cic perspectives 03 2014 english

DEAR READER

Has the European Central Bank (ECB) opened Pandora‘s box?Yields on European peripheral government bonds have fallen back close to pre-crisis levels and in some cases have even dropped below that. Spain, for ex-ample, is currently yielding just under 3% on its ten-year paper. That‘s just marginally higher than the in-terest being paid on its US equivalent. Equities are reaching new record highs practically on a weekly ba-sis. If the general rule of thumb is true that share pri-ces are a leading indicator of economic change, then a massive growth spurt should be on the cards in the second half of the year.

However, the yields on government bonds of the major economies contradict this assumption. These are back at crisis levels, having even fallen beyond that this year. At around 0.5%, Eurozone inflation does not really point to robust business activity. In addition, investors‘ inflation expectations for the next five years are very low, at less than 1% per year. So are we facing a new crisis?

For its part, while the ECB would like to help accelerate growth, it is also lowering its inflation forecasts. As a rule, inflation rises when business activity increases. So, does that mean we should really be concluding that the ECB does not actually believe in the effectiveness of its own measures?

Mario Geniale, Chief Investment Officer

Economic perspectivesSigns point to growth in the second half of 2014. Following a weak first quarter – owing to the extremely harsh winter – and an annualised decline in gross domestic product of –1%, the USA is staging a recovery. The effects of this recovery will ensure that growth comes in close to +3.5% in the second quarter, before settling down at around +3% by the end of the year.

The Eurozone’s recovery is set to continue, mainly thanks to the ongoing revival in the region’s periphery. However, persistently high unemployment and unresolved structural problems, such as the high level of debt and an environment that is hostile to investment, are reflected in a growth rate of +1.3% to +1.4% – considerably lower than that in the USA. Switzerland is benefiting from the recovery in the neighbouring countries, as is shown by the increase in export figures. With construction activity remaining healthy, exports will help lift growth in Switzerland to more than +2% by the end of 2014.

Unconventional measures should provide growth momentum

Inflation in the Eurozone has been declining for years and risks entering a deflationary spiral such as that seen in Japan. The ECB must use every means at its disposal to prevent this. To this end, from September 2014 until 2016 it will provide ultra-cheap money to banks for up to 7% of the amount they lend to clients, provided they pass on this capital to businesses out-side the financial sector. This move is intended to stimulate investment activity and create sustainable growth, but depends on whether or not the banks actually make use of this opportunity. (mge)

IMPRINT Editor: Bank CIC (Switzerland) Ltd.,Marketing and communication,Marktplatz 11-13, P.O. Box 2164001 Basle, Switzerland, T 0800 242 124Authors: John James Bayer ( jb),Jürg Bützer ( jub), Christopher Endrikat (enc), Mario Geniale (mge), Christian Meier (mch), Carl Münzer (muc) Editorial deadline: 18.06.2014

03/2014 QUARTERLY MARKET OUTLOOK

CIC_perspectives_0314EN.indd 1 19.06.14 14:20

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SWISS EQUITIESThe Swiss equity market put in a solid performance in the first half of the year, with the pharmaceutical sector doing notably well. For one thing, takeovers and transfers are taking place in this sector, as pharmaceutical companies attempt to align themselves strategically. The positive mood that prevails is also reflected in the prices of smaller enterprises, particularly in the biotech sector. However, direct investments in these equities entail a high degree of risk and are therefore suitable only for investors who are capable of bearing the risk. We remain confident about the two Basel-based pharmaceutical giants Novartis and Roche and continue to recommend buying these stocks. (mch)

EUROPEAN EQUITIESEquities have been on a roll for the past two years. The impetus provided by the expansionary monetary policy of the European Central Bank (ECB) is proving stronger than the continuing economic headwinds and political turbulence. Although Europe is back on the path of growth, the road ahead remains rocky. The political environment in and around Europe is in a state of flux. Tensions between Europe and Russia have not yet been resolved. This situation is further aggravated by the outcome of the recent European elections, following which representatives of nationalist and Eurosceptic parties will now increasingly torpedo consensus-building and thus Europe’s capacity to act. Investors, on the other hand, remain calm. The investment crisis, combined with historically low rates of interest, favours equities. However, we are maintaining our cautious stance, and recommend multi-nationals such as Allianz, Danone and Sanofi. ( jub)

US EQUITIESUS equity indexes have risen to new, lofty heights, with no end to the party in sight. The US Federal Reserve (Fed) has been able to calm investors and get the economy back on track for growth. The labour market is also staging a gradual recovery. So, for the time being, the Fed is succeeding in exercising its dual mandate of securing economic growth and full employment. While this scenario actually favours equities, common sense nevertheless dictates caution. We recommend stocks such as AT&T, Proctor & Gamble and Chevron. These are defensive and offer attractive dividend yields. ( jb)

BONDSIn the second quarter of 2014, equity-market interest rates came under further pressure. The main contributing factors included the Ukraine crisis, low inflation in the Eurozone and a slight decline in business activity in the European core countries. At the same time, the situation in the periphery countries has improved. Yields on 10-year German government bonds fell temporarily to 1.3%, while those of the periphery countries even sank to their pre-crisis levels. We expect to see the euro crisis gradually ease, but still feel there is considerable need for action in addressing the problems facing the Eurozone. We therefore consider it likely that interest rates will start to trend upward again by the end of the year. (muc)

Equity markets are in a party mood. At the end of the first half-year, various indices continue to set new records each day or are rising to levels last seen several years ago. However, there are also signals urging caution. One factor is the investors’ hunt for yields, which is causing dangerous speculative bubbles to form, another is the volatility of the US stockmarket, which is stuck at a historically low level, demonstrating remarkable parallels with the boom of 2007. Back then, volatility was at a similar level and the S&P 500 at an all-time high – and we all know how that story turned out. So, is this the calm before the storm? (mch)

The Markets “Is this the calm before the storm?”

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Perspectives 03/2014 Bank CIC (Switzerland) Ltd.

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DEAR READER

Although it is common knowledge, the topic generally remains taboo. We are none of us immortal. Let’s admit it: this is not an easy subject to contemplate. Have you already given some thought to the topic of inher-itance?

By law, if nothing is put down in writing general rules apply. These determine how

the assets left by the deceased are passed on after death. But people need to be aware that it is not just assets that can be passed on. Debts, such as an outstanding car loan, mortgages or tax debts also form part of the estate.

To ensure a basic division of the assets within the family, the law invests certain persons with a statutory entitlement to a compulsory portion of the estate, through which part of the inheritance is paid out to them. The amount of this compulsory portion is determined by the marital status of and degree of kinship with the deceased. Despite these rules, family hostilities that can drag on for years are often triggered. Because alongside children of one’s own and a first wife, there can also be a patchwork family, a child born out of wedlock, a lover, a business partner in a jointly run company or charitable institution, who all stand to inherit some part of the estate. Situations of this nature often lead to disputes, even when a last will and testament has been drawn up. Legal tricks are employed in an attempt to have the will declared at least partially invalid. These can even succeed if certain legal requirements have not been met.

For example, extreme formal shortcom-ings, breaches of any possible compulsory portion entitlements or serious legal de-fects or violations of moral principles.

But do we really want our own children to end up battling it out in court or suing their mother? Who wants their ex-wife to seek a declaration of invalidity, with all

the long years of expensive and malicious court action that this involves?

What can you do to avoid difficulties of this kind?

Take an active interest in the subject and obtain information at an early stage. Consult with a legal advisor and notary to get an initial picture of the possibilities that are open to you and of what the law says. A lot of this information can be found on the internet.

Take a good look at what exactly you want to bequeath – and what is to happen to it after your death. Don’t forget to take out-standing debts, such as last year’s tax debts or a lease, into consideration.

If you wish persons who are not entitled to inherit by law to receive part of the in-heritance, as in the case of patchworkfamilies, insurance policies or foundations can represent a potential solution.

Once the question of the property that makes up the estate and who you would

like to leave it to has been clarified, you will see whether the statutory rules on succession are sufficient for your purposes. If this is not the case you are best advised to draw up a last will and testament. It is worthwhile consulting a lawyer and notary, who will make sure that you satisfy the formal requirements and comply with the law. It is also possible to deposit your last

will to prevent it from going missing or being wilfully destroyed.

If you do not wish to pay lawyers’ and nota-ries’ fees to ensure a legally watertight so-lution, you can write out your testament by hand. The validity of holographic wills is fully recognised by law provided you make absolutely sure to comply with the statutory formal requirements. You should therefore find out in advance what content needs to be included and what form the document should take.

The important point is to actively engage with this topic and make sure you make the right provision. After all, who wants to drive a wedge between family members or burden their heirs with debts?

Passing on trouble? No thanks.

This column reflects the personal views of the author.

Christopher Endrikat is Certified Financial Planner (CFP), expert in taxes and financial planning of Banque CIC (Suisse).

The Column with Christopher Endrikat, Certified Financial Planner (CFP)


No need to pass on difficulties to your heirs!


Now is the time to invest in convertible bondsConvertible bonds are an attractive alternative to equities and bonds. Almost no other asset class has such a balanced opportu-nity/risk profile in this environment. Convertible bonds are fixed-income securities issued by a company that feature a conversion right which allows investors to convert the bond into a specified number of shares of that same company during the term of the in-vestment. Investors thus receive interest income while also partici-pating in the equity markets. As convertible bonds combine the features of both equities and bonds, they offer returns similar to equities at a level of risk similar to bonds. Owing to their complex-ity, individual investments are not suitable for private investors. We therefore recommend investment funds and draw your attention to our CIC CH - Convert Bond Fund, which has featured among the best in its class since the start of the year. (mch)

Long-term trend in demand for commoditiesCommodities can be divided roughly into three categories: agri-cultural goods (soft commodities), construction materials (hard commodities) and energy sources (energy). The value of construc-tion materials and energy sources depends directly on the perfor-mance of the global economy. The economic slowdown in China in particular has undermined the price of industrial metals used in the construction sector and has put the brakes on energy prices. This downturn admittedly represents a momentary snapshot, as the emerging markets look set to experience rising demand in the long term. How can investors benefit from this situation? For investors with a long-term horizon, we recommend investing directly in a broadly diversified mining company. Not only does BHP Billiton fit the bill, it also has an appealing dividend yield of 4.2%. ( jb)

DISCLAIMER The expected returns and estimated risk are not reliable indicators of future profits or future risks. The effective returns can deviate significantly from these values, and past positive perfor-mance is no guarantee of future returns. The conditions contained in this document are purely indicative and subject to amendment at any time. Bank CIC (Switzerland) Ltd. gives no guarantee as to the reliability and completeness of this document and rejects any liability for losses which may result from its use.


In BriefOverview of topical investment themes

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cic perspectives 03 2014 english

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