Baloise Market View

Current economic and financial market outlook

Monitoring COVID-19: Case numbers

Easing in Europe, while cases in South America rise sharply

Baloise Market View, 15 June 2020 2

5-day average of new coronavirus cases

per 100'000 inhabitants

Global coronavirus case numbers

0

2

4

6

8

10

12

14

16

18

20

Jan Feb Mär Apr Mai Jun

United States

Brazil

Russia

United Kingdom

Spain

Italy

France

Germany

Turkey

India

0

500'000

1'000'000

1'500'000

2'000'000

2'500'000

3'000'000

3'500'000

4'000'000

4'500'000

5'000'000

5'500'000

6'000'000

6'500'000

7'000'000

7'500'000

8'000'000

8'500'000

Jan Feb Mär Apr Mai

United States

Brazil

Russia

United Kingdom

Spain

Italy

France

Germany

Turkey

India

Rest of the World

Sources: Baloise Asset Management, Bloomberg Finance L.P.

Monitoring COVID-19: Reproduction numbers

Cases are likely to rise again in Russia, South America, India and the USA

Baloise Market View, 15 June 2020 3

COVID-19

Reproduction number*

Quellen: Baloise Asset Management, Centre for the Mathematical Modelling of Infectious Diseases per 11.06.2020

*Number of persons infected by a sick person on average; countries without values in white

Financial market development since the beginning of the year

Recovery in many market segments, but fear of a second wave is increasing

Baloise Market View, 15 June 2020 4

BondsEquities FX Alternatives & Commodities

Source: Baloise Asset Management, Bloomberg Finance L.P.

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

per 15.06.2020

2020 High

2020 Low

Performance ytd in local currency

Macroeconomic environment: Summary

OECD scenarios indicate a permanently lower growth path

Baloise Market View, 15 June 2020 5

› Governments are gradually lifting lockdowns, thereby reviving the global

economy. However, the economic damage of the pandemic is likely to be

lasting.

› In our baseline scenario (p.8), we assume that the global recession will

bottom out in the second quarter.

Economy

› The US policy rate is in a target range of 0.00-0.25%. The quantitative

easing program (QE) is unlimited in terms of volume and now also

includes corporate bonds.

› The European Central Bank (ECB) has increased the volume of QE to

cushion the pandemic by an additional EUR 600 billion to a total of 1.35

trillion. EUR 1.35 trillion and extended it by six months until mid 2021.

› The Swiss National Bank (SNB) increased the tax-free allowances to

relieve the banks. It also introduced a new refinancing facility to provide

additional liquidity to the banking system

› We are currently observing strongly deflationary trends, which are likely to

continue in the coming months.

› In the USA, inflation (excluding energy and food prices) is 1.0%. Core

inflation in the euro zone is currently 0.9% and in Switzerland only a

meager -0.5%.

Inflation

Monetary policy

Production slump with weak recovery

World GDP, Index Q4 2019 = 100

Macroeconomic environment: OECD GDP forecasts for 2020

Massive slump in growth, even without a second wave

Baloise Market View, 15 June 2020 6

-16

-14

-12

-10

-8

-6

-4

-2

0

Single hit Double hitSources: Baloise Asset Management, OECD

In % vs. previous year

Macroeconomic environment: monetary policy

Clear signal from the Fed: no rate hike expected until 2022

Baloise Market View, 15 June 2020 7

0.0

0.5

1.0

1.5

2.0

2.5

2020 2021 2022

June 2020 December 2019Sources: Baloise Asset Management, Federal Reserve Bank

Fed interest rate forecasts (aka the Dot Plot)

Economic and financial market outlookOur current scenarios for 2020

Baloise Market View, 15 June 2020 8

DownsideBase case

Ec

on

om

yF

ina

nc

ial

Ma

rke

ts

70% Upside

› U-shape: Sharp slowdown in growth leads

to global recession in the first half of the

year, followed by the beginning of a

gradual recovery in the second half

› L-shape: Severe global recession as the

virus spreads uncontrollably and the

economic support measures fail

› V-shape: Global recession in the first half

of the year with very strong growth

rebound in Q3 and Q4

› Interest rates are moving sideways from

current levels

› Elevated credit spreads due to

downgrades and rising default rates

› Short term volatile stock markets

development (+/- 15% from current levels)

› Interest rates reach new lows

› Sharp rise in credit spreads due to

massive rise in default rates and wave of

downgrades

› Sell-off on stock markets (losses >30%

from current levels)

› Slight increase in long-term interest rates

› Gradual narrowing of credit spreads due

to ample central bank support

› Stock markets recover significantly

thanks to very generous liquidity situation

As

su

mp

tio

ns

› Fed: 0-0.25% + QE

› ECB: TLTRO + extension QE until 2021

› SNB: High FX interventions

Mo

ne

tary

po

lic

y › Fed: further QE expansion in size and

scope

› ECB: -10bp + QE / adjustment capital key

› SNB: -25bp + high FX interventions

› Fed: 0-0.25% + QE is throttled from Q4

› ECB: TLTRO + QE only until the end of

2020

› SNB: Only gradual FX interventions

› Global pandemic remains under control

thanks to extensive lockdown measures

› Steady but prudent lifting of lockdown

measures keep reproduction numbers R(t)

below or close to 1 and further waves

remain manageable

› R(t) increases well above 1 leading to

even more severe global pandemic waves

› Full lockdown measures have to be

reinstated in most countries

› Massive default wave in the oil sector with

spill-over effects into other industries

20% 10%

› Rapid containment of the pandemic thanks

to "social distancing“

› Faster than expected lifting of lockdown

measures with no impact on R(t)

› Potential game changers on the treatment

side (tests or vaccine)

Risk overview

Main risks in the coming 12 months

Baloise Market View, 15 June 2020 9

Europe

› Uncontrolled coronavirus pandemic leads to a massive slump in

growth and a burden on the budgets of already highly indebted

countries Downgrade from Italy to HY

China

› Global slump in demand leads to a significant and

sustained slowdown in growth

› Rising credit defaults due to the high indebtedness of

state-affiliated companies

Global

› Another massive increase in global COVID-19 case numbers after

initial easing measures

› Escalation of the trade dispute between the USA and China

USA

› Slump in consumption due to rapidly rising

unemployment caused by the coronavirus

› Persistently low oil price leads to a massive increase in

default rates in the US energy market

› Volatility in the face of US presidential elections

Baloise Market View: At a glance

Positioning against benchmark

Baloise Market View, 15 June 2020 10

› Equities: The rising number of cases and the bleak economic situation recently caused

volatility again. We therefore continue to prefer a defensive positioning in the short term.

In our baseline scenario, we assume that the lockdown measures will be further relaxed

and that the massive economic policy measures will cushion the economic downturn.

We therefore consider equities to be attractive over twelve months. However, we are

constantly monitoring the course of the coronavirus cases and the high-frequency

indicators and would also rebuild our equity holdings more quickly if any medical

progress were to be made or if an economic trend reversal were to become apparent.

› Bonds: We expect a long term low interest rate environment both in the short term and

over 12 months, which is why we underweight bonds overall. Spreads on investment

grade corporate bonds have narrowed, but still appear attractive to us, also in view of

the default risks. We therefore overweight corporate bonds in the medium term, but are

cautious in terms of credit selection, as the crisis is likely to continue to lead to rating

downgrades and higher default rates. Government bonds are unattractive against the

background of our current baseline scenario.

› Alternative investments: The alternative investment segment offers attractive sources

of return with relatively stable income, such as real estate. But here too, selectivity is

advisable. The current valuations of real estate funds, for example, leave little room for

further appreciation on average, but the broad diversification between the individual

funds offers opportunities and overall real estate funds still offer an attractive risk

premium.

› Cash: In view of the volatile market environment, an increased liquidity ratio is indicated

in the short term despite negative interest rates. In the medium term, this should be

reduced back to neutral by shifting into higher-yielding asset classes.

Attractive Attractive

● ●

● ●

● ●

● ●

● ●

● ●

● ●

● ●

Sources: Baloise Asset Management per 12.06.2020

Senior Secured Loans

Cash

Fixed Income

Corporate Bonds

Government Bonds

Alternatives

Real Estate

3-6 Months 12 Months

Unattractive Unattractive

Equity

Baloise Market View: In detail

Positioning against benchmark

Baloise Market View, 15 June 2020 11

● ●CHF ● ●EUR ● ●USD ● ●

EmMa (USD) ● ●● ●

CHF ● ●EUR ● ●USD ● ●

Government Bonds CHF ● ●EUR ● ●USD ● ●

● ●Real Estate Funds (CHF) ◌ ● ●

Equity (CHF) ● ◌ ●Senior Secured Loans USD ● ●

Cash CHF ● ●Current view ●; previous month ◌

Sources: Baloise Asset Management per 12.06.2020

More

attractive

3-6 Months 12 Months

Less

attractive

Less

attractive

Corporate Bonds

Alternative

Investments

Fixed Income

Equity

More

attractive

Baloise Asset Management

Aeschengraben 21

CH-4002 Basel

www.baloise-asset-management.com

Disclaimer:Baloise Asset Management AG accepts no responsibility for the key figures and performance data used. The content of the publication contains opinions on

market developments and is intended solely for information purposes and is not intended to provide investment advice. In particular, the information in no way

constitutes an offer to buy, an investment recommendation or a decision-making aid in legal, tax, economic or other matters. No liability is assumed for losses

or lost profits that could arise from the use of the information.

Swiss Exchange AG, ("SIX Swiss Exchange") is the source of the Swiss Performance Index (SPI) and the Swiss Bond Index (SBI) and the data contained

therein. SIX Swiss Exchange was in no way involved in the preparation of the information contained in this report. SIX Swiss Exchange makes no warranties

and excludes all liability (whether arising from negligence or otherwise) with respect to the information contained in this report - including but not limited to

accuracy, adequacy, correctness, completeness, timeliness and suitability for any purpose - and with respect to errors, omissions or interruptions in the SPI or

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Baloise Market View, 15 June 2020 12