Baloise Market View Economic and financial market outlook
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Baloise Market View Economic and financial market outlook
Financial market development since the beginning of the year
War in Ukraine and high inflation weigh on the markets
Real Estate &
Shares Bonds FX Alternative
Investments
Development
40% › Russia invaded Ukraine on the night of
24.02.2022.
30%
20% › Equity markets corrected,with the
strongest falls being in the euro area and
10%
emerging markets.
0%
› The flight to safety strengthened the gold
-10% price and put pressure on long-term
-20% interest rates. The yield on 10-year
German government bonds fell back into
negative territory for the first time since
the end of January.
› Commodities soared in the face of
Russia's important role in the energy
2022 High markets. As a result, the oil price
2022 Low
Performance ytd in local currency
per 01.03.2022 reached an eight-year high in early
March.
Source: Baloise Asset Management, Bloomberg Finance L.P.
Baloise Market View, 01.03.2022 2Financial markets: What does the war mean for the stock markets?
Recovery usually sets in quickly, but differences are massive
World Equity Market › Geopolitical conflicts often trigger sell-offs
Indexed, 100 = Start of the correction amid a geopolitical event*
in equity markets.
120 › Historically, however, most corrections
115 have been modest. On average, losses of
110 less than 5% were seen for the world equity
105
index. After three weeks, the pre-crisis level
was reached again. However, the range of
100
market reactions to geopolitical conflicts is
95
very wide.
90
85
80
31
13
19
25
37
43
49
55
61
67
73
79
85
91
97
1
7
109
103
115
121
127
133
139
145
151
› Central banks are likely to become more
Number of days cautious in tightening policy.
Max-Min Median 25%- 75% percentile
Sources: Baloise Asset Management, Deutsche Bank, Bloomberg Finance L.P. › The current conflict is driving up the oil
*Note: Geopolitical conflicts from 1973 onwards (Israeli-Arab war / oil embargo, impeachment of President Nixon, Islamic Revolution of Iran in
1979, hostage-taking in Iran, Soviet intervention in Afghanistan, US invasion of Grenada, bombing of Libya, First Gulf War, bombing of
price, while equities are under pressure.
Kosovo, 9/11 attacks, Iraq war, Arab Spring, intervention in Libya, Ukraine conflict, intervention in Syria, Brexit vote, air strikes on Syrian
airbase). Safe havens are therefore in demand.
Baloise Market View, 01.03.2022 3Macroeconomic environment: Economy
What are the consequences of the sanctions against Russia?
Russia's financial system under pressure › The sanctions imposed by Western governments
are aimed at bringing the Russian economy to its
140 65 knees. The first consequences can already be seen.
130
70
120 › The Russian rouble, for example, lost about 30% of
110 75 its value in the last two weeks.
100
80
90 › The Russian central bank was forced to raise key
80
85 interest rates from 9.5% to a record high of 20%.
70
60
90
› The G7 countries are ready for further financial
95 pressure on Russia.
50
40 100
01.2021 04.2021 07.2021 10.2021 01.2022
Russian Equity Market (MSCI Russia)
Russian rouble (price of 1 USD in RUB, right scale)
Sources: Baloise Asset Management, Bloomberg Finance L.P.
Baloise Market View, 01.03.2022 4Macroeconomic environment: Economy
Russia primarily important due to its role in the energy sector
› The economies of Russia and Ukraine account for Russia's raw material production
In % of global production in 2020
only about 2% of global economic output.
50
› Russia's role in the energy sector is particularly
45 43
important, however, as the country is the second
largest oil producer in the world. 40
35
› Europe relies on Russia for about a third of its gas
needs, with many of the pipelines flowing through 30
Ukraine. 25
› The alternatives are limited. Any interruptions in 20
16.6
Russian gas exports would therefore have a 15 12.1
11
disproportionately strong impact on Europe. 10
› A major risk for european manufacturing, already 5
burdened by material and supply bottlenecks, is to 0
have to reduce or completely stop its product ion. Palladium ErdgasGas
Natural Weizen
Wheat Öl
Oil
Sources: Baloise Asset Management, Bloomberg Finance L.P., The Economist
Baloise Market View, 01.03.2022 5Macroeconomic environment: Inflation
Strong rise in commodity prices likely to fuel inflation further
Commodity price development
Indexed; 100 = value from 03.01.2022 › The Russia-Ukraine conflict is likely
175 to delay the decline in high inflation
Oil (Brent)
rates due to higher commodity prices.
Wheat
Natural gas
150 Palladium › Supply chain disruptions pose
Bloomberg Commodity Index another risk to inflation normalisation
125 › Ukraine is an important partner for
the German car industry. Car
manufacturers, such as Volkswagen,
100 are reducing production in view of the
shortage of materials and
interruptions in deliveries.
75
02-01-2022 23-01-2022 13-02-2022
Sources: Baloise Asset Management, Bloomberg Finance L.P.
Baloise Market View, 01.03.2022 6Macroeconomic environment: Monetary policy
Central banks will tighten the reins cautiously
Market expectations for the US key interest rate › Investors expected central banks to raise interest
at the end of 2022 rates sharply in 2022, especially in the USA.
In %
1.8 › The war should somewhat delay central banks'
1.6 monetary policy normalisation and thus
1.4
reduce the risk of raising interest rates too
quickly, which is positive for equity markets
1.2
1 › However, fighting inflation, which continues to
0.8 rise due to the increase in commodity prices,
remains essential for central banks.
0.6
0.4 › Risk of stagflation increases sharply, i.e.
0.2 weaker growth but continued high inflation which
0
is poison for equity markets
07.2021 09.2021 11.2021 01.2022 03.2022
Sources: Baloise Asset Management, Bloomberg Finance L.P., based on Fed Funds Futures
Baloise Market View, 01.03.2022 7Economic and Financial Market Outlook: Global
Our current scenarios for the coming 12 months
60% Base case 30% Downside 10% Upside
› Protracted conflict between Russia and Ukraine › Further strong escalation of the war, with › The war in Ukraine comes to an end soon, e.g.
Assumptions
with the risk of further sanctions, the effect massive additional economic sanctions and through a diplomatic agreement
remains similar to what is currently the case measures › Decline in raw material prices, material and
› Gradual decline in commodity prices and material › Commodity prices remain elevated and supply bottlenecks already largely resolved in
and supply bottlenecks only gradually resolve consumer and investor inflation expectations soar the first half of 2022
towards the end of 2022
› Global economic growth remains robust › Russia's countermeasures as a result of further › Improved outlook leads to the return of above-
Economy
› Dynamics, however, vary greatly depending on sanctions have a negative impact on global average economic growth
country and sector economic growth (especially in Europe) › Inflation shows signs of normalisation towards
› Increased inflation rates over the next months with › Stubbornly high inflation persists leads to upward mid-year
decline towards the end of the year pressure on interest rates
› Central banks are cautiously turning to less › Central banks, especially in the advanced › With inflationary pressures easing, central banks
Monetary
Politcs
expansionary policy economies, are caught between the conflicting are not under pressure to tighten monetary policy
› In the USA, interest rates will be raised for the first goals of fighting inflation and cushioning the quickly and abruptly
time in March threat of a growth slowdown.
› Long-term interest rates slightly rise and credit › Upward pressure on long-term interest rates for › Gradual and sustained increase in long-term
Financial
markets
spreads widen in the short term sovereigns with lower credit quality, while weaker interest rates
growth prospects for high credit quality provide › Tightening of credit spreads
› Volatile stock market development - a sideways downward pressure › Stock markets rise and reach new highs
trend overall › Sharp widening of credit spreads and sell-off
in equity markets
Note: The negative and positive scenarios are those that we believe are most likely / have the strongest financial market implications. This does not mean that there
Baloise Market View, 01.03.2022 are no other risks or opportunities. Risks of a geopolitical nature can change at any time.
83M Fixed Income Equities Real Estate Alternatives Cash
Baloise Market View: At a glance Attractive ◌
◌ ● ●
Positioning against benchmark ● ● ◌
Unattractive ●
› Equities: The war in Ukraine has the potential for further escalation and represents a clear risk for the equity markets. We
therefore expect volatility to remain elevated for the time being. In this environment, a more defensive orientation of the portfolio
and the examination of hedges are indicated. However, the continued robust economic environment and the expectation that
central banks will now raise interest rates less rapidly should support risk assets such as equities in the medium term. We
therefore prefer an equity allocation in line with the strategy.
› Bonds: We consider bonds to be less attractive overall. Government bonds are generally unattractive, but serve as a stabiliser in
the portfolio, especially in the current environment. We now rate corporate bonds somewhat more attractive due to the higher yield
compared to government bonds. The credit spreads of corporate bonds have risen further. In certain segments, especially in the
EUR, risk premiums appear more attractive to us than in previous months. However, given the volatile environment, a further
increase in credit spreads cannot be ruled out, which is why we are maintaining a slight underweight.
› Real estate: The low interest rate environment, especially in Europe, remains intact. This is fundamentally positive for the real
estate markets, although increased attention should be paid to location and type of use. The strongest demand continues to be for
residential properties in good locations. Based on the high valuations in many cases, a stronger than expected rise in interest rates
could put some pressure on the asset class in the future.
› Alternative investments: In view of the increased uncertainty, gold in particular is attractive and should offset the increased
market volatility somewhat. In the alternative investments segment, attractive strategic sources of return can still be found in
isolated cases due to the lower liquidity relative to other asset classes. In the event of rising interest rates, senior secured loans
(SSL), for example, represent an interesting alternative due to their variable interest rates compared to, for example, high yield
bonds.
› Cash: Given the current risks, we prefer an increased liquidity ratio.
Baloise Market View, 01.03.2022 9Baloise Market View: In detail
Positioning against benchmark
3 Months
Unattractive Attractive
Fixed Income ●
Bonds CHF ◌ ●
Government Bonds, foreign curreny hCHF ●
Corporate Bonds, foreign curreny hCHF ●
Bonds EM ●
Equities ● ◌
Switzerland ● ◌
World ●
Emerging Markets ●
World, Small Cap ●
Real Estate ●
Switzerland ●
Global ●
Alternatives ● ◌
Cash ◌ ●
Current view: ●; previous month: ◌
Sources: Baloise Asset Management as of 01.03.2022
Note: Alternative investments include commodities, gold, infrastructure, senior secured loans and convertible bonds.
"hCHF" means hedged in Swiss francs, EM/ Emerging Markets stands for emerging markets
Baloise Market View, 01.03.2022 10Baloise Asset Management
Aeschengraben 21
CH-4002 Basel
www.baloise-asset-management.com
Disclaimer:
Baloise Asset Management AG assumes no liability for the key figures and performance data used. The content of the publication contains opinions on market
developments and is for information purposes only and does not constitute investment advice. In particular, the information in no way constitutes a purchase
offer, an investment recommendation or a decision-making aid in legal, tax, economic or other matters. No liability is assumed for any losses or lost profits that
may arise from the use of the information.
Swiss Exchange Ltd, ("SIX Swiss Exchange") is the source of the Swiss Performance Index (SPI) and the Swiss Bond Index (SBI) and the data contained
therein. SIX Swiss Exchange was not involved in any way in the preparation of the information contained in this report. SIX Swiss Exchange makes no warranty
and disclaims all liability (whether arising from negligence or otherwise) with respect to the information contained in this report, including, without limitation, the
accuracy, adequacy, correctness, completeness, timeliness and suitability for any purpose, and with respect to any errors, omissions or interruptions in the SPI
or SBI or the data therein. Any dissemination or transmission of the information originating from SIX Swiss Exchange is prohibited.
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