Baloise Market View

Current economic and financial market outlook

Monitoring COVID-19

Easing in Europe, while case numbers in South America are surging

Baloise Market View, 29 May 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

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

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.

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

as per 28.05.2020

2020 High

2020 Low

Yield (YTD)

Financial market development since the beginning of the year

Recovery in many market segments

Baloise Market View, 29 May 2020 3

BondsShares FX Alternative & Raw materials

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

in local currency

Macroeconomic environment: Summary

Mobility data points to a recovery

Baloise Market View, 29 May 2020 4

› Governments are easing lockdowns and mobility data signals a recovery

(see graph on the left).

› In our baseline scenario (p.7), we assume that the global recession will

bottom out in the second quarter. Thanks to the massive economic policy

stimulus, we expect a gradual recovery in the second half of the year.

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

include corporate bonds.

› The European Central Bank (ECB) improved the conditions for long-term

bank loans (TLTRO). The QE volume, specifically for cushioning the

pandemic, remains at EUR 750 billion for the time being.

› The Swiss National Bank (SNB) raised the negative interest rate

exemption threshold for 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

Mobility data: Retail and recreation locations

Sources: Google, Baloise Asset Management as of 28.05.2020

-100

-80

-60

-40

-20

0

20.05.2020 14.05.2020 Max. Decline

% change since the beginning of the year*

*Average from 3 January - 6 February 2020

10

20

30

40

50

60

70

UK

Total Manufacturing industry Services

Macroeconomic environment: purchasing manager indices

Signs of recovery but prospects for the 2nd quarter remain bleak

Baloise Market View, 29 May 2020 5

10

20

30

40

50

60

70

05-17 05-18 05-19 05-20

Euro area

10

20

30

40

50

60

70

05-17 05-18 05-19 05-20

USA

Sources: Baloise Asset Management, Bloomberg Finance L.P. as at 22.05.2020

10

20

30

40

50

60

70

05-17 05-18 05-19 05-20

Germany

10

20

30

40

50

60

70

05-17 05-18 05-19 05-20

China

Macroeconomic environment: monetary policy

Fed balance sheet climbs to over USD 7 trillion (33% of US GDP)

Baloise Market View, 29 May 2020 6

0

1

2

3

4

5

6

7

8

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

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

Since COVID-19 outbreak:

+ USD 2.9 trn

(14% of US GDP)

Global Financial

Crisis:

USD 1.2 trn

Federal Reserve Balance Sheet USD trillions

Macroeconomic environment: Fiscal policy

A 750 billion euro aid package for the next generation of the EU

Baloise Market View, 29 May 2020 7

› The EU Commission has proposed a massive economic

stimulus package to cushion the economic consequences

of the coronavirus crisis.

› The EU's reconstruction plan is worth €750 billion, of which

€500 billion is in the form of grants to member states and

€250 billion in loans.

› This is to be financed by debts on behalf of the EU, which

must be paid off via the EU budget by 2058

› Weeks of negotiations are to be expected, as the 27 EU

states must unanimously agree to the overall package in

order to implement it.82

77

32

91

63

32

0 50 100 150 200

Italy

Spain

Greece

Grants Loans

Planned support under the EU reconstruction planbillion EUR

Sources: Bloomberg News, Baloise Asset Management as of 28.05.2020

Economic and financial market outlookOur current scenarios for 2020

Baloise Market View, 29 May 2020 8

DownsideBasic scenario

Ec

on

om

yF

ina

nc

ial

Ma

rke

ts

75% Upside

› U-shape: Global recession in the first half

of the year, followed by the beginning of a

gradual recovery in the second half

› W-shape: Short recovery followed by

another growth decline as the virus

spreads uncontrolled again (2nd lockdown)

› V-shape: Global recession in the first half

of the year with strong recovery in Q3 and

Q4

› Interest rates trade sideways

› Credit spreads stabilise

› Short-term volatile stock market

development (+/- 10% from current levels)

› Interest rates reach new lows

› Sharp rise in credit spreads

› Sell-off on the stock markets (losses

>30% from current levels)

› Slight increase in long-term interest rates

› Gradual narrowing of credit spreads

› Equity markets recover significantly

thanks to generous liquidity situation

Assu

mp

tio

ns

› Fed: Key rate at 0-0.25% + QE

› ECB: TLTRO + extension QE until 2021

› SNB: Continuous FX interventions

Mo

neta

ry

po

lic

y › Fed: QE expansion, primarily in corporate

bonds

› 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 lockdown measures

› Steady but prudent lifting of the lockdown

keeps the reproduction numbers R(t) below

or close to 1 and further waves remain

manageable (locally limited)

› R(t) rises well above 1, leading to a

second more severe pandemic wave

› Complete lockdown must be reintroduced

in many places

› Massive payment defaults in the oil sector

with spill-over effects on other sectors

15% 10%

› Rapid containment of the pandemic thanks

to "social distancing

› Faster than expected lifting of the

lockdown without effect on R(t)

› Potential "game changer" on the treatment

side (tests or vaccine)

Risk overview

Main risks in the coming 12 months

Baloise Market View, 29 May 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, 29 May 2020 10

› Equities: Equity markets have become decoupled from the gloomy economic data and

are currently pricing in a V-shaped recovery. We therefore see a potential for

disappointment in the short term and prefer a defensive positioning. In our baseline

scenario, we currently assume that the lockdown will be further relaxed and that the

massive economic policy stimulus will cushion the economic downturn. We therefore

regard equities as attractive over twelve months, whereby we prefer more defensive

sectors. However, we are constantly monitoring the course of the coronavirus cases

and high-frequency economic indicators and would also rebuild our equity holdings

more quickly if any medical advances were to be made or if an economic turnaround

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 seem attractive to us, also in view of the

default risks (see here). We therefore overweight corporate bonds in the medium term,

but are cautious with regard to credit selection, as the crisis is likely to result in further

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

key. Current valuation of real estate funds, for example, leaves little room for further

advances, but the spread between the individual funds is very high.

› 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 28.05.2020

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, 29 May 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 28.05.2020

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, 29 May 2020 12