Our View

With confidence into the new year

Dr. Felix Brill · Dr. Thomas Gitzel · Bernhard Allgäuer · Harald Brandl · Jérôme Mäser
Reading time: 14 Min
If one were to look at the current state of the equity markets, one might think that the Corona pandemic was just a bad dream. Even if some expectations of a normalisation seem exaggerated, there are good reasons to look to 2021 with optimism.

The progress in vaccine development and vaccination programmes gives confidence that the corona pandemic is under control in a sustainable way. It is true that life and economic development will be dominated by tightened lockdown measures in the short term. At the same time, however, there are signs that the economy will gain momentum in the course of 2021. The economic recovery will be supported by investments in the green economy. Governments are setting the pace in this respect. Climate protection is at the top of the agenda of government investment programmes, and at the same time, incentives are being provided for the private sector.

In the past year, it has been surprising how quickly the equity markets were able to make up for the sharp slump in spring. Some indices, such as the S&P 500 in the US, have even reached record highs recently. However, due to the corona-induced collapse in corporate earnings equity valuations look rich. At the same time, however, the low bond yields ensure that equities continue to be in demand. In addition, the return to earnings growth in tandem with the economic recovery will provide positive momentum.

As the equity markets in 2020 have largely been driven by technology stocks, it is now important from a return potential view that the recovery broadens. The combination of economic stimuli and voluminous investment programmes in green technologies can be the trigger for this broadening (see the latest issue of Telescope).

Based on this, we believe that equities have a higher return potential than bonds in the medium term, despite the recent rally. Accordingly, we have decided to increase the equity allocation in the investment strategy at the expense of the bond allocation (see Infobox).

While we are confident about the medium-term prospects, there is still a heightened level of uncertainty in the short term and thus the risk of temporary setbacks. It is therefore important to make the portfolio as resilient as possible.

Among other things, we rely on a mix of promising equity theme investments and systematic low-risk equity strategies. In a persistently low interest rate environment, broad diversification across alternative asset classes is also important to make the portfolio robust. In our view, gold and insurance-linked securities are particularly suitable.

Adapting VP Bank's investment strategy

VP Bank’s investment process draws a distinction between investment strategy and investment tactics. The Sstrategy is decided by the Investment Strategy Committee (ISC), which meets twice a year. Tactics are set by the Investment Tactics Committee (ITC), which usually meets on the second Tuesday of every month and also at other times in reaction to exceptional market developments. The results are published in the monthly publication “Our View” (which you read now). 

After the latest strategic review, the ISC has decided to raise the equity allocation in response to the high probability of an economic expansion and to reduce the bond allocation to take account of the low level of interest rates. In the equity sector, emphasis is placed on investment themes that address long-term trends. In the bond sector, interest rate sensitivity has been further reduced. At the same time the ISC has reaffirmed a supplementary positioning in alternative asset classes in order to optimise diversification. This makes the portfolio robust and more effectively shielded against unpleasant surprises. We are also consistently applying sustainability criteria. The new investment strategy will be implemented in wealth management mandates as per 1 January 2021.


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