignores

the question of whether the business

model is fit for the future in the long-

term. For instance, it’s already appa-

rent that the political measures taken

to combat climate change will lead to

substantial writeoffs for the oil and coal

companies. This fact is not yet ade-

quately reflected in the current equity

prices of the companies concerned.

THE GLOBALANCE FOOTPRINT®

CREATES TRANSPARENCY …

The Globalance Footprint® makes such

hidden risks visible. Our analysis of the

important American stock market index

(S&P 500) makes it clear that about

INVESTMENT CASE:

AN OPTIMISED S&P 500

In principle, every equity index can be

optimised by using the Globalance Foot-

print®. Due to its relevance, let’s take

the S&P 500 as a basis. From the total

of the 500 largest US companies we

choose the 100 firms which achieve the

best absolute value in relation to the

footprint. This is the only selection

criterion that is used in this connection.

The sector doesn’t play any role, nor

are other financial considerations, such

as a valuation, growth in profits, balance

sheet structure, etc. considered. The

100 companies that are selected are

then weighted using the same compara-

tive ranking system (market capitali-

sation) as used in the broad-based S&P

500 (see graph on the right).

Key issue

half of these companies have excessive

risks in relation to economic, social and

environ mental factors (see graphic on

the right). So the broad-based S&P 500

is not ideally positioned to profit from

the opportunities associated with

long- term megatrends. Rather it is

susceptible to upheavals resulting from

the increasing global scarcity of resour-

ces, climate change, digitisation or

urbanisation.

… AND IDENTIFIES ATTRACTIVE

INVESTMENTS

The Globalance Footprint® is a globally

unique investment concept. It assesses

every investment in terms of its future

viability and its impact on the national

economy, society and the environment.

Future viability describes how well

attu ned a company is to relevant global

megatrends. The Globalance Footprint®

measures the lasting effect which a com-

pany has in the real world. For further

details of the footprint, see the box.

The methodology

The Globalance Footprint® assesses

the future viability of investments

and their impact on the economy,

society and the environment

based on three principles:

• Objectivity: selection of criteria

based on recognised, urgent and

global challenges.

• Relevance: concentration

on areas which have the most

influence on the footprint of

a specific sector.

• Far-sightedness: Consideration

of the entire life cycle from pro-

duction to the use of products

and services.

The assessment process is orga-

nised in a structured and compre-

hensible manner, and it uses a

systematic assessment matrix for

all the investments in each asset

class.

DAVID HERTIGHead of Investments and founding partner

“The Globalance Footprint® uncovers

hidden risks.”

5GLOBALANCE investment outlook

A POSITIVE FOOTPRINT IS

ATTRACTIVE

The companies selected by Globalance

are aligned with global megatrends,

and they make a positive contribution

to the economy, society and environ-

ment. They correspondingly score

an average of 70 Globalance Footprint

points, significantly better than the

S&P 500’s 52 points. The Globalance

Footprint® measures the absolute

effect of investments. This is shown

at the sector level: for instance, the

IT sector is much better represented

than the energy sector.

42 PERCENT OUTPERFORMANCE

OVER FIVE YEARS

A comparison of performance is inten-

ded to show whether the com panies

with a positive Globalance Footprint®

score do actually outperform the S&P

500 as a whole. To do this, we compare

the performance of both portfolios over

the last five years. The starting point

used was the S&P 500 companies as at

30th April 2013. We use the footprint

data that was available at that time

to select the best 100 companies.

The footprint evaluation and selection

is carried out every twelve months.

On average, 30 of the firms in the top

100 were changed each year: ten due to

the annual indexing adjustment of the

S&P 500, and about 20 based on the

footprint ranking at that time. The result

of the comparison of perfor mance over

five years is clear. The Globalance S&P

Footprint outperforms the S&P 500 by

42 % (see graph in middle of page) – and

that’s with a comparable level of risk

(see table above).

Our conclusion: a positive footprint

makes a positive contribution to per-

formance.

EVALUATION OF THE RESULTS

How can this extra performance be

explained? A suitable financial analysis

enables the performance to be broken

down into specific factors.

Of the 42 percent outperformance,

25 percent is attributable to the selec-

tion of the sectors, and 16 percent

to the selection of the individual

securi ties. Barely 1 percent is attribut-

able to “style factors” – i.e. special

company quali ties, such as high

dividend growth, a high debt-equity

ratio etc.

The result is very pleasing. Firstly

the negligible style factor component

makes it clear that no company-specific

anomalies are responsible for the extra

performance. Secondly, 16 percent

of the extra performance is exclusively

attributable to the better selection

of securities. This proves that a positive

Globalance Footprint® – factoring out

any influence due to the specific sector

involved – achieves a better return.

Conclusion:The Globalance Footprint®

makes hidden risks transparent

and identifies future movers.

Future movers are companies

which benefit from global mega-

trends such as climate change

or digitisation. These future

movers are in a better position

than the market as a whole.

In the past, Globalance Footprint

companies have demonstrably

achieved significant extra returns

compared to the equity market

as a whole.

S&P 500 Index Globalance Footprint S&P Difference

Total return 87.2 % 129.6 % 42.4 %

Return p.a. 13.1 % 17.8 % 4.6 %

Volatility p.a. 12.5 % 13.3 % 0.8 %

Maximum loss -24.8 % -25.3 % -0.6 %

MAINSTREAM VS. GLOBALANCE FOOTPRINT®

HIGHER RETURNS FOR THE SAME RISK

2013

0

50

100

150

2014

2015

2016

2017

2018

Globalance Footprint S&PS&P 500 Index

THE GLOBALANCE FOOTPRINT®S&P 500 Index Globalance Footprint S&P

Source: Globalance Bank AG

6

Researchers have discovered haem,

a plant molecule which helps to give

roasted meat its characteristic flavour.

This already forms the basis for selling

vegetarian hamburgers in the USA

which are barely distinguishable from

the original version made of beef.

BUT WHAT IS BAD ABOUT BEEF?

Our hunger for meat is damaging us

and the environment. Medical studies

have shown that many cancers are

attributable to the excessive consump-

tion of red meat. And what’s more,

the rearing of cattle is one of the main

drivers of climate change. It accounts

for more greenhouse gases than all of

the world’s cars, lorries, railways and

ships put together. Meat production is

an important starting point in the fight

against global warming.

15,400 LITRES OF WATER …

… are needed to produce a kilogram of

beef. But only 1,600 litres are needed

to make the same quantity of wheat

or bread. 45 percent of available agri-

cultural land in the world is now used

for rearing cattle or for animal feed.

This competes with the cultivation of

cereals for end consumers, which has a

much greater nutritional potential.

WITH A POSITIVE FOOTPRINT

In July 2016 the first “impossible

burger” came onto the US market. It

smells, tastes and looks just like

conventional beef, but it’s purely plant-

based and it has a very good Globa-

lance Footprint®: 95 percent less land

and 74 percent less water are con-

sumed, and greenhouse gas emissions

are 87 percent lower than in the

case of ’real’ beef.

FUTUREMOVER

Future movers are companies

which recognise megatrends, and

align their business models

according to them. One such

future mover is Impossible Foods.

The company was founded in

Cali fornia in 2011, and it’s the

father of the “Impossible Burger”

and other vegetable-based meat

substitute products. Another

future mover is Memphis Meats,

a Silicon Valley start-up.

Stem cells are used in a bioreactor

to grow beef, pork and chicken.

It currently takes 21 days to

produce 500 grams – and it costs

18,000 US dollars. Memphis Meats

intends to achieve production

at competitive prices by 2021.

We’ll follow its progress.

TAKES CELLS 14-21 DAYStomature in a bioreactor

Could be in stores by 2021

Grown fromReal Cow &

PiG cells

Costs s| 18,000to produce1 lb. of beef

USING THE “HAEM-BURGER” TO COMBAT CLIMATE CHANGE

Investment trends

PETER ZOLLINGERHead of Impact Research

By 2050 the world’s population

is expected to total ten billion

people. Because of this, and due

to changing eating habits, by

then about 70 percent more food

will have to be produced than is

currently the case. Conclusion:

To ensure future food security in

future we will have to make much

more productive use of our avail-

able land and water resources.

Source: www.swissveg.ch/wasserverbrauch

WATER USED IN THE PRODUCTION OF FOODSAmount of water used for the production of 1 kg of foods

potatoes apples wheat/bread rice cheese eggs chicken pork beef

1 kg

of foods

300liters

800liters

1’600liters

2’500liters

3’200liters

3’300liters

4’300liters

6’000liters

15’400liters

Sour

ce: M

emph

is M

eats

Source: www.swissveg.ch/wasserverbrauch

WATER USED IN THE PRODUCTION OF FOODSAmount of water used for the production of 1 kg of foods

potatoes apples wheat/bread rice cheese eggs chicken pork beef

1 kg

of foods

300liters

800liters

1’600liters

2’500liters

3’200liters

3’300liters

4’300liters

6’000liters

15’400liters

Source: www.swissveg.ch/wasserverbrauch

WATER USED IN THE PRODUCTION OF FOODSAmount of water used for the production of 1 kg of foods

potatoes apples wheat/bread rice cheese eggs chicken pork beef

1 kg

of foods

300liters

800liters

1’600liters

2’500liters

3’200liters

3’300liters

4’300liters

6’000liters

15’400liters

7GLOBALANCE investment outlook

The record for the first half of 2018:• The year had barely started when volatility returned to the stock markets.

• This led to periods of significant pressure affecting risk investments such as equities.

• Due to the continuing turnaround in interest rates, bonds also didn’t provide a safe haven.

• Against this background, our allocation of assets was well chosen: our global future mover equities performed

significantly better than the Swiss Market Index (SMI): the extra return is 11 percent.

• The replacement of bonds by low correlated investments made a positive contribution to performance.

• Our avoidance of commodities and the systematic hedging of foreign currencies stabilised our client portfolios within

a volatile environment.

REVIEW OF THE 1ST HALF OF 2018An unsatisfactory first six months

The year got off to a positive start, but

in February there was the first major

distortion of the stock market with the

US Dow Jones index tempo rarily suffe-

ring its biggest ever loss on a single day.

The main factors behind this were

fears of a rise in the USA inflation rate.

Then in March there were fears of

an escala tion of the trade dispute

between the USA and China, and confi-

dence took another knock in May due

to the political events in Italy. We had

already reviewed and increased the

quality and diversification of our port-

folios at the end of 2017, and taken

precautions to avoid a preponderance

of equities. With a high proportion of

low correlated investments and a gold

holding of roughly 6 %, the portfolios

were re siliently structured, and this

significantly reduced volatility. With

regard to equities, our global invest-

ment approach proved to be correct:

the World Share Index ended the

period significantly ahead of the Swiss

Market Index (see graphic).

The tactical underweighting of bonds

paid off. Neither government bonds

nor corporate bonds produced positive

returns in the first half of 2018.

However, low correlated investments

such as micro finance achieved

positive returns – the fact that they

were not directly linked to the financial

markets had a stabilising influence

on the portfolios. At the start of the

year a strong euro was dominant in

relation to the weakening US dollar.

This situation was reversed owing to

the government crisis in Italy. The

systematic hedging of foreign currency

exposures cushioned any negative im-

pacts. Commodities suffered price falls

in the first half of 2018 – but this did

not affect our clients because we

didn’t have any commodities invest-ments in our portfolio.

RETURNS OF THE MOST IMPORTANT ASSET CLASSESIndices; 1.1. – 28.6.2018

Source: Bloomberg L.P.

-

2.4

%

-1.0

%

-0.9

%

-0.7

%

-9.8

%

0.3

%

1.0

%

0.5

%

-1.4

%

USD

Com

mod

ities

Corp

orat

e bo

nds

CHF

Gov

ernm

ent

bond

sCH

F

Insu

ranc

e lin

ked

Mic

ro-fi

nanc

ein

vest

men

ts

Wor

ld e

quit

y in

dex

(MSC

I Wor

ld)

EUR

Swis

s M

arke

t In

dex

(SM

I)

© Globalance Bank AG | Gartenstrasse 16 | CH-8002 Zurich | Telephone +41 44 215 55 00 | Fax +41 44 215 55 90 info@globalance-bank.com | www.globalance-bank.com

Disclaimer This document is exclusively for information purposes. It constitutes neither an invitation nor a recommendation to purchase, hold or sell financial instruments or banking services, and it does not release the recipient from the responsibility to exercise his own judgement. In particular, the recipient is advised to check the appropriateness of the information to his own circumstances as well as its legal, regulatory, fiscal and other consequences – ideally with the aid of an adviser. The data and information contained in this publication has been compiled with the greatest of care by Globalance Bank AG. Nevertheless, Globalance Bank AG provides no guarantee of its correctness, completeness or reliability, nor any guarantee that it is up-to-date, and it accepts no liability for losses which may arise from the use of this information. This document may not be reproduced as a whole or in part without the written permission of the authors and Globalance Bank AG. Copyright © 2018 Globalance Bank AG – all rights reserved.

Annual consumption of meat in China (excluding fish and seafood; kg per head)

Source: FAOSTAT

Supply of sustainable fish products (MSC) worldwide (number of products)

Source: Marine Stewardship Council

Expenditure on “ethical” food products in Great Britain (billion GBP)

Source: Triodos Bank und Ethical Consumer

45

2000 20131985

19 62 10’9

64

2012 2016 2008

1’07

9

24’7

03

5.3

2009 20152000

1.3

9

5

2011 2018E2004

0.25

15 1’00

0

2015 20162014

145

1’20

0

5

2017 2023E2016

4.5

9.3

0

2000 2020E1980

0.5

- 0.5

0.8

2050E 2080E2010

1 0.6

1.3

2017 2050E1980

0.5

2.5

142

2007 20152000

87 226

7.4

2007 20142000

2.1

28.2

9

2007 20142000

5.6

Proportion of annual emissions that are covered by CO2 legislation (%)

Source: World Bank Group, Ecofys, VividEconomics Source: CDP, UN PRI, Global Counsel

Global market for energy and building services systems (bn. USD)

Source: Statista

Rate of change in working populationin Europe (annual average rate in %)

Source: BCA Research

Working population in China (billions)

Source: BCA Research

Population growth in Africa(billions)

Source: BCA Research, Worldometers

Global debt (tn. USD)

Source: McKinsey, IMF

Debt in China (private and public; tn. USD)

Source: McKinsey

National debt in the USA(tn. USD)

Source: Statista

17.8

Number of companies with voluntary internal CO2 prices

GlobalanceBarometer

Economy

Inflation

�

Risks

Markets