Q4 2020 OUTLOOK Banque Havilland is a Private Banking Group established in 2009. The Bank is headquartered in Luxembourg with offices in London, Monaco, Liechtenstein, Dubai and Switzerland. The Group provides private banking, asset and wealth management services and institutional banking services to High Net Worth families and individuals from all over the world. TABLE OF CONTENTS MARKET ENVIRONMENT 4 EQUITIES 9 BONDS 12 COMMODITIES AND CURRENCIES 15 MARKET ENVIRONMENT As we move into the final three months of at home’ theme and certain technological what has been a quite extraordinary year, trends were brought forward by the Covid investors are faced with both imminent outbreak, but even since then the Nasdaq and long-term challenges that on the has rallied a further 30% before the recent surface will require perhaps more intricate pull-back. The performance of growth and and thoughtful planning than has been momentum stocks versus so-called value necessary for some time. stocks has also widened to extreme levels, more so than any point in history, with At global level, the rebound of risk assets earnings per share in the value category since the Covid-inspired nadir of March 23rd having declined by 50% year-on-year by has been so furious that we have reached an aggregate compared with a 15% decline inflection point far earlier than could have for growth. Conversely, many other global been anticipated, as unprecedented central indices are still very much in the red and bank and government stimulus has seen many even then with big gaps between the indices financial assets recover or surpass their pre- of neighbouring economies (eg. A difference virus peaks within a few months. of about 15% between the French CAC and the German DAX), while in the commodities Where we may have expected in Q4 to markets Gold is up around 30% in 2020 but be tentatively seeing recovering equity Crude Oil remains down well over 30%. markets, we are instead once again With such significant divergences even concerned about unrealistic valuations and between similar asset classes, it is clear to asset bubbles! The rebound, of course, has see that a modest degree of mean reversion not been universal by any means (except could result in opportunity for investors even perhaps in the bond markets) and nowhere if the headline valuations look unappealing is the disparity better demonstrated than at this point. how much the US equity market rebound has depended on the technology giants. In fact if you exclude Facebook, Apple, Amazon, Google, Netflix and Microsoft the S&P 500’s market cap has barely changed from where it was in January 2018. While the Nasdaq has been as high as 30% year to date even after March lows, the Dow Jones remains in negative territory - we wrote in last quarters Outlook how much of this was rational to a certain extent as many businesses would benefit from the ‘stay 4 OUTLOOK Q3 2020 -100 1000 2000 3000 4000 5000 6000 expected. Sentiment is strong but may have peaked.. (source: Bloomberg) (source: peaked.. have butmay Sentimentisstrong expected. than beenworse have releases meansthatdata reading andanegative thanexpected beenstronger have releases data meansthat reading Apositive expectations. market to surprisesrelative data measure SurpriseIndices The CitiEconomic -Global SurpriseIndex Citi Economic Bloomberg) (source: altogether. down hasbroken thatthecorrelation theextent high,to isatarecord stocks andvalue stocks Growth between The divergence 10years past over Styles vValue Growth 100 150 -50 50 0 0 01/09/2009 Dates 01/01/2010 13/08/2010 01/05/2010 12/11/2010 11/02/2011 01/09/2010 13/05/2011 01/01/2011 12/08/2011 01/05/2011 11/11/2011 01/09/2011 10/02/2012 11/05/2012 01/01/2012 10/08/2012 01/05/2012 09/11/2012 01/09/2012 08/02/2013 01/01/2013 MSCI Value Index 10/05/2013 09/08/2013 01/05/2013 08/11/2013 01/09/2013 07/02/2014 01/01/2014 09/05/2014 01/05/2014 08/08/2014 07/11/2014 01/09/2014 5 06/02/2015 01/01/2015 08/05/2015 01/05/2015 07/08/2015 06/11/2015 01/09/2015 MSCI Growth Index 05/02/2016 01/01/2016 06/05/2016 01/05/2016 05/08/2016 01/09/2016 04/11/2016 01/01/2017 03/02/2017 05/05/2017 01/05/2017 04/08/2017 01/09/2017 03/11/2017 01/01/2018 02/02/2018 01/05/2018 04/05/2018 03/08/2018 01/09/2018 02/11/2018 01/01/2019 01/02/2019 01/05/2019 03/05/2019 01/09/2019 02/08/2019 01/11/2019 01/01/2020 31/01/2020 01/05/2020 01/05/2020 01/09/2020 31/07/2020 OUTLOOK Q3 2020 Away from the US tech giants and Asia, of the ‘V-shaped’ variety as signalled by stock markets have in reality been the data from the US, China and Europe. treading water now for a few months and Forward-looking PMI’s in particular have one could argue the case that these are rebounded swiftly into expansion territory, more reflective of the ‘real’ economy, with while employment and industrial production optimism over the economic rebound being has started to recover in most regions as tempered by fears of further government governments ease their lockdown policies, restrictions in response to any resurgence but it has to be said that all this is subject of the virus. As such, markets remain highly to reversal should further draconian anti- sensitive to changes in sentiment either virus measures come in. Presently, it way. Encouragingly the race for a successful seems that most governments are loathe vaccine against Covid 19 is well underway to re-establish nationwide shutdowns and and positive news-flow surrounding this has would prefer localised approaches which surely been a large factor in why equities have points to a more lumpy recovery than a remained buoyant, but we would suggest straight line to previous economic activity that much of this hope is already priced levels, whereas a return to full lockdown in, and that the anticipated timescale of a would suggest another large dip before good vaccine being rolled out to the general resuming any recovery. The IMF forecasts public is potentially too optimistic meaning GDP Growth will return to pre-Covid levels any hiccups (such as the Oxford/Astrazenica in 2021, but perhaps most reassuringly of test-patient having side-effects) could skew all is that the death rate of the virus is now risk to the downside. Nevertheless, should statistically very low and steady, and has not a vaccine arrive this year it will draw a line picked up even though the new cases being under the economic recovery and therefore confirmed has increased (most likely due to asset prices – representing something of a far greater levels of improved testing, of a silver bullet as far as markets are concerned wider, less vulnerable populace). One would and essentially as a consumer confidence hope this clear pattern continues and deters placebo. As for the economic recovery itself, politicians from the most economically much was made of what ‘shape’ it would damaging course of action. take, and quite simply to date it has been Covid 19: net changes in Cases, Recoveries and Deaths 400000 350000 300000 250000 200000 150000 100000 50000 0 21/01/2020 28/01/2020 04/02/2020 11/02/2020 18/02/2020 25/02/2020 03/03/2020 10/03/2020 17/03/2020 24/03/2020 31/03/2020 07/04/2020 14/04/2020 21/04/2020 28/04/2020 05/05/2020 12/05/2020 19/05/2020 26/05/2020 02/06/2020 09/06/2020 16/06/2020 23/06/2020 30/06/2020 07/07/2020 14/07/2020 21/07/2020 28/07/2020 04/08/2020 11/08/2020 18/08/2020 25/08/2020 01/09/2020 08/09/2020 15/09/2020 Worldwide - Cases (Net Change) Worldwide - Deaths (Net Change) Worldwide - Recovered (Net Change) The death rate of the virus does not appear to be proportional to the number of cases. (source: Bloomberg) 6 OUTLOOK Q3 2020 Away from the economy and Covid a in terms of being the continuity candidate number of familiar geopolitical risks are who will maintain a lower tax environment set to reach some sort of finality in the for corporate America, with a Democrat final quarter of the year, namely the US sweep of both Congress and Senate being election in November and confirmation the least favourable scenario as this could of the exact terms of Britain’s departure lead to higher taxes, a greater deficit and from the European Union, while the US the possible break-up of the mega-tech and China have moved their trade dispute companies. As it stands markets seem into the technology sphere. All are known complacent about a Biden victory, though events and investors should take comfort this could be a measured expectation of in this while expecting increased volatility additional stimulus that would counter the as matters come to a head. With respect more socialist aspects of such a regime, to the US election, a Trump victory is or a belief that Trump will close the polling largely seen as a market friendly outcome gap as the election draws near. OECD World GDP Growth Outlook 6 4 2 0 -2 -4 -6 -8 -10 01/01/2010 01/01/2011 01/01/2012 01/01/2013 01/01/2014 01/01/2015 01/01/2016 01/01/2017 01/01/2018 01/01/2019 01/01/2020 01/01/2021 After troughing in Q2, GDP growth expectations for 2021 are back at 2019 levels.