

MARKET OUTLOOK
The start of a new cycle – 2024

Marketing material
Publication date: 11 January 2024, 8:00 CET
Please find important legal information at the end of this document.
Source: Bank Julius Baer & Co. Ltd. (Julius Baer), unless explicitly stated otherwise.

 

Editorial
Dear Reader,

Our outlook for 2023 was that it would be the When it comes to overarching themes, the power of
year of the cool-down. Whilst this took a while to the Magnificent 7 and the ability of artificial intelli-
come to fruition, we did eventually see both growth gence to impact all sectors should not be ignored.
and inflation rates slowing as expected. Now that Furthermore, as always, alternative investments pro-
we have entered 2024, the talk is all about when vide another option for increasing the diversification
we will finally see the major central banks start to of a portfolio.
loosen their monetary policy. Until the timing of
this becomes apparent, there may be some ner­ The market rally that we saw at the end of 2023
vousness in the markets. However, as inflation cools demonstrates the power of remaining invested.
off further, we expect to finally embark on a new, Julius Baer looks forward to helping you navigate
more familiar economic cycle. Barring any wild-card your way through your investment decisions in 2024
events, we expect both equities and bonds to by maximising the opportunities that the new cycle
benefit. is expected to bring. As always, we thank you for
your trust in us and wish you a very successful year
At the start of the year, it pays to remain invested in ahead.
quality growth and defensive stocks, as well as qual-
ity bonds. However, as the markets get the first scent Yours faithfully,
of the new, lower interest rate environment, investors
will benefit from adding cyclicals to their portfolios
too.

Yves Bonzon Christian Gattiker

Group Chief Investment Officer Head of Research
Member of the Executive Board

3


Contents

A brief review 5
Macroeconomy and strategy  10
Fixed income 18
Equities 30
Alternative investments  40
Further information 50
Important legal information 53

4
A brief review
2023 turned out much better than many invest-
ors had expected. Most asset classes ended the
year in positive territory, with many equity indices
posting double-digit gains. However, the year was
not without setbacks along the way. The sharp rise
in yields to levels not seen since the onset of the
Global Financial Crisis was difficult to digest for
both equity and bond investors. Fixed income invest-
ors, in particular, had to hold their nerve. However,
a stronger-than-expected decline in inflation rates
and markets increasingly pricing in the start of a
rate-cutting cycle in 2024 pushed yields lower, so the
year ended on a positive note for bond investors as
well.
A brief review

Market review
2023 will be remembered as the year when artificial intelligence (AI) went mainstream and
risk assets defied higher policy rates. However, following the largest interest rate increases
in decades, growth will remain under pressure. We expect 2024 to be the year in which
central banks start their rate-cutting cycles, thus paving the way for a new economic cycle
into 2025 and beyond.

Equity regions
2019 2020 2021 2022 2023 5-year annualised
Switzerland 29.98% 1.07% 19.51% -17.50% 2.94% 7.21%
Eurozone 26.05% -3.32% 21.54% -9.94% 16.85% 9.54%
USA 30.88% 19.70% 25.75% -20.31% 27.04% 15.14%
Japan 18.48% 10.23% 12.93% -6.45% 30.04% 12.77%
UK 16.37% -13.93% 15.13% 5.33% 6.15% 6.83%
China 24.34% 29.49% -19.30% -21.43% -11.20% -2.80%
Emerging markets ex. China 16.23% 12.55% 7.87% -19.65% 20.07% 6.88%

The best The worst

Japan posted the biggest gains of 2023 – mainly Only one major equity region ended 2023 in the red
driven by a weak yen, sustained regulatory reforms, – China. The country suffered from the downturn
and a loose monetary policy. Investors’ focus was, in its property sector and from fiscal and monetary
however, on US equities, which were not far behind stimulus measures that market participants consid-
thanks to the region’s high exposure to the year’s ered insufficient. Switzerland ended the year only
winning theme: AI. slightly positive, mainly due to its defensive sector
composition, which could not benefit from 2023’s
improved risk sentiment.

6
 A brief review

Equity styles
2019 2020 2021 2022 2023 5-year annualised
Quality 36.08% 22.20% 23.24% -22.16% 32.22% 16.57%
Value 21.75% -1.16% 18.42% -6.62% 11.29% 8.87%
Growth 33.68% 33.83% 19.33% -29.56% 36.79% 16.02%
Large cap 27.73% 15.94% 20.04% -18.31% 25.04% 13.30%
Small cap 26.18% 15.96% 12.09% -19.07% 15.53% 9.76%
Cyclicals 31.54% 19.30% 25.80% -22.40% 33.60% 15.40%
Defensives 21.69% 1.60% 21.70% 4.20% 2.20% 9.80%
High dividend 23.15% -0.03% 12.07% -4.76% 8.97% 8.19%

The best The worst

Quality, growth, and cyclical stocks were 2023’s Defensive stocks were the worst-performing equity
outperformers, as they benefited from the style in relative terms over the year, with only a
improved equity-market risk sentiment and a slightly positive return in 2023. The style became
better-than-expected economic backdrop. We increasingly unpopular among investors, who
expect the stellar performance of the growth seg- became bolder towards the end of the year. High
ment to continue in 2024 as bond yields potentially dividend was another style which, although solidly
continue to fall. in the green, was less in favour in the high-yielding
environment of 2023.

Equity sectors
2019 2020 2021 2022 2023 5-year annualised
Information technology 47.55% 43.77% 28.21% -31.26% 53.11% 23.92%
Materials 23.35% 19.93% 12.19% -9.97% 14.40% 12.01%
Oil & gas 11.45% -31.46% 37.71% 43.77% 2.23% 9.88%
Industrials 27.77% 11.68% 14.10% -12.79% 22.83% 12.20%
Communications 27.39% 22.98% 13.02% -37.17% 45.41% 10.46%
Healthcare 23.24% 13.52% 15.52% -4.54% 3.68% 10.47%
Financials 25.51% -2.84% 24.80% -10.62% 15.94% 10.22%
Consumer cyclical 26.57% 36.62% 15.67% -34.61% 34.58% 12.91%
Consumer defensive 22.80% 7.79% 9.85% -6.13% 2.24% 7.52%
Real estate 22.96% -4.99% 24.11% -24.50% -9.59% 0.38%
Utilities 22.53% 4.76% 6.09% -4.11% -0.02% 6.15%

The best The worst

AI was the dominant theme in financial markets in Real estate was the only sector to end 2023 really in
2023. Thus, it is unsurprising that information tech- the red – down almost 10%. Elevated yield levels put
nology was not only the best-performing sector over pressure on this highly interest-rate-sensitive sector.
the year but also closed the year spectacularly – up Defensive sectors also showed lacklustre perform-
more than 50%. Communications also performed ance, with utilities changing little from the start of
well – up more than 40%. the year and consumer defensives and healthcare
ending up only slightly in the green.

7
A brief review

Fixed income
Developed markets 2019 2020 2021 2022 2023 5-year annualised
US government bonds 6.86% 8.00% -2.32% -11.65% 3.70% 0.50%
US TIPS 8.43% 10.99% 5.96% -11.38% 3.81% 3.14%
USD IG corporates 14.54% 9.89% -1.04% -15.76% 8.15% 2.59%
USD high yield 14.32% 7.11% 5.28% -11.19% 12.87% 5.36%
USD floating-rate notes 4.28% 1.38% 0.52% 1.33% 6.66% 2.82%

Emerging markets 2019 2020 2021 2022 2023 5-year annualised

EM hard currency 12.13% 7.02% -2.48% -16.24% 9.53% 1.37%
EM local currency 9.47% 5.29% -2.53% -8.23% 6.57% 2.09%

The best The worst

Despite being a very difficult year, all fixed income Safety did not pay off in relative terms in 2023,
segments ended 2023 on a positive note. A with US government bonds and US Treasury
better-than-feared US economy led to excess inflation-protected securities (TIPS) ranking among
returns in risky bonds. The best-performing seg- the weakest performers. The longer duration of
ments were US high yield (which, despite increased these sub-asset classes was a drag on performance
default rates, moved up more than 12%) and emerg- for most of 2023 but helped their recovery in the
ing market hard-currency bonds, due not only to last two months of the year. However, with the eas-
tightening credit spreads but also to the high carry ing cycle potentially set to begin in 2024 and econ-
of these instruments. omies likely to continue to face growth constraints,
we prefer medium-to-longer-duration high-quality
bonds in order to mitigate reinvestment risks.

Commodities
2019 2020 2021 2022 2023 5-year annualised
Brent crude oil 22.68% -21.52% 43.61% 10.45% -10.32% 7.45%
US natural gas -25.54% 15.99% 49.43% 19.97% -43.82% -3.08%
Gold 18.87% 24.42% -5.74% -0.13% 13.45% 10.09%
Silver 15.32% 47.38% -15.61% 2.95% 0.19% 9.16%
Platinum 22.05% 10.71% -14.02% 11.33% -7.33% 4.57%
Aluminium -1.84% 10.61% 34.93% -16.18% 0.08% 5.23%
Copper 3.32% 25.97% 25.65% -14.10% 1.38% 7.33%
Iron ore 28.70% 70.26% -27.81% -1.08% 22.55% 13.91%

The best The worst

It has been a difficult year for commodity markets, Energy prices were the worst performing segment
which have had a very mixed performance. Nev- within the commodity complex. Oil was down
ertheless, gold ended the year above USD 2,000 despite geopolitical tensions, and ample supplies of
per ounce for the first time in history, as prices were natural gas pushed prices below pre-energy-crisis
pushed up by excessive expectations of interest rate levels. China’s weak growth backdrop put the prices
cuts. Iron ore shrugged off the weakness in China’s of industrial metals under pressure amid surging
property market, reflecting hopes of stimulus meas- supplies.
ures, while copper outperformed all industrial metals
due to looming structural supply shortages.

8
 A brief review

Hedge funds
2019 2020 2021 2022 2023* 5-year annualised
Equity long/short 13.71% 17.89% 11.67% -10.13% 6.57% 7.47%
Event-driven 7.49% 9.26% 12.41% -4.83% 6.00% 5.90%
Relative value 7.42% 3.38% 7.59% -0.68% 5.59% 4.61%
Trading 6.50% 5.38% 7.72% 8.98% -1.19% 5.42%
Credit/income 6.47% 6.26% 7.95% -2.62% 5.81% 4.70%
Multi-strategy 10.45% 11.83% 10.16% -4.14% 4.87% 6.47%

The best The worst

There were positive returns for the broad equity After a very strong 2022, global macro-related
long/short index on the back of the attractive envi- ‘discretionary trading’ strategies lagged in 2023.
ronment for long-biased managers who captured Many managers were caught on the wrong foot and
the positive market return. However, outperform- were short-squeezed in March when bond yields
ing the markets was more difficult as volatility came dropped like a stone following the US banking cri-
down over the course of the year, and, except for the sis while many were expecting higher yields. This
Magnificent 7, most stocks moved very little. This led to a broad de-risking, and many managers were
meant that more market-neutral managers strug- underinvested in H2, when fixed income, equities,
gled throughout the year. Nevertheless, their chance and currencies exhibited some strong directional
to shine came in the August-to-October period, moves.
when markets sold off and volatility was high.

Source: Bloomberg Finance L.P., Julius Baer Investment Writing

Note: Please see the ‘Further Information’ section of this publication for more details on the indices used. Annual performance num-
bers are in USD, except for equity regions that are calculated in local currency. EM = emerging markets, ex. = excluding, IG = investment
grade. * As at the end of November 2023.

Past performance is not a reliable indicator of future results. Returns reflect all ongoing charges excluding transaction fees. All
investments have inherent risks, and investors may not recover their initial investment.

9
Macroeconomy
and strategy
Following a turbulent year, softer inflation and strong
seasonality effects supported markets into a year-
end rally in 2023. So what is in store for 2024, and
how should investors position their portfolios at the
beginning of this year? When it comes to economic
growth, we expect neither a boom nor a bust. How-
ever, we do envisage a transition from the current
cycle into a new cycle. In equities, we would start the
year with exposure to quality growth and defensive
stocks. In fixed income, investors should take advan-
tage of the current interest rate environment and
lock in attractive yields with quality bonds. Regarding
currencies, we expect the US dollar to remain range-
bound, and within commodities, we still like copper.
 Macroeconomy and strategy

Approaching a new cycle

With inflation expectations falling, as was confirmed by Q4 2023 data releases, the pros-
pect of central banks cutting interest rates is very real. We expect the first rate cuts to hap-
pen in Q2 of this year, which would mark the beginning of a new cycle. In anticipation of
this, market sentiment should improve after a possibly nervous start to the year.

Rate cuts are on the cards Economic growth in the first half of 2024 is set to
Many factors have influenced the current cycle. be constrained, in our view, since we expect to see
Geopolitical events, including but not limited to the monetary policy on hold – most likely until some-
tragic wars in Ukraine and the Middle East, have had time in the second quarter. Thereafter, we expect
to be digested by financial markets. Prior to this, the current cycle to come to an end when the first
the enormous external shock of the Covid-19 pan- rate cuts are implemented by central banks, marking
demic led to the biggest policy support packages in the beginning of a new cycle. This end-of-cycle envi-
history, which ultimately caused economies to over- ronment could, however, result in some nervousness
heat, triggering record inflation levels across the in the first few months of the year, because there
globe. Central banks responded by raising rates at are still a number of uncertainties, not least regard-
an unprecedented speed and scale. ing the timing and extent of future rate cuts. There-
fore, we would not be surprised to see a shaky start
to 2024, but we expect that confidence will return
as investors digest a positive outlook for 2025 and
beyond.

Approaching a new, more normal economic cycle

2020 2024

Source: Julius Baer Investment & Wealth Management Solutions

11
Macroeconomy and strategy

Where will inflation settle?

Inflation usually lags growth, i.e. there is generally a
delay in terms of when inflation is visible in an econ-
omy. However, in the current cycle, the effects have
Research Focus
been immediate and enormous. Looking ahead,
inflation should continue to fall closer to the comfort Want to find out more
zone of central banks. The question now is when will about the key macro
inflation bottom? The risk is that overly restrictive trends, as well as our
policies for a longer period of time could hamper the views across asset classes
recovery of economies. Thus, we believe that West- for 2024 and beyond?
ern governments and central banks will choose to Take a look at our
accept slightly higher inflation of around 3%. The Research publication.
reasons for this include the post-crisis normalisation
of demand and, more importantly, supply-side fac-
tors, e.g. geopolitical tensions have led to a change
in global supply chains, and demographic pressures
in the workforce in the West and in China could limit
the labour supply going forward and put upward
pressure on wages.

Inflation is coming down further – but how far?

Underlying inflation (% year-on-year)

0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

United States Eurozone

Source: Macrobond, Julius Baer Research

Note: Underlying inflation is based on various measures of inflation from which common fluctuations have been removed using dynamic
models. Underlying inflation can be regarded as a leading indicator for headline inflation.

12
 Macroeconomy and strategy

What does this all mean for investors? Turning to currencies, the US dollar, which is the
In our base-case scenario of a peak in long-term global reserve currency and a safe haven in times
yields, as well as a soft landing of the US econ- of crises, has been appreciating for 14 years. Thus,
omy in 2024, we see the year as a good one for many are expecting an end to its upward trajec-
developed-market equities overall, with the best tory. However, among other factors, the US dollar
returns potentially materialising in the second half has been supported by a very resilient US econ-
of the year when monetary policy becomes less omy, as well as the fact that the US has become
restrictive. To start the year, we prefer to keep expo- self-sufficient in terms of energy supply and is a
sure to quality growth and defensive stocks, as eco- leader with regard to technology in many industries.
nomic activity is likely to slow down in the first few In 2024, we expect the US dollar to remain range-
months of 2024. In the quality growth space, we like bound, i.e. it will continue to trade within a relatively
information technology and communication stocks, tight price range.
and within defensives, we like the healthcare sec-
tor, Swiss equities, and European utilities. Then, at Regarding commodities, the shock waves unleashed
some point during the first half of 2024, investors up to 2022 by the pandemic, overheated manu-
should start to anticipate the transition from the old facturing sectors, adverse weather, and geopolitics
cycle to the new one and accordingly shift the focus diminished in 2023, and we believe that this ‘super-
of their portfolio to more cyclical stocks.­In emerg- charged’ cycle should continue to deflate in 2024.
ing markets, companies are expected to experience Generally, we expect that commodity prices will
a significant reversal in the current decline of earn- fall at first and then trade rangebound. In the cop-
ings growth, which has historically been a key driver per market, however, rising demand on the back of
of stock market returns. We thus maintain an Over- growth in electric vehicle production and supply
weight rating on Brazil1, India, South Korea2, and constraints in the years ahead could provide a boost
Taiwan3. to prices.

In the fixed income space, there is still an opportun-

ity to lock in the current attractive yields with qual-
ity bonds, since the quality segment compensates
investors comfortably above expected inflation lev-
els. We therefore believe that the safer the issuer,
the better. We particularly like Swiss-franc-denom-
inated bonds, where investors could benefit from
their safe-haven features.

Video
Our Head of Research
Christian Gattiker shares
our expectations for the
global economy and key
asset classes.

1
Brazil: For local residents, the investments into the local market are bound by legal restrictions.
2
South Korea: For local residents, investments into the local market are bound by legal restrictions. The same regulation may also apply
to foreign residents.
3
Taiwan: The services offered by Julius Baer in local markets are restricted.

13
‘The start of a new
cycle in 2024 should
open up many
opportunities.’

Christian Gattiker
Head of Research
Macroeconomy and strategy

Special

What if things do not go

according to plan?
As always, the world is complicated, and there are many moving parts. A number of differ-
ent scenarios might change the market environment, underlining our preference for start-
ing the year with exposure to the quality segments. Let us now take a look at a few of the
possible ‘setback’ scenarios.

US recession jitters China fails to stimulate its economy sufficiently in

While our base-case scenario does not involve a H1 2024
recession in the US, there is a scenario where poten- China is another source of concern, as the economy
tial cracks in the labour market could develop and faces a number of structural headwinds due to very
growth could slip into negative territory. If the US adverse demographic and economic developments.
were to fall into a recession, this would most likely In fact, China is still the biggest uncertainty in terms
also impact growth elsewhere. of growth and inflation in 2024. All measures imple-
mented by the government thus far have not been
sufficient for the country to avert growth headwinds.
Crucially, what happens in China also has knock-on
effects on the rest of the world, especially those
 Macroeconomy and strategy

economies that have become heavily tied to the

Chinese economy. It remains to be seen what stimu-
lus measures the Chinese authorities will put in place
and how effective they will turn out to be.
Secular Outlook
What will drive the
US election turmoil
investment world in
All eyes will be on the US presidential election that
the years to come? Our
will take place in November of this year. Recent polls
CIO outlines the long-
suggest that it will be a close call between the return
term trends shaping the
of President Trump and the re-election of President
current decade.
Biden. In terms of the potential economic impact, a
shift back to Trump would likely result in more pol-
icy uncertainty, particularly in foreign policy matters.
However, the overall confrontational stance of the
current government towards China would likely not
change significantly. If Biden were to be re-elected
and have sufficient backing by Congress, there is a
risk that fiscal policy would remain highly expansive,
which might mean more financial stability risks and
also a weakening of the US dollar.

Geopolitical risks
Finally, geopolitical events are among the other
potential wild cards that we could foresee. Geopo-
litical rivalries have returned with a vengeance in the
last few years, extending well beyond the strategic
confrontation between the US and China. Thus, the
new geopolitical landscape is complex and fragile.
Fixed income
Our key message in fixed income is simple: now
could be the time to lock in the higher yields of
high-quality issuers in order to benefit from them
in the future. In line with this, we reiterate our call
for Swiss franc bonds, especially (but not only) for
investors who have a different reference currency.
For those seeking additional income from emerg-
ing market hard-currency bonds, we point to Latin
America, the Middle East, and investment-grade
Asian corporate issuers. Finally, despite some hic-
cups, we believe investors should take a closer look
at the complex world of subordinated bank debt and
corporate hybrid bonds.
 Fixed income

Locking in the higher yields of

quality bonds for longer
Investors may need to consider a new approach to fixed income in 2024. Bond yields are
at levels that investors only dreamed of two years ago, and across developed markets, they
now offer more income than inflation is likely to eat up again. As disinflation continues
and nominal yield levels are attractive, now could be the time to consider locking in quality
returns in traditional bond portfolios.

Harvesting rather than hunting yields as disinflation is setting in, the tide is turning. The
For years, central banks, particularly in developed key task for fixed income investors now is to secure
markets, kept interest rates low through ‘quantita- a high income and manage reinvestment risk as
tive easing’ strategies. Thus, the dominant strat- opposed to focusing solely on interest rate risk. The
egy for fixed income investors was the pursuit of likelihood of government bond yields rising substan-
extra yield by chasing risky bonds. Now that yields tially from current levels has diminished significantly,
have returned to normal levels and monetary pol- which provides a cushion for bond investors.
icy tightening in developed markets has peaked

Quality bonds offer comparably attractive yields again

Yield levels across major currencies

Capture the yields

now to benefit in
the longer term.

Today Time horizon

Source: Julius Baer Investment & Wealth Management Solutions

Note: Past performance and performance forecasts are not reliable indicators of future results. The return may increase or decrease as a
result of currency fluctuations.

19
Fixed income

Focus on maturity management not recommend tactically increasing exposure to

We expect the yields of medium-to-longer matur- the riskiest fixed income segments at this time. The
ities to remain rangebound, while those of shorter focus should rather be on prudent diversification and
maturities will likely decline over the course of holding high-quality bonds of varying maturities.
2024. Therefore, the focus is no longer primarily
on squeezing out that extra bit of yield by investing Sleeping better with high-quality bonds
in risky bonds but rather on ensuring that portfo- There is another argument in favour of maintaining
lios benefit from today’s higher yields over the long exposure to high-quality bonds. After the substan-
term as well. Crucially, investors require a balanced tial rise in yields over the last two years, these bonds
approach to managing the credit and maturity pro- now not only offer a good yield but also a buffer
files of bond portfolios. against any further rise in yields. If yields were to rise
again this year, they would have to increase quite
High-quality bonds to become a major performance significantly before investors would experience a loss
contributor in 2024 over a 12-month investment horizon. Thus, the cur-
While we believe that a global recession is unlikely rent yields provide somewhat of a safety layer. That
to hit the world economy over the next 12 months, said, the scenario of yields rising significantly again
potential risks (e.g. an accelerating slowdown in is not our base case, even if the probability is not
China, political turbulence as a result of the US negligible.
presidential race, or rising geopolitical tensions)
underline the uncertainties in our macroeconomic Nonetheless, this suggests that, unlike three to four
outlook. Coupled with a review of valuations across years ago when we faced a low-yield environment
asset classes, with risk premiums generally tight, and any rise in yield levels could have nearly irrevers-
we believe that a significant fixed income exposure ible negative effects on portfolio performance, the
will be a strong contributor to the performance of timing of fixed income investments is less of a con-
diversified portfolios in 2024. Given the macroeco- cern for investors today.
nomic backdrop, and at current valuations, we would

Yields offer carry and buffer against further yield rises

% Basis points

6 At current levels, 10-year US Treasury yields 200

would have to rise more than 50 basis points
before performance turned negative. 180
5
160
4
140
3
120

2 100

80
1
60
0
40
-1
20

-2 0
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

10-year US Treasury yield (l.h.s.) Yield buffer (r.h.s.)

Source: Macrobond, Julius Baer Research
Note: Total return calculation simplified by neglecting roll down and convexity. The yield buffer reflects the difference between the cur-
rent yield and the 12-month-ahead break-even yield, i.e. the yield change that would equal coupon income. Past performance and per-
formance forecasts are not reliable indicators of future results. The return may increase or decrease as a result of currency fluctuations.

20
 Fixed income

Swiss-franc-denominated bonds –
a store of value
Switzerland benefits from a politically stable robust fundamentals and sound economic cli-
environment, strong economic policies, and a mate, coupled with lower inflation, you get an
well-developed legal system. Furthermore, the appealing investment case for fixed income
country boasts healthy government finances, investors. To quote our Chief Investment Officer
which are characterised by low debt levels, a Yves Bonzon: ‘Each portfolio should have an allo-
large trading surplus, and extensive currency cation to Swiss assets.’ This is even more true if
reserves. These strengths have made the Swiss the investors’ base currency is not Swiss francs,
franc one of the most resilient currencies over despite the fact that Switzerland’s nominal yields
the last decades. If you then add in Switzerland’s are lower than in many other countries.

CIO Monthly
Switzerland is home to one of the strongest
equity markets, having outperformed global
equities and gold through both inflationary
and disinflationary
periods. We highlight
why Swiss assets deserve
an allocation in every
portfolio.

Podcast
Still not convinced?
Find out why our
experts like Swiss
assets.

21
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 Fixed income

Subordinated bank debt –

in regulatory conundrums
Within a bank’s capital structure, there are mainly situation of each such bond before investing.
two types of subordinated debt, called tier-2 (T2) Given the potential pitfalls of such bonds, it is
and additional tier-1 (AT1, also known as contin- not surprising that the UK regulator, one of the
gent convertibles [CoCos]). The latter are per- strictest in the world, considers AT1 instruments
petual bonds (i.e. they have no maturity date), to be unsuitable for retail investors.
and they rank below dated T2 debt. Furthermore,
both forms of subordinated debt rank below Nevertheless, investors would be well advised not
other (senior) bonds in the event of a bank’s to ignore the highly complex world of subordi-
liquidation or bankruptcy, but they rank above nated bank bonds and, for that matter, corporate
a bank’s equity – at least in theory. In times of hybrid (or equity-linked) bonds, as this type of
extreme financial stress, some regulators have debt offers higher yields and welcome diversifi-
the power to write off certain types of deeply cation. While constant vigilance and an informed
subordinated bank debt, starting with AT1 debt, perspective are essential to navigate the com-
while allowing shareholders to retain their equity plexities of this segment, it could be an attract-
investments. This situation has caused some ive addition to a portfolio, especially as long as
controversy in the past. It is therefore crucial for issuers’ profitability and capital ratios remain
investors to understand the terms and regulatory favourable.

Research Focus
We take a closer look
at subordinated bank
debt and highlight what
investors need to know
about the segment.

23
Fixed income

Interview

Emerging market hard-currency

bonds
In this interview, Eirini Tsekeridou, from Fixed Income Research, talks about why emerging
market hard-currency bonds look promising now and which areas we find the most
appealing.

You recently upgraded emerging market hard- the Middle East, and investment-grade Asian corpo-
currency bonds to Overweight. Can you please rate debt. This is also supported by our overall con-
elaborate on the rationale behind this decision? structive macroeconomic view for 2024.
We consider bonds issued in stable global currencies
(e.g. US dollars or euros) by emerging market issuers So of the three regions you just mentioned, Latin
as an attractive diversifier for portfolios that include America is the most recent one that you have
high-quality bonds from various developed markets. upgraded to Overweight. Why do you like it?
We have become more optimistic about the seg- There are several reasons why we find Latin America
ment, because we believe that the monetary easing attractive. We expect easing inflationary pressures
cycles in most emerging markets will continue this and rising export revenues to improve the region’s
year. Our Overweight rating stems from our convic- financial health this year, leading to a modest recov-
tion that there are pockets of value in Latin America, ery in growth. Other favourable factors include our
expectation of a stable US dollar and that the US will
avoid a recession. In addition, we expect a decrease
in political risk in the region this year, whilst geopol-
itical conflicts are likely to remain concentrated in
other parts of the world. Finally, we consider current
bond valuations in the region to be attractive.

You also continue to like the Middle East, in

particular the Gulf region. What is your investment
case there?
We see some key advantages for the region this
year, which, altogether, make it an attractive invest-
ment prospect for 2024. Firstly, the Middle East
is projected to continue to grow at a solid pace,
which, combined with low rates of inflation, makes
for a robust economy. Secondly, there is the subject
of fiscal break-even oil prices, which are currently
lower than actual oil price levels. Fiscal break-even
oil prices refer to the minimum oil prices per barrel
that countries need to meet their planned spending
levels while maintaining a balanced budget. So the
fact that break-even prices are lower than current
levels means that these countries achieve a budget
surplus. Thirdly, the region’s large sovereign wealth
funds adequately cover external debt and provide an
important stability factor.

And finally, for investors looking to invest in Asia,

what would be your preference?
In Asia, we prefer high-quality, investment-grade
corporate bonds. Although the valuations are tight
and borrowing costs are likely to remain elevated,
the overall fundamentals are improving. Thus, in
our view, the spreads for quality issuers have some
further compression potential. With regard to the
riskier parts of the region’s bond universe, China’s
troubled property sector is likely to remain a drag.

Research Focus
This year will offer many
opportunities for fixed
income investors. Take
a closer look at the
segments our analysts
like best.
‘New and positive
drivers emerge
across emerging
economies.’

Eirini Tsekeridou
Fixed Income Research
Fixed income

Special

Four key takeaways for 2024

Our Head of Fixed Income, Markus Allenspach, discusses four pivotal factors that had a
significant impact on the fixed income world in 2023, and he shares what insights we can
derive from them.

1. The resilience of the US economy of US inflation is no longer an optimistic projection

At the end of 2022, the bond market had been posi- but rather an economic reality. Consequently, the
tioned for a weak US economy and an anticipated probability of the US Federal Reserve cutting rates is
series of interest rate cuts. However, incoming data considerably higher for 2024.
soon pointed to very robust domestic demand,
mainly fuelled by increased social benefits from the 2. The slowdown of the Chinese economy
US government and an unexpectedly strong private In contrast to the US, China did not live up to the
investment response to the government’s initiatives market’s high expectations. The rapid reopening
for energy transition and self-sufficiency in the semi- of the economy following the complete removal
conductor sector. Hence, rather than rate cuts, there of Covid-19 restrictions in late 2022 did not revive
were four rate hikes in 2023 – in February, March, domestic demand nor the property sector the way
May, and July – which pushed bond yields higher. the market had expected, and this had negative
For 2024, budget constraints are tightly set, which implications for the global commodities market. The
points towards a likely fiscal withdrawal instead of a prospects for China remain bleak, and we believe
further fiscal impetus. More importantly, the slowing that the world’s second-largest economy will expand
below potential in 2024, with the property market
remaining depressed. That said, while the authorities
have so far shown little appetite for an additional
large-scale stimulus, it is reassuring to know that
they still have ample room for a proactive stimulus,
which could help protect the economy from a mean-
ingful downside in the future.

3. The demise of several banks

There were a number of bank failures and bailouts in
the spring of 2023 for very different reasons. Fears
of a broadening systemic crisis, however, did not
materialise thanks to the swift intervention of reg-
ulators and central banks. Nonetheless, the events
sent shockwaves throughout the financial system.
We regard the collapse of the affected banks as idio-
syncratic events and are not anticipating a systemic
crisis that would necessitate a shift to a more defen-
sive stance in 2024.
4. The reversal of quantitative easing
For years, Western central banks kept interest rates
low and bought substantial amounts of government
bonds, basically crowding out private investors. The
lack of safe assets was viewed as a significant chal-
lenge for institutional investors. Surprisingly, rather
than praising the return of the government bond
supply, the market struggled to take on the influx
of government bonds. This was due to still elevated
government revenue shortfalls and the balance
sheet reductions by central banks in the US, the UK,
and the eurozone. We expect the supply of these
bonds to remain significant throughout 2024, even
as government deficits decline in real terms.

The fiscal push in the first half of 2023 brought

more economic resilience and ultimately additional
US interest rate hikes. The combination of the four
factors described above has resulted in signifi-
cantly higher bond yields, and we believe that now
is the time to lock in these yields and enjoy a higher
income in the future.
Equities
Based on our expectations of a slowdown in global
growth in early 2024, we anticipate that growth will
pick up again towards the latter half of the year, with
central banks becoming more accommodative again
as inflation continues to slow towards target levels.
We maintain our preference for US assets, favour-
ing quality growth stocks along with some defensive
exposure, with cyclicals set to come back into focus
ahead of the next economic cycle.
 Equities

A broadening opportunity set

In line with our view that the US economy will expand in 2024, albeit at a slower pace, the
backdrop for mega-cap information-technology stocks remains positive, while defensive
and cyclical stocks also warrant a mention. We spoke to Mathieu Racheter, Head of Equity
Strategy, who outlines his key calls in the context of the changing economic cycle below.

We expect a soft landing for the economy in 2024. secular bull market in US equities could mark the
What does this mean in terms of your equity start of a new attempt to push above their highs
strategy? of 2021. In addition to our fundamental view, the
As we enter the new year, we expect neither a boom technical picture speaks in favour of US equities
nor a bust when it comes to economic growth. After relative to their European counterparts. Further-
last year’s almost unprecedented rise in US Treasury more, the relative performance of US equities ver-
yields, our expectation is for a Goldilocks scenario sus safe-haven assets, such as gold and government
of a soft landing in the US, shaped by stable growth bonds, continues to strengthen, which is a sign that
and stable interest rates. This would allow bond investor sentiment is improving. As for the US dol-
yields to continue to fall and equity prices to rise fur- lar, we expect the greenback to remain rangebound
ther, which would be an environment favourable for in 2024.
growth stocks. Accordingly, we are generally con-
structive on equities, and within equities we main-
tain a clear preference for US stocks with a quality
growth bias.

Following the strong performance of US stocks in

2023, do you still see them in pole position in 2024?
Our clear regional preference for US over European
equities is supported by the fundamentally con-
structive backdrop for US equities. The US equity
market has seen broad-based improvements in
recent months, as corporate earnings growth is now
back in positive territory and risk appetite has recov-
ered strongly from the shock sequel of events that
included inflation spikes, a rate frenzy, geopolitics,
and recession fears. The resulting resumption of a
Equities

‘The relative Artificial intelligence stole the show in 2023, and

the Magnificent 7 proved themselves worthy of the
performance of US name. Does this mean that you will maintain your
equities versus safe- quality growth preference in 2024?
In terms of styles, we like quality growth, with a par-
haven assets continues ticular focus on information technology (IT) and
to strengthen, which communications companies, which make up approx-
imately 40% of the S&P 500, due to their superior
is a sign that investor earnings momentum relative to other sectors. At
sentiment is improving.’ the same time, they benefit from stable or lower
yields due to their relatively longer duration profile.
The current super cycle of growth and innovation in
Mathieu Racheter, Head of Equity Strategy
artificial-intelligence (AI) technology has important
implications for asset allocations given that, in the
past, it has led to significant shareholder value crea-
tion among those companies at the forefront of the
movement. Now that we have moved into 2024, it
appears as though there will be a continuation of the
bull market in the US IT sector, as AI continues to
establish itself in industries as diverse as healthcare,
automobiles, advertising, and education.

AI has also been the driver of the rise in the Mag-

nificent 7 stocks. This was demonstrated by their
phenomenal rally in the first seven months of

Piecing together our key equity calls for 2024

Cyclicals

Quality growth Defensives

IT Communications Healthcare

Source: Julius Baer Equity Strategy Research

32
 Equities

2023, when they dominated market returns as their

bottom-up fundamentals continued to improve.
Given their outsized impact on US stock market per-
formance and their prevalence in many investment
Video
portfolios, their prospects are of particular impor-
tance. We still like last year’s winners and see any Tune in to see why
possible corrections as an opportunity to increase the Magnificent 7
exposure to the group. Their continued strong continue to sparkle.
free-cash-flow generation, coupled with their lead-
ing positions in key growth markets, means that
they remain front and centre when it comes to value
creation.

Given the dominance and outperformance of the

IT and communications sectors, many defensive
markets were left behind in 2023. Is the outlook for With specific regard to the healthcare sector, we
defensives now more attractive? like it due to its inherent defensive characteristics
Absolutely. The more appealing valuations of defen- and see opportunities in large-cap biopharmaceu-
sives now offer an attractive entry point. For invest- tical stocks, in particular. For example, companies
ors keen to add a little robustness to portfolios, we offering drugs to combat obesity have been in the
advocate building up some defensive exposure, news lately, as the demand for their weight-loss
where we see opportunities in the areas of health- treatments far outstrips the supply. As a longstand-
care, Swiss equities, and European utilities. ing outperformer, we believe the healthcare sector

Magnificent 7: Continued growth at an attractive price

Sales growth (CAGR)

20

15

10

0
2013–2019 2021–2022 2023–2025E

Mega-cap technology companies 493 remaining S&P 500 companies

Source: FactSet, Julius Baer Research
Note: Magnificent 7 mega-cap technology companies = Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla; reve-
nue-weighted. CAGR = compound annual growth rate; E= consensus estimate. 2020 figures are not included due to the pandem-
ic-related special effects. Past performance and performance forecasts are not reliable indicators of future results. The return may
increase or decrease as a result of currency fluctuations.

33
 BEYOND
MARKETS

Not enough time to read investment

research? We hear you.

Tune in to our Beyond Markets podcast

series to get our expert views and strategic
inputs on market developments and
investing trends from around the globe.

juliusbaer.com

APPLE SPOTIFY
 Equities

offers the best long-term growth prospects among

its peers. We also see further value creation potential
in the health insurance space, along with attractive
investment opportunities in the area of MedTech, as
Podcast
higher costs for more orthopaedic and cardiovascu-
lar procedures validate the case for positive Med- Everybody is talking
Tech momentum. about the new
weight-loss drugs.
Hear what our experts
The Swiss equity market should also not be over-
have to say.
looked, since it represents one of the most defen-
sive markets within the equity universe. Investors in
Swiss stocks not only benefit from exposure to sta-
ble and growing companies but also from currency
appreciation. The Swiss franc is among the world’s
strongest currencies and typically provides a hedge
against global growth and geopolitical risks. In the
longer term, we expect the Swiss equity market to
remain a store of value, offering investors a compa-
rably high degree of stability coupled with the pros-
pect of long-term growth.

As the year progresses and the new economic cycle

emerges, will that finally be the moment when
cyclicals make a comeback?
After a potentially shaky start to 2024, confidence is
expected to bounce back later in the year. Once the
economy has reached its trough, the prospects for
2025 and beyond should be priced in by the second
half of the year. Thereafter, we expect market par-
ticipation to broaden and would advocate tactically
adding cyclical exposure in anticipation of a new
economic cycle. Investors eager to increase their
exposure to cyclical markets may wish to consider
some of our preferred subsectors, which include
automotives, semiconductors, machinery and equip-
ment, and transportation.

35
Equities

Next Generation

AI front and centre

Next Generation themes have been challenged lately due to fears of a global economic
slowdown, which have led to downward revisions in their earnings forecasts. This is a
reminder that while thematic investing typically addresses secular structural trends, it
remains susceptible to short-term cyclical shifts, with the notable exception of artificial
intelligence (AI).

With most valuation metrics below their multi-year

averages, we believe 2024 may provide investors
with opportunities to capitalise on these attractive
valuations, and they could consider investing in our
most preferred themes. For example, Cloud Com-
puting & AI was, by far, the most successful theme
of 2023 – not only because of the groundbreaking
technological advancements in AI but also due to
its impressive market performance. While AI will
retain its role as an efficiency-enhancing technology,
over the coming years its applications will be rolled
out across almost every conceivable industry. The
recent interest in generative AI (GenAI) technology,
in particular, has provided the next leg up in equity
markets, driven by mega-cap technology stocks. We
have seen a pickup in the pace of innovation and
the number of new product announcements in this
area and have observed the ever-expanding ability
of GenAI to solve increasingly complex problems.
Furthermore, the monetisation potential for devel-
opments in AI makes it very appealing and gives us
confidence about the theme’s long-term investment
opportunity. Going forward, we expect the perform-
ance of AI stocks to be driven by fundamentals and
monetisation capabilities rather than merely by hype
around the technology. Our view is that the AI race
has only just started and that it will last for many
years, in line with its ability to solve increasingly
complex problems.

Beyond AI, we see further opportunities in a number

of other Next Generation themes. In Future Mobil-
ity, we note that competition among car companies
has intensified, raw material costs have come down,

36
 Equities

and sentiment has deteriorated much more than Looking ahead, we remain confident about the
justified amid still soundly growing electric vehicle potential of the structural trends that are driving our
sales in the world’s key markets. Within our Future investment themes. The start of a new economic
Cities theme, we see a strong fundamental back- cycle in 2024 should open up many more oppor-
drop for the building technology and efficiency seg- tunities and, after a potentially bumpy start, reward
ment, e.g. in relation to the rapid ageing of buildings those willing to take risks – especially those who
in Europe, three-quarters of which are no longer choose to be invested from the very start. Last year’s
energy efficient. Moreover, our Extended Longevity high-flyer theme of Cloud Computing & AI remains
theme explores how our ageing global population attractive given the strong structural and cyclical
presents investment opportunities due to the rise of support, and valuations remain reasonable against
chronic diseases, changing consumer preferences for this backdrop. Existing investors should maintain
improving one’s longevity and healthspan, and an their positions, while new investors should use tem-
increased demand for financial planning. porary setbacks to build up their exposure.
Equities

Deep dive

A closer look at emerging

markets and Asia
Improving market dynamics in Asia, excluding China, should provide attractive opportun-
ities for emerging market equities in the second half of the year. We focus on India, while
the winds of change in Japan are making its equity market look attractive again. Look-
ing beyond Asia, Brazil, in particular, offers value on the back of an improving economic
backdrop.

Emerging markets offer compelling growth start 2024, our outlook for emerging market equi-
prospects ties (excluding China) is more optimistic given the
Last year, emerging market equities fell short of better growth prospects for emerging market econ-
investors’ expectations, delivering flat returns and omies in terms of both gross domestic product and
significantly underperforming developed markets corporate earnings relative to their developed mar-
due to weaker growth in China, a sharp rise in US ket counterparts.
Treasury yields, and geopolitical uncertainties. As we

Bullish on emerging markets excluding China

Earnings per share*

%
50

40

30.5%
30

20 19.1%
15.2%

10 8.7%

Emerging markets
Developed markets Emerging markets China excluding China
Source: Bloomberg Finance L.P., Julius Baer Research
Note: * Expected annual growth over the next two years. Past performance and performance forecasts are not reliable indicators of
future results. The return may increase or decrease as a result of currency fluctuations.

38
 Equities

Digging deeper, our highest-conviction pick in

emerging markets for 2024 is the Indian market.
India’s structural transformation and growth trend
remain intact, fuelled by a rising consumer market,
Video
a large youth population, and ongoing urbanisation,
which is helping to boost household spending. This As India is Asia’s sweet
positive outlook is further reinforced by weakening spot, we delve deeper
investor confidence in China, which puts India in a into why it makes such a
favourable position as a viable alternative to China compelling investment
in the eyes of global investors. case.

Despite showing signs of gradual progress, China,

the world’s economic powerhouse, remains beset
by problems, not least within its real estate sector.
We thus remain on the sidelines, especially in the
absence of any major game-changing economic
stimulus.

Outside of Asia, we see potential in Brazilian equi-

ties, which currently offer a good entry opportunity
at highly compelling valuations. We believe that the
benefits afforded by the lower interest rate environ-
ment have not fully kicked in yet.

Japan: A shift in monetary policy should

boost stocks
With hopes that this year will mark the turn- We have upgraded Japanese equities to Over-
ing point in Japanese monetary policy, market weight due to several factors. We believe that
dynamics in Japan appear to be changing for the recent shift from deflation to inflation should
the better. We see a number of opportunities benefit corporates and the broader economy.
in Japanese equities, which, beyond their cyc- Furthermore, the Tokyo Stock Exchange has
lical nature, are now supported by the winds of implemented several important reforms, which
change in the corporate landscape. This should should result in improved governance, greater
lead to higher profitability and better value efficiencies, and more attractive corporate valu-
after significant stagnation in capital returns ations. Lastly, improved fund flows from both
and should be a magnet for further inflows from foreign and domestic investors should provide a
domestic and international investors alike who welcome tailwind for asset prices.
are in search of alternatives to Chinese assets.

39
Alternative
investments
In this chapter, we provide a brief overview, as well as
our outlook, on our favourite hedge fund strategies.
‘Relative value’ strategies and investment styles were
our preference in 2023 and remain a top choice for
2024 as we transition to a new macroeconomic cycle
that is accompanied by sharply diverging views in
the markets. Among other strategies that we like,
we think the time is also ripe for ‘stressed/distressed
credit’ (a substrategy of ‘event-driven’) on the back
of some weaker companies coming under intense
pressure due to high financing costs.
 Alternative investments

Reaping the benefits of

diversification
The diverse nature of the hedge fund universe means that suitable strategies, many well-
aligned with our market outlook view, are available all along the investment cycle. These
offer sources of potential return that are not available to traditional strategies, thus adding
diversification benefits to traditional portfolios.

Our strategy focus in 2024 substrategy includes the term ‘distressed’, in reality
We continue to favour ‘relative value’ strategies and it means hedge funds investing in both stressed (i.e.
investment styles, which, among others, exploit mis- still performing but challenged) and distressed (i.e.
pricings in financial markets for comparable or cor- non-performing/bankrupt) companies.
related financial instruments. The factors behind
a mispricing can be macroeconomic in nature or In the subsequent sections, we will delve more
related to financial market dynamics; they can deeply into our preferred strategies, highlighting
also be corporate events or short-term supply and recent market developments and our outlook for
demand imbalances. Investment managers using 2024.
these strategies take long positions in assets that
are deemed to be undervalued and short positions
in those considered as overvalued in anticipation of
a price convergence. As a result, profitability may
be achieved irrespective of market direction, and
‘Investing in the right
a trade is frequently motivated by expectations of hedge fund in this
mean reversion. ‘Relative value’ strategies may gen- market environment
erate attractive and relatively stable returns, but
they are not infallible, since unforeseen events and could translate into
instances of illiquidity can make them fragile, with steady and consistent
leverage having the potential to amplify losses.
‘Equity long/short’ strategies with a market-neutral returns that are not
focus are also well placed to potentially benefit amid driven by the mood in
growth jitters, irrespective of the broader market
moves.
equity and fixed income
markets.’
Other effective strategies at present that are some-
what more correlated to the market (i.e. directional) Adrienne Jaersvall, Head of Fund Advisory
are ‘trading’ strategies, especially ‘discretionary trad-
ing’, as the markets continue to experience signifi-
cant macroeconomic changes. Moreover, in terms
of ‘event-driven’ strategies, the ‘distressed credit’
substrategy is expected to benefit from the growing
number of high-yield companies that are weighed
down by the rise in financing costs. While the

41
Alternative investments

‘Relative value’ strategies and investment styles

Benefiting from higher volatility

and rates
In this section, we look at our favoured ‘relative value’ strategies and investment styles,
which are mostly market neutral. Their strategy approach means that they often run with
plenty of cash on their balance sheet, which can now be invested at attractive higher short-
term rates.

M
onetising the start of a new cycle One reason for this potential instability is that there
After over two years of increasing inter- is considerable uncertainty about the level of change
est rates to lower inflation, central banks in US interest rates, which is a crucial factor for
are expected to change direction in financial markets. Currently, the federal funds target
2024 and begin to lower rates to encourage eco- range stands at 5.25%–5.50%. However, expecta-
nomic growth. Based on past experience, there may tions for the end of 2024 vary considerably – from
be instability in certain areas of the market as central moving it only slightly lower to as low as 3% based
banks transition from one monetary policy stage to on inflation and growth forecasts for 2024, as at the
another. time of writing. From an investment perspective, this
means a rapid and massive repositioning of many
portfolios over the course of the year, as it becomes
 Alternative investments

E
clearer what action the US Federal Reserve will quity market neutral amid growth jitters
ultimately take. When portfolios are repositioned, Within the ‘equity long/short’ strategy,
some securities are sold and others are bought with- we prefer those managers who have a
out much consideration for price, which opens up market-neutral focus. They are often found
‘relative value’ opportunities across the asset class within multi-manager platforms. This investment
spectrum. approach includes active trading (both long and
short) in individual stocks. The objective is to iden-
The ‘relative value’ substrategies that are best posi- tify stock-specific catalysts that will result in the
tioned in this situation are ‘fixed income relative stock rising (long) or falling (short), while also hedg-
value’ and cross-asset ‘volatility arbitrage’. There ing non-stock-specific risks at the market, sector,
may also be some opportunities for macro-related industry, and style levels. The strategy thrives in a
‘discretionary trading’ managers who accurately pre- more volatile environment. Considering that we
dict significant asset class movements in 2024. expect a jittery start to the year amid a growth slow-
Relevant strategies: ‘Relative value’ and ‘Trading – down, including some recession concerns at times,
discretionary trading’ (macro-related) market-neutral equity strategies could well be in the
sweet spot, at least in the first half of the year. Fur-
thermore, given that 2023 returns were, for most of
the year, heavily skewed towards a relatively small
‘Higher volatility and number of stocks, more stocks should contribute to
positive returns in 2024, which should also help the
interest rates offer a strategy to perform.
great hunting ground Relevant strategy: ‘Equity long/short – opportunistic
trading’
for “relative value”
strategies.’
Ivan Iliev, Julius Baer hedge fund expert
 MOVING
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 Alternative investments

N H
ature, politics, and economics driving igher short-term rates equal higher
commodities in 2024 too strategy returns
Commodities can be a fertile asset class ‘Event-driven – merger arbitrage’ is an
for directional and, at times, even for example of a strategy that directly bene-
non-directional ‘relative value’-type strategies. This fits from higher rates. Its aim is to profit from the
is mainly because a sharp change in price, either price difference between a target company’s trad-
positive or negative, is sooner or later followed by ing value following a takeover announcement and
a countermovement driven by fundamentals. For the acquirer’s offering price at deal completion. The
example, as prices rise, supply enters the market, stock of the firm being acquired is expected to trade
and assuming that demand remains unchanged, at a level that implies a return which exceeds that
prices subsequently fall again. Furthermore, com- of short-term deposit rates, otherwise there is no
modities are, and will always be, subject to the value-added return for the hedge fund. Thus, higher
vagaries of global tensions, and we have seen more short-term rates translate into a higher return for the
of these in recent years. Weather-related phenom- strategy.
ena, such as El Niño, can also lead to disruptions.
Lastly, 2024 looks set to be one of the busiest ever Furthermore, trading opportunities arise when the
in the emerging market electoral calendar, with elec- likelihood of a deal’s success changes, such as when
tions taking place in major commodity-importing regulators signal potential obstacles that could
and commodity-producing countries, which can lead jeopardise the takeover. This would then lead to
to market uncertainties. As commodities experi- the stock moving further away from the announced
ence bouts of volatility and sometimes sharp moves, takeover price in the short term. Correctly assessing
hedge funds that trade commodities should be well these situations, for example in Microsoft’s acquisi-
positioned to take advantage of opportunities that tion of Activision last year, could yield even higher
arise throughout the year. expected returns.
Relevant strategy: ‘Trading – commodities’

Going forward, deal activity is expected to be

supported by ample resources in private equity,
sovereign wealth funds, and financially strong cor-
porations. Sectors like biotechnology may see
increased merger and acquisition deals due to lower
valuations, with large-cap biopharmaceutical com-
panies seeking new drug pipelines for future growth
driving this anticipated uptick in activity.
Relevant strategy: ‘Event-driven – merger arbitrage’

45
Alternative investments

Directional credit strategies

Stressed and distressed

situations
In this section, we explain why directional credit strategies in stressed and distressed cor-
porate situations are at the beginning of an attractive investment cycle for hedge funds.

I
nvestment opportunities due to higher that around USD 1 trillion in debt from companies
refinancing costs with poor credit ratings will need to be refinanced
Our fixed income analysts suggest avoiding over the next five years. ‘Event-driven’ hedge funds
high-yield debt for now due to relatively low seek to monetise such situations by investing in
spreads, the anticipation of rising default rates, and stressed (i.e. still performing but challenged) and
the fact that many companies cannot cover their distressed (i.e. non-performing/bankrupt) com-
cost of capital. In this environment, the opportun- panies. This may involve acquiring the debt of a
ity set for ‘event-driven’ hedge funds that invest in bankrupt company at a discount, converting some of
stressed and distressed situations is expected to that debt into equity (‘loan-to-own’), restructuring
increase. Some companies with floating-rate debt the company, and finally selling it or listing it on a
have already seen their funding costs rise, and others stock exchange.
will have to refinance at much higher rates than they Relevant strategy: ‘Event-driven – distressed/
are likely to be able to sustain. Indeed, it is estimated stressed credit’
 Alternative investments

‘Event-driven’ hedge funds could benefit from the rising maturity wall

US high-yield bonds maturing annually (USD billion)

300

250

200

150

100

50

0
2024 2025 2026 2027 2028 2029
Source: ICE Bank of America Merrill Lynch, Bloomberg Finance L.P., Julius Baer Investment & Wealth Management Solutions
Alternative investments

Special

The six core hedge fund

strategies
The table below provides a brief explanation of the six core hedge fund strategies and our
specialists’ view on them.

Strategy and its variations Our specialists’ view What it is

Equity long/short Invests in both long and short positions in equity securities.

Seeks to take a long position in underpriced stocks while short-selling

Fundamental Underweight
overpriced stocks.

Seeks to profit from inefficiencies and dislocations in financial markets

Opportunistic trading Overweight at a macroeconomic, market-sector, single-stock, factor, or foreign-
exchange level.

Invests in companies undergoing corporate events such as

Event-driven
mergers, spin-offs, and bankruptcies.

Seeks to exploit pricing inefficiencies that may occur before or after a

Activism Neutral
corporate or news event.

Seeks to identify credit securities where there is a near-to-medium-

Distressed credit Overweight term event, such as an asset sale, refinancing, or merger, or where an
operational or financial turnaround is anticipated.

Seeks to exploit market inefficiencies before or after a merger or

Merger arbitrage Overweight
acquisition.

Seeks to exploit opportunities that arise throughout a company’s life as

Special situations Neutral
a result of extraordinary, or special, corporate events.

48
 Alternative investments

Strategy and its variations Our specialists’ view What it is

Invests in securities from the same or a highly comparable issuer

Relative value
that are mispriced relative to each other.

Seeks to profit from the relative mispricing across different security

Capital structure arbitrage Overweight
classes from the same company’s capital structure.

Seeks to profit from a pricing discrepancy between a company’s con-

Convertible arbitrage Neutral
vertible bonds and its underlying stock.

Seeks to profit from relative value dispersions of credit instruments

Fixed income relative value Overweight
with the same or similar risk profile.

Seeks to profit from the difference between the forecasted future price
Volatility arbitrage Overweight
volatility of an asset and the actual price paid.

Also known as ‘data-driven investing’, seeks to identify pricing

Quantitative equity Overweight
(mean-reversion) relationships and capitalise on them.

Invests in both long and short positions in financial markets based

Trading
on a top-down view of global markets.

Seeks to generate returns in commodity markets using technical ana-

Commodities Overweight
lysis and fundamentals. It is a non-benchmark-based approach.

Seeks to generate returns across asset classes using technical analysis

Discretionary Overweight
and fundamentals. It is a non-benchmark-based approach.

Seeks to generate returns using algorithmic trading programmes, also

Systematic Neutral
known as ‘methodical trading’.

Invests in debt securities and other income-producing assets to

Credit/income
generate income and capital appreciation.

Seeks to generate profit from combining straight bonds and hedge

Credit long/short Neutral
overlays (mainly hedging credit risk and interest rate risk).

Structured credit Neutral Seeks to create value from pools of various (illiquid) loans.

Reinsurance/insurance-linked
Neutral Seeks to earn returns from exposure to reinsurance catastrophe risks.
securities

Multi-strategy-oriented hedge funds seek to generate income by

Multi-strategy
mixing some or all of the main hedge fund investment styles.

Source: Julius Baer Fund Offering, Julius Baer Investment Writing

49
Further information
 Further information

Further information
Please find below further information on benchmarks and indices used in the review sec-
tion of this publication.

Market review
Equity regions
Region Index
Emerging markets excluding China MSCI Emerging Markets excluding China Net TR USD
Switzerland MSCI Switzerland NR CHF
Eurozone MSCI EMU Net TR EUR
China MSCI China Net TR USD
USA MSCI USA Net TR USD
Japan MSCI Japan NR JPY
UK MSCI United Kingdom NR GBP

Equity styles
Style Index
Quality MSCI World Quality Net TR USD
Value MSCI World Value Net TR USD
Growth MSCI World Growth Net TR USD
High dividends MSCI World High Dividend Yield Net TR
Cyclicals MSCI World Cyclical Sectors TR USD
Defensives MSCI World Defensive Sectors TR USD
Small caps MSCI World Small Cap Net TR USD
Large caps MSCI World Large Cap Net TR USD

Equity sectors
Sector Index
Information technology MSCI World Information Technology Net TR USD
Materials MSCI World Materials Net TR USD
Oil & gas MSCI World Energy Net TR USD
Industrials MSCI World Industrials Net TR USD
Communications MSCI World Communication Services Net TR USD
Healthcare MSCI World Health Care Net TR USD
Financials MSCI World Financials Net TR USD
Consumer cyclical MSCI World Consumer Discretionary Net TR USD
Consumer defensive MSCI World Consumer Staples Net TR USD
Real estate MSCI World Real Estate Net TR USD
Utilities MSCI World Utilities Net TR USD

Note: EMU = European Monetary Union, NR = net return, TR = total return

51
Further information

Fixed income
Segment Index
US government bonds Bloomberg US Treasury Total Return Unhedged USD
US TIPS Bloomberg US Treasury Inflation Notes TR Index Value Unhedged USD
USD investment-grade corporate bonds Bloomberg US Corporate Total Return Value Unhedged USD
USD high-yield bonds Bloomberg US Corporate High Yield Total Return Index Value Unhedged USD
USD floating-rate notes Bloomberg US Floating Rate Notes TR Index Value Unhedged USD
EM hard-currency bonds Bloomberg Barclays EM Hard Currency Aggregate TR Value Unhedged USD
EM local-currency bonds Bloomberg Barclays EM Local Currency Government TR Unhedged USD

Commodities
Commodity Future
Brent crude oil Generic 1st ‘CO’ Future, ICE Futures Europe Commodities
US natural gas Generic 1st ‘NG’ Future, New York Mercantile Exchange
Gold Generic 1st ‘GC’ Future, Commodity Exchange, Inc.
Silver Generic 1st ‘SI’ Future, Commodity Exchange, Inc.
Platinum Generic 1st ‘PL’ Future, New York Mercantile Exchange
Aluminium Generic 1st ‘LA’ Future, London Metal Exchange
Copper Generic 1st ‘LP’ Future, London Metal Exchange
Iron ore Generic 1st ‘SCO’ Future, Singapore Exchange

Hedge funds
Strategy Hedge fund index
Equity long/short HFRI Equity Hedge Total Index
Event-driven HFRI Event-Driven Total Index
Relative value HFRI Relative Value Total Index
Trading HFRI Macro Total Index
Credit/income HFRI Credit Index
Multi-strategy HFRI Fund Weighted Composite Index

Note: 1st = front-month futures contract, EM = emerging markets, HFRI = Hedge Fund Research Index, NR = net return, TIPS = Treas-
ury inflation-protected securities, TR = total return

52
Important legal
information
Important legal information

Imprint
Authors General risks
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[email protected] any asset class mentioned may fall, as well as rise, and
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[email protected] involved in any asset class mentioned may include, but are
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[email protected] risks, and economic risks. The investor may be exposed to
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[email protected] of a financial instrument are denominated in currencies
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[email protected] ident. The investment, as well as its performance, would
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[email protected] increase or decrease in value. Investments in emerging
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[email protected] volatile than investments in established markets. This
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[email protected] performance. Past performance, simulations, and per-
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