DFO Reflections — Q1 2021

In many respects, the first quarter of 2021 followed the per- formance of the final quarter of 2020: shares of small and medi- um-sized companies as well as developing countries continued to outperform; shares of cyclical industries also rallied strongly,

whereas so-called ‚stay-at-home stocks‘ or shares of companies with high-quality and less cyclical earnings underperformed. China and Hong Kong saw an exuberant bull market.

From mid-February, however, there was a break in these trends as major vaccination advances in Israel, the UK and the US prompted a rethink among capital market participants. Since then, the motto has been that there will inevitably be a recovery of the global economy in the course of 2021 and that America‘s very extensive investment programmes will lead to a marked upswing, especially in the industrial sectors that have lagged behind. Above all, the perception of the American economy has changed considerably. After the U.S. appeared helpless and unstructured last year, the new administration seems to have clear ideas and appears well organised and decisive.

As a result, the U.S. dollar has stabilised considerably, and risen strongly against the Euro and the Japanese Yen.

The most important development of the quarter, however, was a significant rise in long-term U.S. interest rates. The yield on the ten-year U.S. Treasury Bond rose from under 1 % to more than 1.75 % in the meantime. Such interest rate increases are

always accompanied by bond price losses, which is why the government bond markets had their worst quarter since the early 1980s. The same applies to the performance of developing country bonds, which are normally priced off U.S. government bonds. The general rule is that a one per cent rise in interest rates leads to about a seven- percentage point drop in the price of 10-year government bonds. Bonds with shorter maturities fall correspondingly less, bonds with longer maturities fall more sharply in price.

Only high-yield bonds (junk bonds) were largely spared price losses. This is mainly due to the fact that high-yield bonds tend to follow stock markets and do well when the economy is generally doing well. This is currently the case.

In contrast to the changed perception of the United States, sentiment in Hong Kong and China has also reversed since mid-February. The government in Beijing has made it clear that it is not interested in a stock market boom and will act rather moderately in stimulating the financial markets through the central bank. Since central bank liquidity is the lifeblood of financial markets, this news was received negatively and led to a strong correction of the stock markets in China and Hong Kong.

At the end of the quarter, 2021 so far looks like a positive year for equities and a negative year for bonds. The strongest winners are neglected industries, relative losers are the darlings of the previous year and especially the ‚stay at home stocks‘. The latter had outperformed in 2020 and need a breather. However, since no one can estimate when such a pause will be over, we advise against saying goodbye to high-quality companies. In the long term, share prices always reflect the level of a company‘s pro- fitability, even if there is a short-term dip, which we currently experience.

Das Family Office PTE LTD relies on a proven and broadly diver- sified investment approach, which suggests portfolio solutions that combine reliable investment components based on an investor‘s respective investment horizon and cash flow needs: the longer an investor‘s respective investment horizon, the higher the advised risk share (equity share) should be. Conversely, risk should be avoided if short-term investment horizons are in focus and liquidity must be readily available.

This strategy again worked very well in the first quarter of 2021, as our investment components and reference portfolios all played their assigned roles. Only portfolios containing exclusi- vely government and senior investment grade bond building blocks have recorded moderate price losses. Even though this is unpleasant, this development is still within expectations. If one compares historically similar phases, one will come to the conclusion that the price losses should be recovered within the course of a few quarters.

As an independent and client fee-based advisor, Das Family Office PTE LTD not only focuses on currently very popular ETFs, but also on index funds and institutional share classes of acti- vely managed funds to achieve the best possible outcome for our clients. Single securities can be added upon request.

With this in mind, have fun browsing through the various data and presentations of investment modules and reference port- folios. It‘s worth it!