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Notenstein Compass, April 2013
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Arbitrary and uncoordinated expropriation of depositors in Cyprus, ongoing record-high unemployment in many parts of Europe and political stalemate in Italy – these are just some of the events that made headlines in the first quarter. The equity markets, however, were unperturbed: the Swiss Market Index climbed an impressive 14.5 percent, its third-best quarterly performance since the turn of the century.
The small island state of Cyprus made headlines as its gov-
ernment, under direction and pressure from the EU, set out
to help itself to depositors’ savings, thus sparking debate
about legal security across Europe. You can read more on
this topic in this month’s Notenstein Dialogue.
Another type of creeping expropriation is taking place
through negative real interest rates for the euro and US dol-
lar. With interest rate policy in many countries keeping
yields on government bonds lower than inflation, consum-
ers are experiencing a real loss of purchasing power.
Under such conditions, the current stock market rally is not
surprising: valuations on equities with real-asset characteris-
tics and stable dividend yields are back near their historical
averages and are thus fairly valued. However, they remain
attractive compared to other asset classes – particularly bonds,
where sharp price gains suggest that any potential bubble is
more likely to be found in the fixed-income segment. The ex-
pansionary monetary policy measures adopted by central
banks in industrialised countries around the world give a
boost to equities, but not exclusively; this dabbling style of
policy-making has a stark effect on currencies as well. The
yen provides an instructive example. The Bank of Japan has
left no stone unturned in seeking to exit the deflationary spi-
ral (“Muddling along”) and artificially stimulate the economy,
but such measures are toxic for fixed-income investments
in the medium term. In light of the distortions in the currency
markets, we continue to favour real-asset currencies such as
the Swedish krona, Canadian dollar and Australian dollar.
While currencies in the industrialised nations seem to be in
a global race to the bottom, those in the emerging markets
appear to be heading for an upturn. As the global economy’s
centre of gravity shifts, the currencies of the “Golden East”
and other emerging markets will become stronger, and their
economies more competitive, than ever. Another key trend
is the growing middle class in Asia. The Asia-Pacific region
is already home to around one quarter of the world’s middle
class, and in 20 years the figure will be two thirds. Some two
billion Asians are set to enter the middle class, bringing
along purchasing power and a shopping list. This is a bright
prospect for globally active Western companies that can
adjust to changing markets.
Martin Schenk Dr Ivan Adamovich
Head of Private Banking Head of Private Banking
Switzerland International
Notenstein Compass
Notenstein Compass, April 2013
– 2 –
Equities: hitting all-time highs
Nikkei: +19%, SMI: +15%, Dow Jones: +11% – results that
would be respectable for a “normal” year on the stock ex-
change currently apply to just the first quarter of the year.
The rally in recent months lifted valuation levels in many
markets back towards their historical averages, with the re-
sult that equities are no longer “cheaply” but rather “fairly”
valued. Investors may now be wondering how much upside
potential still exists for shares.
Economic conditions remain promising for equities. Although
global economic growth has been weak and Europe is mired
in recession, the outlook for future global growth is brighter
today than it was six months ago. The US economy is gather-
ing pace, China’s is reviving and Japan appears to have halted
its downward economic spiral. Against a backdrop of increas-
ing but sluggish growth accompanied by low or negative infla-
tion, central banks have free rein to extend stimulus measures.
At the same time, the systemic risks that have plagued the
financial markets over the last five years are retreating into
the background. The muted market reaction to such factors
as the election drama in Italy and the resurgence of the euro
crisis in Cyprus indicates that investors are increasingly refo-
cusing on the fundamental data for individual markets. Equi-
ties are also enjoying a revival among both private and in-
stitutional investors, who recently began channelling more
money into this asset class after several years of shunning it.
In this constructive environment, it seems realistic to expect
equity risk premiums to decline further, towards levels pre-
dating the financial crisis.
In the context of investment portfolios, however, the oft-
cited historical valuation comparison is less relevant than
the relative appeal of various asset classes. After all, investors
can only purchase assets that are available today – they can-
not invest at yesterday’s prices. The obvious preference for
equities compared to other assets, particularly cash and
fixed-income paper, can be largely attributed to the antici-
pated surplus earnings on shares.
Paper currencies race to depreciate: currency wars?
When considering the relative attractiveness of various invest-
ments, the adage “Don’t fight the Fed” comes to mind. With
their ultra-low interest rate policies and government bond
purchasing programmes, the US currency guardians and other
big central banks are exerting pressure on interest rates,
encouraging investors to assume more risk and ultimately
changing the anticipated relative returns between asset classes.
Both investment grade bonds, i.e. bonds with good or very
good credit ratings, and more speculative fixed-income pa-
per have become comparably expensive. Investors’ quest for
returns has reduced risk premiums far further on bonds than
on equities, which implies that central-bank monetary policy
is setting up equities as the asset class with the most promis-
ing risk-return profile.
However, this extremely easy and increasingly creative mon-
etary policy is leaving its mark not only on equities; it has also
had a growing influence on currencies in recent years. The
Japanese yen and pound sterling made the most prominent
headlines as the two weakest currencies in the year to date.
The yen’s frailty can be attributed to the Japanese gov-
ernment’s no-holds-barred scramble to exit a long-term de-
flationary spiral. Its combination of expansionary monetary
Valuations for European shares and bonds*
0x
5x
10x
20x
25x
Equities: MSCI EuropeCorporate bonds: Investment grade
High-yieldCCC
*Shares: price/earnings ratio; bonds: inverse of the yield (1/yield)
15x
07/09 01/10 07/10 01/11 07/11 01/12 07/12 01/13
Source: Bloomberg, Notenstein analysis
…given the surge in prices in the fixed-income segmentShares more attractive than bonds…
JPY/CHF* and GBP/CHF
0.90
1.00
1.10
1.20
1.30
1.35
1.40
1.45
1.50
1.55
01/12 04/12 07/12 10/12 01/13
GBP/CHF (right scale)JPY/CHF (left scale)
Competition for the weakest currency?The race to the bottom
Source: Bloomberg, Notenstein analysis*100 JPY for 1 CHF
Notenstein Compass, April 2013
– 3 –
policy and debt-financed economic stimulus programmes, gar-
nished with an inflation target of 2 percent, which the new
central bank governor Haruhiko Kuroda aims to reach within
two years, was christened “Abenomics” after Japan’s prime
minister. Thanks to this cocktail of measures, the yen has de-
preciated by some 20 percent since October 2012. In the UK,
on the other hand, it is the loss of the country’s AAA credit
rating and an economy on the verge of recession that have
hobbled sterling. In order to stimulate the economy, Chan-
cellor of the Exchequer George Osborne recently gave the
nod to the Bank of England to ease monetary policy even
further, granting the central bank more flexibility to pursue
its inflation target of 2 percent – a goal that has proved elu-
sive over the last five years. The market reaction proves
that such monetary policy dabbling cripples a currency: in-
flation expectations climbed higher while sterling lost
ground.
Asia’s middle class: the market of tomorrow
The recent developments in the forex markets have given
rise to talk of “currency wars”, suggesting that central banks
are purposefully weakening their domestic currencies. While
Japan’s intention to weaken the yen is fairly obvious, it is
more difficult to discern such purpose in the UK. In any case,
investors are less concerned about whether a currency depre-
ciates as a result of a concerted effort to provide vitally nec-
essary economic stimulus, or as a result of expansionary mon-
etary policy. Rather, they seek diversified investments in
fundamentally strong currencies that are not caught up in the
depreciation spiral, and in gold, a real asset.
Just ten years ago, Asian currencies were under enormous de-
preciation pressure and many countries were having problems
with their balance of payments. Today, these currencies are so
strong that they are affecting the competitiveness of the re-
gion. Asia’s increasing significance is not only evident in the fi-
nancial markets; the shift in the world’s economic centre of
gravity from West to East is even more obvious in the upward
mobility of wide swathes of the population. Just a few years
ago, less than one quarter of the world’s middle class lived in
the emerging markets of Asia. Today, a wave of households in
these developing regions are on the verge of entering the mid-
dle class. OECD studies predict that by 2030, two out of three
people in the global middle class will live in the Asia-Pacific
region. The rise in prosperity forecast for around two billion
inhabitants of China, India, Indonesia and other emerging
markets in the region translates into a surge in their purchas-
ing power. As a result, in less than 20 years, around 60 percent
of global consumption is projected to be generated in Asia.
China has for some time been the world’s largest market for
mobile telephony, and recently became the world’s largest
market for automobiles as well. However, not only electron-
ics companies and automakers are looking to Asia as the
market of tomorrow: food manufacturers and luxury goods
companies likewise stand to gain from growth in the “Gold-
en East”. Ultimately, private investors can also benefit from
this megatrend by investing directly in Asian companies, or
indirectly via Western firms – and here too, the investment
instrument with the greatest potential is equities.
7%8% 5% 5% 7% 5%
2009 2020 2030
Africa
18%10% 7%
26%
17%10%
2009 2020 2030
North America
8%10% 7% 7% 6%6%
2009 2020 2030
South America
22%29%
36% 38%
20%14%
2009 2020 2030
Europe54%
42%
28%23%
59%66%
2009 2020 2030
Asia-Pacific
Share of the global middle classShare of consumption by the globalmiddle class
Asia’s burgeoning middle class
Source: OECD, Notenstein analysis
Notenstein Compass, April 2013
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Pharmaceuticals sector: higher R&D spending pays off The pharmaceuticals sector received more licenses for new
drugs in 2012 than it had for many years. The increased in-
vestment in research and development of innovative sub-
stances appears to have paid off, given the steady rise in li-
censing hurdles. Since the 1996 high in licensing approvals,
investors have been sceptical about the growth prospects for
the pharmaceutical industry, as evidenced by the sector’s un-
derperformance of the world equity market in seven of the
last ten years. Today, however, pharmaceutical companies en-
joy a much brighter growth outlook thanks to awards of new
distribution rights and positive results in key clinical trials.
This is particularly true for Novartis, Roche and Sanofi, whose
interesting product pipeline and leading market positions
pave the way for new growth for these defensive shares.
Emerging Markets Exposure II Tracker A burgeoning middle class in Asia is now discovering brand
name consumerism amid a general rise in private spending
in the Asian countries, where growing consumption has a be-
nign effect on gross domestic product and infrastructure de-
velopment supports further growth. Companies that already
generate sales in Asia thus have an opportunity to raise
revenues from the region through sales growth, which in turn
enhances their valuation thanks to the positive earnings
outlook.
A diversified tracker certificate on companies that generate
a substantial share of sales in the emerging markets allows
investors to participate indirectly in increasing consumption
by Asia’s growing middle class, and at the same time benefit
from the growth outlook for the region. Since the certificate
is denominated in Swiss francs but has no currency hedge,
investors also participate in potential exchange rate move-
ments against the euro, yen and South Korean won.
Issue Notenstein Compass, April 2013 Published by Notenstein Private Bank Ltd, Bohl 17, PO Box, CH-9004 St. Gallen, [email protected], www.notenstein.ch Editors Oliver Hackel, Head of Macro Research; Dr Pascal Gisclon, Macro Research; Oliver Forrer, Trading & Communication Customer service Comments and requests regarding any of our publications may be sent to www.notenstein.ch/contact or by mail. The Notenstein Compass is published every two months to- gether with Notenstein Dialogue, in which Notenstein experts discuss key economic and social issues with a leading figure from business or academia. Our bank also publishes Notenstein Brunch, a daily market commentary (available in German), and Fokus Asien, which offers in-depth background information on developments in Asia several times a year (available in German, French and Italian). Legal notice The material in this publication is provided for information purposes only and in particular, it does not constitute a simplified prospectus under the terms of Article 5, paragraph 2 CISA. Further information on structured products can be found on our website: www.notenstein.ch. You can also call us with your enquiries at +41 (0)71 242 53 53.ISSN 2235-8323
Investment instruments in focus
Imprint
Number as % of sales70 20
1990 1995 2000 2005 2010
2823
3026 25
22
53
39
3035
2724
1721
36
20 2218
24 2621
30
39
60
50
40
30
20
10
0
1816141210
86420
Number of licensing approvals (left scale)R&D expenses (right scale)
Source: US Food and Drug Administration, Bloomberg; Notenstein analysis
Name SectorABB IndustrialsSchindler IndustrialsSulzer IndustrialsGivaudan MaterialsSyngenta MaterialsSonova HealthcareDufry Consumer discretionaryAlstom IndustrialsSchneider Electric IndustrialsAdidas Consumer discretionaryAnheuser-Busch Consumer discretionaryBMW Consumer discretionaryDiageo Consumer discretionaryLVMH Consumer discretionaryAir Liquide MaterialsCasio IndustrialsPanasonic Consumer discretionarySumitomo Metals MaterialsSamsung TechnologyPosco Materials
Issuer Notenstein Private Bank Ltd Maturity date 21.03.2015Guarantor Raiffeisen Switz. Coop. Reference underlying CHF 100Issue date 22.03.2013 Issue price CHF 99