Investment Ideas

Credit conditions are tightening as a result of the rise in global interest rates. This should trigger a sharp growth slowdown in advanced economies, even as the consumer is holding up well for now.

Investors looking to add a defensive shield to their portfolio can consider this 1Y USD JB Tracker Certificate on the Attractive Defensives Basket.

This product provides exposure to seven stocks that our Equity Research analysts favour for when growth slows and which are on their recommendation list due to their attractive fundamentals:

•           American Tower is a vital element in the US infrastructure communication network with high entry barriers, long-term earnings visibility, and a low dependence on growth.

•           AstraZeneca is a key player in healthcare, our preferred defensive sector; the company offers sector-leading growth with multiple pipeline read-outs and product sales acceleration expected.

•           Ahold Delhaize is among the most locally dominant food retailers, with a strong private label offering catering to cash-strapped consumers.

•           L'Oréal’s business is beauty, which never seems to go out of fashion; the company has dominant brands and is growing faster than its market.

•           McDonald’s is the brand name in fast food, and offers defensive growth due to its scale and investments in technology.

•           Pernod Ricard is in the beverage business, which is defensive in nature, and the company stands out due to its strong organic growth driven by its pricing power and the demand trend from wine to spirits.

•           RWE is a German utility, a traditionally defensive sector; it benefits from a growing renewables business and the ability to satisfy rising demand for flexible power capacity.

With its exposure to select defensive stocks, our 1Y USD JB Tracker Certificate on the Attractive Defensives Basket can help build some resilience in a portfolio as previous interest rate hikes are starting to bite and growth is slowing.

Source: Bank Julius Baer & Co. Ltd. (Julius Baer), unless explicitly stated otherwise.

For further information about this product click here:

IMPRINT

This content constitutes marketing material and is not the result of independent financial/investment research. It has been produced by Bank Julius Baer & Co. Ltd., Zurich, which is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA.

This content is intended for information purposes only and does not constitute advice, an offer or an invitation by, or on behalf of, Julius Baer to buy or sell any securities, securities-based derivatives or other products or to participate in any particular trading strategy in any jurisdiction.

Julius Baer does not accept liability for any loss arising from the use of this document.

This content may include figures relating to simulated past performance. Past performance, simulations and performance forecasts are not reliable indicators of future results.

For further details about risks and suitability, as well as important legal information, please consult the following link: IMPORTANT LEGAL INFORMATION

Headwinds

There is no doubt that the US dollar has been the world’s reserve currency for over 100 years. Just now, though, its status appears to have taken a knock. Recent developments on the global markets have raised suggestions that the greenback may have passed its zenith. The Middle Kingdom in particular would like to weaken the dollar's influence on global trade, which is why Beijing has lately put an emphasis on settling oil and gas deals in the yuan. Indeed, the communist government has just marked a further success: its state-owned oil and gas giant CNOOC and the French TotalEnergies completed the first LNG trade in the Chinese currency at the end of March.

Yuan in demand

Beijing has long been trying to conclude more trade agreements officially in the yuan, or renminbi (RMB), as the currency is generally known in the People's Republic. During a visit to the Saudi capital, Riyadh, in December 2022, president Xi Jinping made it clear that China would use the Shanghai stock exchange “to the full extent” as the platform for yuan settlements of oil and gas deals. This strategy of the Middle Kingdom is being well received in Russia especially, which is increasingly accepting the yuan as a result of Western sanctions. There is still a long way to go before the greenback is booted out completely as the global reserve, however, with some 41% of world trade being transacted in dollars and only around 2.7% in the yuan. Furthermore, about 60% of all foreign exchange reserves are held in the US currency in the form of government bonds, for instance. Here, though, China is coming back into the game: its US government bond holdings amount to some USDtn 1. Should Beijing put these on the market, the greenback would be severely weakened and could possibly lose its dominant position.

Catching up in the medium term

On the one hand, then, possible bond sales hang over the dollar like the sword of Damocles. On the other, China is keen to establish its own currency in global trade. The joint study by the Wilson Center and the British market researcher Enodo Economics comes to the conclusion that Beijing will make progress over the next five years, particularly in sectors that had not previously been critical to Beijing’s internationalisation of the RMB. Among the main sectors cited by the experts, for instance, is the increasing inflows of Chinese savings into Hong Kong's financial markets. In addition, Beijing is set to make technical adjustments so that Chinese government bonds can be used as security for cross-border financial transactions, something which could trigger a worldwide surge in demand for these instruments.

Marked interest rate gap

Another factor dragging on the greenback is the sometimes huge difference in interest rates between the USA and emerging countries. Both the Mexican and the Brazilian central banks, for instance, had already stepped on the monetary policy brake before the Federal Reserve did so, which in turn led to positive interest rate differentials against the US dollar. The Banco Central do Brasil started its cycle of increases back on 17 March 2021, hiking the base rate from 2.00% then to 13.75% now. To compare, the Fed has lifted its interest rate spread from 0.00% to 0.25% in March 2022 to 4.75% to 5.00% now. The significant widening of interest rate differentials is also driving exchange rates, with the Brazilian real appreciating by about a tenth against the greenback since May 2021.

Graph: Interest rate and currency movements USA/Brazil

Source: Central banks, Refinitiv

“All against one”: Inverse capital protected note on a foreign exchange quintet

Race to be the world’s reserve currency

Finance ministe John Connally achieved global fame in 1971 with the comment that “The US dollar is our currency but your problem”. The then member of the Nixon government is still quoted frequently today. The dominance of the US dollar, however, is increasingly being called into question. The BRICS states especially, an economic grouping made of Brazil, Russia, India, China and South Africa, would like to form a counterbalance. This quintet, which accounts for some 40% of the world's population, has long been demanding reform of the international currency and financial order. At the 14th BRICS summit last year, the five member states announced they were working on a “new global reserve currency”.

EM carry trades

It is not only efforts such as these that could impair the US dollar’s dominance: the emerging countries also enjoy an interest rate advantage over the USA as well as brighter economic prospects. According to the forecasts published by the International Monetary Fund (IMF) in January, US growth will slow to 1.4% this year and then to 1.0% in 2024. By comparison, the IMF reckons emerging markets will expand by 4.% in 2023 and 4.2% in 2024. Market players see these trends as fertile ground for EM carry trades. In a carry trade, capital is raised in regions with low interest rates and invested in higher interest-bearing securities in a different currency in another market.

EM currencies in demand

According to Jon Harrison, managing director for emerging market macro strategy at TS Lombard, the Brazilian real and the Mexican peso have recently been the top targets for EM carry trades as they are supported by proactive central banks and relatively high real interest rates. This is reflected by movements in exchange rates: the real has appreciated 7.0% against the US dollar this year alone, while the figure for the MXN/USD FX duo is as high as 7.5%. This is a trend that is being seen across the board in emerging markets, with the Emerging Market Currency Index, the MSCI EM FX, for instance, in which the Chinese renminbi is the heavyweight with a 30% share, climbing just under 3% this year.

Capital protection combined with leverage

Leonteq has taken the latest developments on the foreign exchange markets as an opportunity to put together an interesting basket in which five EM currencies compete against the US dollar: the Chinese renminbi, the Indian rupee, the Brazilian real, the Mexican peso and the South African rand. The new “Inverse Capital Protected Note” enables investors to take advantage of a further appreciation of the five EM currencies against the US dollar while protecting their capital. The product has a term of 18 months and participates at a high rate of 250% in the equally weighted basket comprising USD/BRL, USD/MXN, USD/ZAR, USD/INR and USD/CNH. The capital protection level is 100%, which means that the nominal is fully protected at the end of the term.

Graph: USD/MXN (1 year)

Source: Refinitiv

Legal Disclaimer

This document constitutes Advertising within the meaning of article 68 of the FinSA.

This publication serves only for information purposes and is not research; it constitutes neither a recommendation for the purchase of financial instruments nor an offer or an invitation for an offer. No responsibility is taken for the correctness of this information. Investors bear the full credit risk of the issuer / [guarantor] for products which are not issued as COSI® products. Before investing in derivative instruments, investors are highly recommended to ask their financial advisor for advice specifically focused on the investor´s financial situation; the information contained in this document does not substitute such advice.

This publication does not constitute a simplified prospectus pursuant to art. 5 CISA, or a listing prospectus pursuant to art. 652a or 1156 of the Swiss Code of Obligations. The relevant product documentation can be obtained directly at Leonteq Securities AG via telephone +41 (0)58 800 1111, fax +41 (0)58 800 1010, or via email termsheet@leonteq.com.

Selling restrictions apply for the EEA, Hong Kong, Singapore,the USA, US persons, and the United Kingdom (the issuance is subject to Swiss law).

The Underlying’s performance in the past does not constitute a guarantee for their future performance. The financial products' value is subject to market fluctuation, which can lead to a partial or total loss of the invested capital. The purchase of the financial products triggers costs and fees. Leonteq Securities AG and/or another related company may operate as market maker for the financial products, may trade as principal, and may conclude hedging transactions. Such activity may influence the market price, the price movement, or the liquidity of the financial products.

Insofar as this publication contains information relating to a Packaged Retail and Insurance-based Investment Product (PRIIP), a Key Information Document in accordance with Regulation (EU) No 1286/2014 (PRIIPs Regulation) is available at https://www.priipkidportal.com/

Any - including only partial - reproduction of any article or picture is solely permitted based on an authorization from Leonteq Securities AG. No responsibility is assumed in case of unsolicited delivery.

© Leonteq Securities AG 2023. All rights reserved.

Mega-trends identified

A few days ago investment company ARK Invest published a pretty hefty tome offering investors its regular assessment of the future technologies that deliver the greatest potential. Entitled “Big Ideas” and covering no less than 153 pages, the report shines a light on a raft of mega-trends, from the electric car through molecular cancer diagnostics all the way to AI and bitcoin. In all, the experts analyse 14 disruptive technologies whose value could appreciate by 40% a year until 2030. According to ARK, this will in turn have an enormous influence on the capital markets. The fund boutique anticipates that these markets will account for the greater part of global stock market capitalisation by the end of the decade.

Bitcoin bull market ahead

That ARK is not shy about optimistic expectations is evident from the forecast for Bitcoin. “Bitcoin’s long-term opportunity is strengthening,” says the latest Big Ideas issue. The management team reckons the price of the cryptocurrency will rise to USDmn 1.48 by 2030 in a bullish scenario. This corresponds to a compound annual growth rate (CAGR) of around 70%. Star investor and ARK founder Cathie Wood is somewhat more cautious in the case of a bear market, but still predicts a value of USD 258,500, which would be equivalent to a CAGR of 40%. One of the positives identified by Wood is that heavyweight institutions remained positive towards the asset class last year, when cryptos were suffering a significant correction. BlackRock, for instance, embarked on a partnership with Coinbase in June with the aim of giving institutional clients direct access to Bitcoin. Together they could pour trillions of dollars into the asset class over the next few years. In November 2022 Fidelity officially launched retail bitcoin and ether trading accounts enabling investors to trade and custody them on its platform.

On the trail of cancer

The ARK strategists led by Yassine Elmandjra divide the 14 disruptive technologies into five overarching investment themes which they predict will undergo a rise in market value of 41% p.a. on average to reach over USDtn 200 by 2030 (see graph). Alongside the public blockchains behind cryptocurrencies, these include artificial intelligence, robotics, energy storage and the multiomics sequencing of digitalised biological data. One of the aims of the last of these is to identify cancer reliably at an early stage. Multiomics testing, which includes other circulating tumour signals such as DNA fragmentation patterns, is the key to success here. The addressable market for molecular diagnostics is valued at some USDbn 95 in the USA alone. The molecular cancer diagnostics segment, according to estimates, is set to jump by more than a fifth each year to pass USDbn 24 by 2030. The ARK team believes manufacturers should be able to increase the value of their companies at a comparable rate.

AI changes the rules of play

One of the overarching themes is artificial intelligence (AI). This technology also reaches into other disruptive innovation platforms such as robotics. Intelligent machines, say the ARK experts, could permanently alter both infrastructure and the way in which products are made and sold. Take autonomous logistics, for example: the projections are for earnings in this sector to rise from almost zero today to USDtn 1 to 2 by 2030. One of the key elements is the autonomous delivery of food and parcels. The big techs, such as Alphabet with its “Google Wing” and Amazon with “Prime Air”, are already on the starting blocks with their self-developed drone and robot delivery solutions. Food and parcel drones could bring in revenue in excess of USDbn 700 by 2030. “The adoption of artificial intelligence should transform every sector, impact every business, and catalyze every innovation platform,” says ARK’s short and sweet summary of the potential of AI.

Development of disruptive innovation platforms by 2030

Source: ARK Invest

Bundled future opportunities: investing in 5 ARK ETFs with just one index

“The Big 5”

The now 67-year-old Cathie Wood founded investment company ARK Invest in 2014. The economist’s intention was, firstly, to focus solely on disruptive innovation, primarily in the public equity markets, and, secondly, to open up research and become a ‘sharing economy’ company in the asset management space. “We're all about finding the next big thing,” is one of Wood’s core statements. The global company has six ETFs under active management: ARK Innovation, ARK Autonomous Technology & Robotics, ARK Next Generation Internet, ARK Genomic Revolution, ARK Fintech Innovation and, since March 2021, the ARK Space Exploration & Innovation ETF as well. Other products offered include the 3D-Printing and Israel Innovative Technology index ETFs. In total, the firm currently manages some USDbn 11. The five biggest ETFs – ARK Innovation, ARK Autonomous Technology & Robotics, ARK Next Generation Internet, ARK Genomic Revolution and ARK Fintech Innovation – feature in the Disruptive Innovation Index launched at the end of 2020.

Corrections in the upward trend

Although the ARK specialists can look back on more than 40 years of experience in investment in technologies, they are not immune to setbacks. Soaring inflation coupled with hefty rises in interest rates have had a tangible impact on tech stocks – and thus ARK ETFs – over the past year. The flagship, the ARK Innovation ETF, for instance, lost around two thirds of its value in 2022. Genomic Revolution and Autonomous Technology & Robotics performed rather better, shedding “only” around half their value. Although Cathie Wood has recently made several adjustments in her portfolio, such as selling the stake in Nvidia and buying Tesla shares, she is still essentially following a clear strategy of investing in companies that own world-changing products. Satisfying the needs of investors focused on the short term, however, is not on her agenda. The funds are still ahead on a long-term view, with the biggest ETF, ARK Innovation, boasting a return of 10.00% p.a. since its launch. Even better were the performances of the two portfolios based on Genomic Revolution (12.20% p.a.) and Autonomous Technology & Robotics (14.40% p.a.).

“Buy the dip”

The Genomic Revolution ETF is dominated by molecular diagnostics, which accounts for just under a quarter. It is hardly surprising, then, that industry representative Exact Sciences leads the top 10 components in the portfolio. The company has specialised in the detection of cancer at an early stage, bringing the first stool DNA test for bowel cancer onto the market in 2014. Operationally, things are going well at Exact just now: at the beginning of January, the group issued a sales forecast above analysts’ estimates. The heavyweights of what has been the strongest ETF since its launch, Autonomous Technology & Robotics, are Trimble, Kratos Defense & Security Solutions and Tesla. Cathie Wood has been particularly fortunate with Tesla of late: at the turn of the year investors reached eagerly for the e-car pioneer, true to the motto “buy the dip”. They were right to do so – Tesla’s share price has almost doubled so far this year.

Five winners in one package

The ARK Invest ETFs have delivered an impressive turnaround in what is still a relatively young stock market year. The ARK quintet in the Disruptive Innovation Index have posted double-digit percentage growth overall. The front runner so far is the ARK Next Generation Internet ETF, which is up 29.60%. As a consequence, the tracker on the Disruptive Innovation Index that was brought into being by Leonteq in November 2020 also turned sharply upwards again. The CHF version of the participation instrument has appreciated by a fifth since New Year, while the USD-denominated instrument has advanced by as much as 22%. The index, in which the five actively managed ARK ETFs have equal weighting, also considers the dividends, which are reinvested in the respective ETFs. The tracker gives investors access to a broad range of technology mega-trends in a single trade. There is a fee of 0.75% p.a. An annual rebalancing ensures that the five underlyings always start the year with equal weightings.

Chart: ARK ETFs performance 2023

Source: ARK Invest

Legal Disclaimer

This document constitutes Advertising within the meaning of article 68 of the FinSA.

This publication serves only for information purposes and is not research; it constitutes neither a recommendation for the purchase of financial instruments nor an offer or an invitation for an offer. No responsibility is taken for the correctness of this information. Investors bear the full credit risk of the issuer / [guarantor] for products which are not issued as COSI® products. Before investing in derivative instruments, investors are highly recommended to ask their financial advisor for advice specifically focused on the investor´s financial situation; the information contained in this document does not substitute such advice.

This publication does not constitute a simplified prospectus pursuant to art. 5 CISA, or a listing prospectus pursuant to art. 652a or 1156 of the Swiss Code of Obligations. The relevant product documentation can be obtained directly at Leonteq Securities AG via telephone +41 (0)58 800 1111, fax +41 (0)58 800 1010, or via email termsheet@leonteq.com.

Selling restrictions apply for the EEA, Hong Kong, Singapore,the USA, US persons, and the United Kingdom (the issuance is subject to Swiss law).

The Underlying’s performance in the past does not constitute a guarantee for their future performance. The financial products' value is subject to market fluctuation, which can lead to a partial or total loss of the invested capital. The purchase of the financial products triggers costs and fees. Leonteq Securities AG and/or another related company may operate as market maker for the financial products, may trade as principal, and may conclude hedging transactions. Such activity may influence the market price, the price movement, or the liquidity of the financial products.

Insofar as this publication contains information relating to a Packaged Retail and Insurance-based Investment Product (PRIIP), a Key Information Document in accordance with Regulation (EU) No 1286/2014 (PRIIPs Regulation) is available at https://www.priipkidportal.com/

Any - including only partial - reproduction of any article or picture is solely permitted based on an authorization from Leonteq Securities AG. No responsibility is assumed in case of unsolicited delivery.

© Leonteq Securities AG 2023. All rights reserved.

Red dominant

War, inflation, coronavirus and rising interest rates all left their mark on equity markets last year. Given the array of stumbling blocks, it is hardly surprising that Switzerland’s leading index finished 2022 with significant drops in share prices. The SMI posted an overall loss of 16.1%, the sharpest decline since the financial crisis of 2008. The domestic blue chips also trailed behind their European competitors, with the DAX falling 12.3% and the EURO STOXX 50 “just” 11.3%. Nevertheless, not all 20 SMI members finished up in the red: Zurich Insurance, UBS, Novartis and Holcim actually managed to close the year with gains, contrasting with Credit Suisse, which suffered the steepest drop of 67%.

Roche: Home-grown problems

The three heavyweights Nestlé, Novartis and Roche, who together account for the great majority of the SMI’s performance, trod different paths in the last twelve months. Whereas Novartis posted increases, as already mentioned, and hence had a positive impact on the index, its competitor Roche, down 23%, fell much more than the market as a whole. The different trajectories of the two pharmaceuticals giants have thoroughly home-grown causes. Some drug flops, for instance, have led to investors being cautious about Roche, with the failure of its great hope, “Gantenerumab”, sitting particularly ill with market players. The eagerly awaited phase III study of the Alzheimer antibody fell short of its targets, pulverising the prospects of billions of euros in revenue.

Novartis: An eventful 2023

Things are going better with Novartis, on the other hand. After currency adjustments, the group is on course for growth and reckons it will hit its targets for the year, with mid-single digit percentage increases in sales and adjusted operating profit on the cards. The health specialist was also recently able to celebrate the success of a drug, when a late clinical study showed that “Iptacopan”, the experimental active agent against a specific blood disease, had lived up to hopes for phase III. Applications for licences are expected to be submitted later this year. Things are also going to get exciting for generics subsidiary Sandoz: Novartis is looking to carve out its with replica drugs business and list it on the Swiss stock exchange, the SIX. According to media reports, the ophthalmology and respiratory arm is also to be sold off in line with the reorientation to lucrative, patent-protected medicines. Bloomberg expects this process to start after the conclusion of the Sandoz transaction.

Nestlé: Medium-term growth trajectory

The share price of the third battleship in the SMI fleet, Nestlé, performed roughly in line with the overall market in 2022. The operating results of what is the world's largest food group are certainly respectable, with the management team led by CEO Mark Schneider raising its growth forecasts after the third quarter. It now expects to post an organic increase in sales for the expired financial year of between 8.0% and 8.5% compared with the roughly 8% anticipated previously. The forecast operating margin of some 17% was reaffirmed. Nestlé also presented hopeful medium-term targets: the group is expecting a sustained, organic rise in earnings in the mid-single digit range until 2025.

Graph: 2022 performance of the three SMI heavyweights

Source: Refinitiv

Product structure of the day:
Bonus certificate with coupon on SMI heavyweight trio

Start-of-year rally

The Swiss equity market welcomed the new year 2023 in a much more positive frame of mind than it ended the previous one. The leading SMI index appreciated tangibly in the first two days of trading, hurdling the psychologically important 11,000 barrier again for the first time in three weeks. The start-of-year rally was driven by hopes that inflation would weaken and enable central banks to engage a lower gear. It could be a little too early for a general all-clear, however. Latvia’s central bank boss Martins Kazaks, for instance, reckons monetary policy will initially be even more restrictive. “Currently I would see that at the February and March meetings we will have significant rate increases,” the ECB Governing Council member said to news agency Bloomberg at the start of the year.

Participation with partial protection

The uncertainties regarding interest rates, inflation, economic growth and geopolitical developments will likely dominate the new stock market year as well. Although the majority of experts are hopeful that equity markets will see a return to better times in 2023, it can't do any harm to take out some partial protection. The most popular yield optimisation products in Switzerland are barrier reverse convertibles, which are instruments that enable returns to be made on shares that are treading water. Should the markets actually head upwards in the coming months, though, this structure does not allow any participation. A remedy is provided by bonus certificates which on the one hand protect owners from losses thanks to a risk buffer, and on the other enable them to profit on a 1:1 basis from price increases above the bonus level.

Two birds with one stone

Leonteq has combined the best of both structures to design a bonus certificate with a secure coupon payment. That means investors receive a guaranteed coupon however the share prices of the underlyings perform. This comes to 4% p.a. and is distributed on a pro rata basis every three months within the 2.5-year term. The certificate participates fully when prices of the equally weighted basket of shares, which consists of Nestlé, Novartis and Roche, rise above the bonus level of 100%. There is no cap in the structure, so the upside potential is unlimited. The product is thus perfectly in keeping with the times: if the situation on the markets remains tight, the coupon payments ensure regular interest at a rate above market level. If the shares pick up again, investors enjoy the full upside benefits.

“Worst of” principle

The barrier, which is fixed at 69% of the starting values, protects investors from temporary setbacks. Should the hopes of higher shares prices be dashed, the guaranteed coupon means that the bonus certificate still comes out better than a direct investment in the trio. What is more, even if a stock falls below its barrier, this does not automatically mean a loss – in that case the classic “worst of” principle applies, and the repayment is governed by the performance of the underlying with the weakest showing. if this makes it back to at least its starting level by the end of the term, the investment can deliver a profit despite having breached the barrier. Take care, however: should the barrier be reached, investors will receive the weakest stock of the three, even if it is trading above the initial fixing at the end of the term.

Chart: Nestlé vs. Novartis vs. Roche

Source: Refinitiv

Legal Disclaimer

This document constitutes Advertising within the meaning of article 68 of the FinSA.

This publication serves only for information purposes and is not research; it constitutes neither a recommendation for the purchase of financial instruments nor an offer or an invitation for an offer. No responsibility is taken for the correctness of this information. Investors bear the full credit risk of the issuer / [guarantor] for products which are not issued as COSI® products. Before investing in derivative instruments, investors are highly recommended to ask their financial advisor for advice specifically focused on the investor´s financial situation; the information contained in this document does not substitute such advice.

This publication does not constitute a simplified prospectus pursuant to art. 5 CISA, or a listing prospectus pursuant to art. 652a or 1156 of the Swiss Code of Obligations. The relevant product documentation can be obtained directly at Leonteq Securities AG via telephone +41 (0)58 800 1111, fax +41 (0)58 800 1010, or via email termsheet@leonteq.com.

Selling restrictions apply for the EEA, Hong Kong, Singapore,the USA, US persons, and the United Kingdom (the issuance is subject to Swiss law).

The Underlying’s performance in the past does not constitute a guarantee for their future performance. The financial products' value is subject to market fluctuation, which can lead to a partial or total loss of the invested capital. The purchase of the financial products triggers costs and fees. Leonteq Securities AG and/or another related company may operate as market maker for the financial products, may trade as principal, and may conclude hedging transactions. Such activity may influence the market price, the price movement, or the liquidity of the financial products.

Insofar as this publication contains information relating to a Packaged Retail and Insurance-based Investment Product (PRIIP), a Key Information Document in accordance with Regulation (EU) No 1286/2014 (PRIIPs Regulation) is available at https://www.priipkidportal.com/

Any - including only partial - reproduction of any article or picture is solely permitted based on an authorization from Leonteq Securities AG. No responsibility is assumed in case of unsolicited delivery.

© Leonteq Securities AG 2023. All rights reserved.

Extreme movements

Meteorologists have just confirmed that the summer of 2022 was the hottest in Europe since records began. Regardless of the heat, though, in the last few months what has been called a “crypto winter” has set in. The term was first coined in 2018 when Bitcoin lost half of its value, dragging the rest of the digital coins down with it. The current bear market in cryptocurrencies is proving to be even more pronounced, however. The bedrock Bitcoin, for instance, which hit a record high of USD 68,789 just in November 2021, has since fallen below the USD 20,000 mark and is now trading lower than it has even been these last two years. Its little brother Ethereum has also had to absorb huge losses, the number two crypto having lost three quarters of the market capitalisation it had at its peak.

A new era

Nevertheless, Ethereum has since staged something of a recovery on the crypto market. In the middle of September, after years in the making, came the eagerly anticipated update called “The Merge”. This changed the mechanism from the electricity-hungry “Proof of Work” to the “Proof-of-Stake” method. “Happy merge all”, tweeted Ethereum founder Vitalik Buterin following the successful reform. According to the developers, the revamp slashes energy demand by more than 99%. That is a huge benefit, because it makes the digital currency attractive to those investors who look at sustainability criteria as well. Another positive influence on the value of Ethereum, say the experts, is the fact that the rate at which new cyber coins are issued could be sharply reduced as a result of the changeover. This anti-inflationary effect can, conversely, lead to rising share prices. There are even suggestions on the market that Ethereum’s increasing attractiveness could see it displace current industry behemoth Bitcoin from its leading position in terms of stock market value.

From crisis ...

The positive changes of direction for crypto prices in summer and then again in autumn were short-lived, however. In fact, most recently the downward trend has accelerated significantly once again, as Bitcoin, for instance, dropped by a fifth within just one week. The latest crash was triggered by the cash flow problems of cryptocurrency exchange FTX.com. The company came under pressure when customers withdraw huge quantities of capital within a very short space of time. According to media reports, the company suddenly had a shortfall of up to 8 billion US dollars. The prospects of a rescue initially seemed good, with rival Binance announcing shortly after the disaster had become public that it wanted to acquire the majority of FTX’s business. Following a comprehensive tax audit, allegations of the possible misuse of customer money and the probability of investigations by the US authorities, though, Binance pulled out.

… into insolvency

FTX ultimately had to file for insolvency, and boss Sam Bankman-Fried, who founded the company in 2019, packed his bags. That may not be the end of the story for him, though: insiders suggest that at least a billion dollars of customer money has disappeared from the company. According to Bankman-Fried, a former Wall Street banker, however, there had simply been misunderstandings in postings. While investigations for possible embezzlement are under way in the Bahamas, the world's largest payment processor, Visa, has terminated its collaboration with the insolvent crypto exchange. It could take some time until the whole truth about FTX emerges, and this will in turn further heighten the uncertainty among crypto investors in the near term. What is more, experts do not rule out the possibility that other industry giants are facing similar problems.

Chart: Bitcoin vs. Ethereum (1 year)

Source: Refinitv

Contrarian trading:

Broad crypto product range allows focused investment

For and against

“Buy when the cannons roar”, goes an often quoted stock market rule first expressed by the banker Carl Mayer von Rothschild back at the start of the 19th century. In other words, investors should go against the tide, investing when the bulk of stock market players are fleeing the trading floor in panic and prices are falling. It is precisely such panicked sell-offs that are the order of the day on the crypto market at the moment. Dogecoin, for instance, recently lost around a third of its value within the space of a single week, while Solana, regarded as the pioneer in the verification of transactions using the Proof-of-Stake method, even fell by almost a half. Although such price ups and downs highlight the fragility of the crypto market, they do not diminish the significance of digital assets. Blockchain is a mature technology on which the next stage of the internet – think web3 – is being built, among others. Indeed, central banks have already leapt onto the crypto bandwagon. According to the latest statements from ECB president Christine Lagarde, the ECB is already at a relatively advanced stage in its search for a central bank-supported digital currency.

Regulatory efforts

That cryptos remain in demand is demonstrated by a new study entitled “Crypto and Established Financial Institutions” produced by Crealogix, a Swiss fintech 100 company. This comes to the conclusion that demand for crypto services will continue to grow. Another factor in favour of the digital currencies is that – unlike the situation a couple of years ago – they have shaken off their “Wild West” status thanks to much tighter regulation. At the beginning of July, for instance, the European Union was the first major economic region to agree on regulations for cyber currencies. In light of the recent upheavals, the global Financial Stability Board (FSB) has proposed worldwide rules for cryptocurrencies. The FSB has put forward nine recommendations in total. These require cryptocurrency firms to hold capital, just like banks, when they conduct similar business to financial institutions. The new proposed regulations are to be finalised by the middle of next year before being rapidly implemented by the FSB member states. Similar noises can even be heard from the industry, too. “We do need some regulations, we do need to do this properly, we do need to do this in a stable way,” said Changpeng Zhao, the boss of cryptocurrency exchange Binance, at the G20 meeting in Bali. The industry collectively had a role to protect investors, he added.

Broad product range

Despite the progress in regulation, investors must always be aware of the risks associated with crypto assets. The opportunities are also enormous, though. Since the launch of Bitcoin in 2009, the cryptocurrency market has already survived several “crypto winters” and come through plenty of bull markets. Leonteq gives prospective buyers a broad array of options for investing in the still young sector. The universe comprises a total of 30 crypto assets in which tracker certificates enable one-to-one participation. Half of them are listed on the SIX Swiss Exchange and five on the BX Swiss, with the rest available over the counter. The market-leading product range extends from 0x through Chainlink and Polkadot to Solana and Yearn.Finance. The management fee for each certificate is 1.50% p.a.

Diversified investment

The Leonteq Crypto Index gives investors an opportunity to “kill 11 birds with one stone” or, to put it better, “buy 11 cryptos in one go”. The actively managed barometer is designed to allow in as many as 25 crypto assets. Their inclusion, though, is tied to certain selection criteria, such as sufficient fungibility, along with minimum requirements on liquidity and market capitalisation. The index is reviewed every quarter and adjusted where necessary. As already mentioned, the barometer currently consists of 11 members. These are dominated by Bitcoin and Ethereum, which together account for almost two thirds of the index's weight. The professional approach means that the management fee of 1.95% p.a. is slightly higher than that for trackers on individual cyber currencies, but these costs are actually relative modest given that this is an actively managed index. The trackers are offered in CHF, EUR and USD denominations. The comprehensive Leonteq crypto platform ultimately makes it hard to choose from the many different alternatives. In light of the considerable fluctuation on the market, however, the chosen capital commitment should always be consistent with the investor’s own risk profile and their overall portfolio.

Composition of the Leonteq Crypto Index

As at: 14.11.2022

Disclaimer:

This document constitutes Advertising within the meaning of article 68 of the FinSA.

This publication serves only for information purposes and is not research; it constitutes neither a recommendation for the purchase of financial instruments nor an offer or an invitation for an offer. No responsibility is taken for the correctness of this information. Investors bear the full credit risk of the issuer / [guarantor] for products which are not issued as COSI® products. Before investing in derivative instruments, investors are highly recommended to ask their financial advisor for advice specifically focused on the investor´s financial situation; the information contained in this document does not substitute such advice.

This publication does not constitute a simplified prospectus pursuant to art. 5 CISA, or a listing prospectus pursuant to art. 652a or 1156 of the Swiss Code of Obligations. The relevant product documentation can be obtained directly at Leonteq Securities AG via telephone +41 (0)58 800 1111, fax +41 (0)58 800 1010, or via email termsheet@leonteq.com.

Selling restrictions apply for the EEA, Hong Kong, Singapore,the USA, US persons, and the United Kingdom (the issuance is subject to Swiss law).

The Underlying’s performance in the past does not constitute a guarantee for their future performance. The financial products' value is subject to market fluctuation, which can lead to a partial or total loss of the invested capital. The purchase of the financial products triggers costs and fees. Leonteq Securities AG and/or another related company may operate as market maker for the financial products, may trade as principal, and may conclude hedging transactions. Such activity may influence the market price, the price movement, or the liquidity of the financial products.

Insofar as this publication contains information relating to a Packaged Retail and Insurance-based Investment Product (PRIIP), a Key Information Document in accordance with Regulation (EU) No 1286/2014 (PRIIPs Regulation) is available at https://www.priipkidportal.com/

Any - including only partial - reproduction of any article or picture is solely permitted based on an authorization from Leonteq Securities AG. No responsibility is assumed in case of unsolicited delivery.

© Leonteq Securities AG 2022. All rights reserved.