Investment PolicyFebruary 2019
Our market view in a nutshell – February 2019
• As the dust settles after the end of the year panic, both macroeconomic data and corporate profits are bringingcalm back to financial markets. A more constructive US administration is also contributing to this normalization,having understood that the patience of the market is limited when it comes to disputes that are detrimental toeconomic growth, such as the government shutdown or the trade dispute
• If we avoid a policy accident, and with the Federal Reserve on hold as long as inflationary pressures remaincontained, we are returning to the "Goldilocks" scenario. This would be an environment conducive to riskassets, particularly for stocks, since valuations now seem relatively attractive
• The same cannot be said for bonds, since the term premium hardly exists. This is the result of (yet another)expectations mismatch between the Fed – which sees robust growth – and bond markets – that seem to bepricing a slowdown. If the latter does not happen, the bond market could be ready for a painful correction
• As investors, we should not be overly concerned about recessions. After all, when price increases are accountedfor, economic growth has been almost uninterrupted over the last century. The end of a cycle is just the beginning ofthe next, and what matters is to be invested in companies that can withstand them
• When it comes to risks for the global economy, we continue to perceive an economic slowdown in China as thelargest of them; and although there is clear evidence that the rebalancing of their economy will be a long and difficultprocess, the Chinese authorities still have certain levers to stabilize their economy. As the impact of infrastructurespending on growth decreases, fiscal and monetary stimuli are gaining importance, which is why we expect China'sexpansionary policies to act once again as a stabilizer of global growth
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MWM Investment Policy
3
From a relative valuation perspective, we like European stocks as they trade at lower multiples, and we expect profits to pick up as economic activity accelerates
Multi-strategy / multi-manager hedge funds with daily liquidity are having a disappointing performance, particularly when compared with other less risky alternatives, like short-term corporate bondsA diversified commodities allocations, further help us to increase diversification and to protect the portfolios against a scenario of rising inflationInvesting in late-stage private equity provides access to the asset class with liquidity provision up to a certain degree
Corporate debt and High Yield currently offer the best combination of risk and return. We prefer medium maturities as theyield curve has flattened considerably and there is little term premium to compensate for taking interest rate risk
High quality debt in Euros presents a very unattractive combination of risk and return as current yields offer very little cushion to weather potential interest rates increases
In European credit we only see value in subordinated debt, asset-backed securities and short-duration high yield
Treasuries offer protection from a slowdown in growth – although this less likely with the fiscal stimulus in the US – whilstTIPS offer protection against rising inflation as a consequence of reflationary policies
Emerging Markets currencies and spreads have adjusted significantly to a stronger dollar and the uncertainties aroundglobal growth. With the Fed signaling being closer to the neutral rate, we deem current levels to offer fair value
Amongst others, we favor Biotechnology and listed Real Estate
Japanese stocks are the cheapest in developed markets, but have suffered recently due to sluggish growth, and concerns about global tradeEmerging markets have corrected sharply since the beginning of the year affected by a strong dollar and trade concerns. We deem the correction suffered has been excessive, and continue favoring India and Frontier Markets within EM
After the recent market corrections, valuations have improved substantially. We have therefore increased our exposure to US equities, mostly through quality and growth oriented companies
Equities
Multi-Strategy Hedge Funds
Commodities
Private Equity
Alternative Investments
Fixed Income
US Credit
European Sovereign
US Treasuries
Europe
Emerging Markets
European Credit
Sectors & Themes
Japan
Emerging Markets
US
Asset Class RationaleView
+
+
−
++
==
Overweight+ Underweight− Neutral=
+
−
A sharp turn in market expectations
4
• As we have more data about the real state of the economy, it seems increasingly clear that the sharp correction in equitymarkets that occurred at the end of the year, was just another incident of anomalous market behavior, caused by thinliquidity and the increase in automated trading
• Despite the strong recovery experienced by risk assets at the beginning of the year, concerns about the slowdown inglobal growth, the trade war, and a chaotic US administration have not disappeared, and we must remain vigilant
Source: Bloomberg, as of February 18, 2019
-1.2%
0.0%
-0.4%
1.6%
0.4%
-0.1%-2.1%
-3.6% -3.0% -3.2%-4.4%
-2.8%
-11.3%-10.4%
-14.4%-15.4%
-11.7%
-2.3%-3.9%
7.8%
0.7%1.1%
0.3%0.4%
1.0%
-0.1%
5.4%
2.9% 3.1% 2.4%
11.0%12.8%
8.3%6.3% 6.8%
13.1%
6.1%
3.3% 2.6%0.5%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Glo
bal A
ggr.
US
Aggr
.
US
Trea
surie
s
US
Aggr
. 1-3
Yr
EUR
Agg
r.
EUR
Agg
r. 1-
3Yr
US
Hig
h-Yi
eld
EUR
Hig
h-Yi
eld
EM A
ggr.
($)
Subo
rdin
ated
Deb
t
S&P
500
Nas
daq
Euro
Sto
xx 5
0
Nik
kei 2
25
Emer
ging
Mar
kets
S&P
GSC
I
Bren
t Cru
de
Gol
d
HFR
I FoF
Dol
lar I
ndex
2018 2019 (Ytd)
Recession obsession
5
• As investors, it is important to look beyond the economic cycles. The end of a cycle is just the beginning of the next,and during the last century there have been very few years in which the economy did not grow
• Recessions tend to be accompanied by a fall in equity markets, but they are not a sufficient or necessary condition.Therefore, we consider that it is more productive to try to evaluate the growth that is implicitly discounted in stockprices (i.e., whether equities are cheap or expensive) instead of trying to anticipate the next recession
Source: Bloomberg
1948
1949
1950
19511952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
19641965
1966
1967
1968
1969
1970
19711972
1973
1974
1975
19761996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
20181977
1978
1979
1980
1981
1982 1983
1984
1985
1986
1990
1991
-5% 0% 5% 10% 15% 20%-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
US Nominal GDP %YoY
S&P
500
Tota
l Ret
urn
y = 0.66x + 0.08R2 = 0.02
Non-Recession Year
Recession Year
Valuations and risk premium provide a cushion
6
• In fact, when looking at valuations, US equities seem to be fairly valued, or even cheap. This is the result of fallingequity prices in a context of widespread increases in corporate earnings
• Moreover, if we normalize P/Es taking into account the level of interest rates, current valuations provide a decentcushion against a slowdown in corporate earnings
Source: Bloomberg
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
10
15
20
25
30
35
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
P/E (S&P 500) (lhs) Risk Premia (rhs)
Term premium speaks potential trouble for bonds
7
• Conversely, bonds seem less and less attractive, with an insufficient term premium offered for holding longermaturities
• With inflation stable around the 2% Fed’s target, a flat yield curve poses a risk of a sharp re-pricing in long-terminterest rates, should there be no slowdown in economic activity
Source: Bloomberg
-1%
0%
1%
2%
3%
0%
1%
2%
3%
4%
2002 2004 2006 2008 2010 2012 2014 2016 2018
US Core Inflation (lhs) Term Premium (10Yr vs. 2Yr US Treasuries) (rhs)
The Fed and the markets see things differently
8
• The current gap in interest rate expectations between the Fed and the markets can have several explanations; the Fedmight have tightened above the neutral rate, or the market could have overestimated the likelihood of a recession
• On previous occasions, the market has been right, or alternatively, the Fed has accommodated itself to market consensus.However, we see a very asymmetric risk in following the market and we continue to recommend short durations
Source: Bloomberg
1.0%
2.0%
3.0%
4.0%
2017 2018 2019 2020 20212018 2019 2020 2021 Longer Term
Fed Dots
Fed Futures
Back to the “goldilocks”?
9
• The normalization of spreads and volatility, together with a patient Fed and contained inflation, can bring us back tothe "Goldilocks" scenario, in which the economy continues to grow at a moderate pace without overheating
• This would be a favorable environment for risk assets. Hence our decision not to reduce risk despite the recentcorrection of the market
Source: Bloomberg
0
100
200
300
400
500
600
700
800
900
2014 2015 2016 2017 2018 20190%
5%
10%
15%
20%
25%
30%
35%
VIX Index (lhs) HY Spreads in bps. (rhs)
China’s economic rebalancing will take time
10
• From a macroeconomic perspective, China continues posing the single largest risk to the global economy. With theimpulse of 2015-16 fading, it is apparent now that the rebalancing of its economy will be a multi-decade process
• As the room for maneuver to stimulate the economy decreases through spending on infrastructure, the Chineseauthorities are launching fiscal and monetary stimuli
Source: Bloomberg
46
47
48
49
50
51
52
53
54
2012 2013 2014 2015 2016 2017 20188%
9%
10%
11%
12%
13%
14%
15%
16%
China Retail Sales Value (lhs) China PMI Manufacturing (rhs)
Trade war no longer looks so easy to win
11
• The US administration was emboldened by the initial market reaction to the trade sanctions on China. If the trade warwas conceived as a “game of chicken”, the new highs in US stock indices and the collapse in Chinese stocks seemed toindicate that there was a clear winner
• However, the strong correction in December, motivated mainly by the impact that trade tensions may have on growth, hasserved as a timely reminder that trade is not a zero-sum game
Source: Bloomberg
2,800
3,300
3,800
4,300
4,800
2017 2018 20192,200
2,400
2,600
2,800
3,000
S&P 500 (lhs) CSI 300 (rhs)
30% Tariff on Solar Panels
25% Tariff on Steel, 10% on
Aluminium
25% tariff on $50 billion of
Chinese goods with "industrially
significant technology”
10% tariffs on another $200 billion
worth of Chinese imports
China threatens tariffs on $50 billion of
U.S. goods
Tariff increase on the additional $200 billion in Chinese goods postponed
Model portfolio evolution
12Source: Bloomberg ,as of January 1, 2019* Fund publishes monthly NAV with a 1 month of delay
-4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Partners Group Global Value*Franklin K2 Alternative Strategies Fund
Amura Absolute ReturniShares Diversified Commodity Swap UCITS
Polar Capital Funds JapanT.Row Price Frontier Markets Equity Fund
Henderson Global Property EquitiesPolar Capital Biotechnology Fund
Pictet Indian EquitiesBNP Paribas TIER US 4% Index
Bonus Certificate Euros Stoxx 50Bonus Certificate SMI
Bonus Certificate S&P 500Wellington Global Quality Growth Portfolio
iShares Edge MSCI USA Quality FactorSchroder ISF - Global Convertible Bond
Neuberger Berman Short Duration EM DebtGAM Star Credit Opportunities
Neuberger Berman Corporate HybridOddo Compass Euro Credit Short Duration USDh
AB Mortgage Income Portfolio - A2M&G Global Floating Rate High Yield Fund
Muzinich Short-Duration High YieldiShares USD Short Duration Corporate Bond
iShares Ultrashort Bond UCITS ETFiShares $ Treasury Bond 3-7yr UCITS ETF
Ytd Last Month
Investment scenarios
13
Driv
ers
Mar
ket i
mpa
ctPr
obab
ility
• Global economic slowdown caused by political accidents or policy errors (Trade war with China, EU breakup, a too aggressive Fed, etc.)
• Deflationary scenario due to a combination of low growth and structural factors, although the rise of protectionism would be inflationary
• The Fed will have to reverse course, which would be complicated if inflation is rising
Scenario 1Recession by political/policy accident
• Correction in credit due to a rise in defaults and a widening of corporate spreads
• Correction in equities due to lower projected earnings, though declining rates will offer support
• Sovereign and IG credit to profit due to flight to quality and the continuation of an ultra-loose monetary policy globally
• USD neutral to weak as flight to quality is counterbalanced by low interest rates
• Commodities will fall
35% (-10%)
• The fiscal stimulus in the US provides a short-term impulse to the global economy, but not enough to attain a higher growth trajectory
• Inflation, particularly in the US will pick-up, but remains subdued globally due to structural factors (demographics, low aggregated demand, deleveraging)
• The Fed will continue its normalization path
Scenario 2Goldilocks
• Equities appreciate moderately, with Europe and Japan catching up with the US
• Credit spreads remain stable as the credit cycle is further elongated
• Sovereigns suffer as monetary policy is progressively normalized
• USD appreciate moderately due to higher interest rate differentials
• Commodity prices will rise in the short-term, normalizing once the impulse vanishes
40% (+10%)
• Growth concerns dissipate, with economic activity accelerating in US, Europe and Japan
• Inflation in the US increases, as a consequence of president Trump’s fiscal stimulus, and pulls other developed economies off deflation
• The Fed will have to step up the pace of rate increases and/or reduce balance sheet
Scenario 3New regime
• Impact on equities will depend on how much real economic growth is sustained, and how accommodative the Fed remains
• Sovereign and IG bonds will face steep losses due to higher rates, particularly if long-term inflation expectations rise
• Corporate credit will correct moderately if inflation comes together with higher growth
• The USD will appreciate, particularly against those currencies facing deflation
• Commodities will gain from higher inflation
25%
Other risksTrade wars, EM crisis, Spread of populist political parties, China slowdown, Terrorism
Short-term catalyzersEnd of trade dispute, improvement in macro-data globally, lower geopolitical tensions
MWM Model Portfolio Balanced USD
14
Cash Fixed Income Equity Alternative Inv.Commodities USD
Asset Allocation Currency Allocation
2%
48%
39%
3%8%
Cash2%US Treasuries
8%
Short-Term IG14%
Convertibles23%
Sub. Debt28%
HY Europe3%HY US
3%HY Floating3%MBS
3%EM3%Growth
4%India2%
Biotechnology3%
Real Estate3%
Frontier Markets2%
US Quality5%
Brazil2%
Str. Products18%
Diversified3%
Multi-Strategy5%
PE3%
USD100%
MWM Investment Profiles
Strategic Asset Allocation
15
Conservative Balanced Growth
AlternativeInvestments
Commodities
Equities
FixedIncome
Cash 3%5%
64%64%
24%
26%
2%2%
5%5%
2%5%
48%43%
38%
39%
3%4%
8%10%
1%5%
30%22%
54%52%
4%6%
10%15%
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
2015 2016 2017 2018 2019
Cash Fixed Income Equities Alternatives Commodities
MWM Model Portfolio – Asset Allocation evolution
16
MWM Model Portfolio – VaR evolution
171 As of January 31, 2018Source: Bloomberg
0%
1%
2%
3%
4%
5%
6%
7%
0%
2%
4%
6%
8%
10%
12%
14%
2015 2016 2017 2018
1Y VaR 99% MWM Balanced (lhs) 1Y Std. Dev MWM Balanced (rhs) 1Y Std. Dev Benchmark (rhs)
MWM Model Portfolio – Peer comparison
18
• Total Return (Ytd1): 11th out of 15• Standard Deviation (1 year1): 1st out of 15• Downside Risk (1 year1): 1st out of 15• Sharp Ratio (1 year1): n/a
1 As of January 31, 2018Source: Bloomberg
-14%
-10%
-6%
-2%
2%
6%
-14%
-10%
-6%
-2%
2%
6%
Dec 17 Jan 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18 Dec 18 Jan 19Janus Balanced Fund Invesco Balanced Risk Allocation Fund Investec Global Strategic Managed FundTempleton Global Income Fund UBS Global Allocation PIMCO Global Multi-Asset FundUBAM Multifunds Allocation 50 Julius Baer Strategy Balanced BlackRock Global Allocation FundNordea Stable Return Fund Schroder Global Multi-Asset Flexible BNY Mellon Global Real Return FundJPMorgan Global Balanced Fund Carmignac Patrimoine MWM Balanced USD
MWM Model Portfolio – Ytd performance
19
• Total Return (Ytd1): 3.19% vs. 3.33% Benchmark2
• Standard Deviation (Ytd1): 4.74% vs. 5.18% Benchmark2
• Downside Risk (Ytd1): 3.26% vs. 3.36% Benchmark2
• Sharpe Ratio (Ytd1): 9.08vs. 8.79 Benchmark2
1 As of January 31, 20182 Benchmark = 5% Fed Funds + 43% JPM Global Aggregate Bond Index + 38% MSCI World + 4% S&P GSCI + 10% HFRI FoHF
-2%
0%
2%
4%
-2%
0%
2%
4%
Dec 18 Jan 19
MWM Balanced USD Benchmark
MWM Model Portfolio – Historical performance (1)
20
• Total Return (1 year1): -2.44% vs. -3.44% Benchmark2
• Total Return (3 year1): 7.58% vs. 19.09% Benchmark2
• Total Return (Since Jan 121): 27.33% vs. 39.07% Benchmark2
1 As of January 31, 20182 Benchmark = 5% Fed Funds + 43% JPM Global Aggregate Bond Index + 38% MSCI World + 4% S&P GSCI + 10% HFRI FoHF
-20%
-10%
0%
10%
20%
30%
40%
50%
-20%
-10%
0%
10%
20%
30%
40%
50%
2011 2012 2013 2014 2015 2016 2017
MWM Balanced USD Benchmark Difference
MWM Model Portfolio – Historical performance (2)
21
• Standard Deviation (1 year1): 3.94% vs. 5.50% Benchmark2
• Downside Risk (1 year1): 2.92% vs. 4.04% Benchmark2
• Sharpe Ratio (1 year1): -1.12 vs. -0.97 Benchmark2
• Var 95% - 1day (1 year1): -0.48% vs. -0.60% Benchmark2
1 As of January 31, 20182 Benchmark = 5% Fed Funds + 43% JPM Global Aggregate Bond Index + 38% MSCI World + 4% S&P GSCI + 10% HFRI FoHF
-5%
-3%
-1%
1%
3%
5%
2012 2013 2014 2015 2016 2017 2018 2019
MWM Balanced USD Benchmark
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22www.morawealth.com
This document is for information purposes only and does not constitute, and may not be construed as, a recommendation, offer or solicitation to buy or sell any securities and/or assets mentioned herein. Nor may the information contained herein be considered as definitive, because it is subject to unforeseeable changes and amendments.
Past performance does not guarantee future performance, and none of the information is intended to suggest that any of the returns set forth herein will be obtained in the future.
The fact that MWM can provide information regarding the status, development, evaluation, etc. in relation to markets or specific assets cannot be construed as a commitment or guarantee of performance; and MWM does not assume any liability for the performance of these assets or markets.
Data on investment stocks, their yields and other characteristics are based on or derived from information from reliable sources, which are generally available to the general public, and do not represent a commitment, warranty or liability of MWM.