AI-Research Update January – Wind of Change

Dear readers,

We hope you had a good turn of the year and a healthy start into the new year.

Let’s take a brief look back at the stock market year 2021: The second half of December brought another small boost in returns at the end of the year. As a result, the S&P 500 closed the year with +26% and the Nasdaq 100 technology index with +32%. The U.S. indices achieved the best performance among the leading indices, as has often been the case.

Annual performance of the leading indices:

S&P 500 +26%; Nasdaq 100 +32%; SMI +19%; DAX +16%; Stoxx 50 +20%; Nikkei +6%.

CAESAR was also able to achieve the high annual returns of the leading index of +26% in its return-optimized strategy on the S&P 500. Our signals on the SMI and Nasdaq slightly lagged the index as they run in volatility-optimized models.

However, the strong performance at the index level does not reflect how difficult 2021 was for capital investors. Highflyer stocks like Roku (-46%) or Teladoc (-70%) or even a blue chip like Walt Disney (-30%) suffered sometimes drastic price losses compared to their 2021 highs. Cyclical swings between value and growth also posed challenges for many a stock market professional. And the first days of the new year are already starting in the old pattern.

This makes it all the more important for you to start the new year well informed.
Read in our new report how the data situation of our KI CAESAR presents itself at the beginning of the year and how our investment experts position themselves considering the macroeconomic approaches of Modern Monetary Theory (MMT). We have provided an overall summary with an optimal positioning of your portfolio for the start of the new year in our research report “Wind of Change”.

We wish you a healthy start to a successful 2022.

Your Private Alpha Team

January Outlook:

Caesar creates its market assessment based on the interplay of various indicators and this can be described as neutral to slightly positive at the start of the new year. Our AI’s assessment of the situation has been much more positive for most of 2021. Hence our title ” Wind of Change”. An extremely bullish environment, as at the start of 2021, is off the table for now, as some indicators have clouded over. Overall, the environment for equities remains positive, but a cash ratio of 30% is currently advisable from a tactical perspective for risk-averse investors.

If one analyzes the monitored individual indicators, such as the real interest rate or the FED money supply, these show undiminished strength. Also, the situation is just easing in the credit spread of BAA corporate bonds to the 10-year U.S. Treasury bond (Chart 3: BAA Corporate Bonds vs. 10y U.S. Treasury).

The year started with interest rates rising from 1.4% to 1.78% on the 10-year US Treasury bond. (Chart 1: 10y US Treasury). The stock markets reacted to this with a huff, especially in the case of growth stocks. A tendency that could continue for several weeks.

If we combine the monitored risk indicators of CAESAR, the situation can be classified as relatively stable according to our market risk model. Market sentiment currently appears to be much worse than the indicators indicate.

If we add our monetary policy comments on MMT (see the Private Alpha Expert Opinion on Central Bank Policy section) to the current assessment of the situation, the bull market as a whole should not yet be at risk. However, the range of fluctuation is likely to be much higher this year.

In summary, our systems envisage a neutral to slightly overweighted equity allocation as the ideal investment level at the start of the new year. The overall equity market environment can no longer be classified as unreservedly bullish, as was the case for most of 2021.

In the case of individual stocks, price setbacks due to pandemic-related or monetary policy news can be used for additional buying, especially in the area of value stocks from the financial and industrial sectors, which continue to be very favorably valued and offer advantageous growth opportunities. Growth stocks that have come back very strongly also offer initial interesting entry opportunities again.

Leading CAESAR Indicators:

Indicators are used by CAESAR to define an ideal investment ratio as well as risk analysis for global equity markets.

Chart 1: 10 Year US Treasury

Conclusion: The yield on the 10-year U.S. Treasury bond is an important indicator for the S&P 500 and the Nasdaq. At the beginning of January, the interest rate is at 1.8%. The significant increase is negative for growth stocks. Currently, value stocks are preferable to growth stocks.

Chart 2: Metals Index

Conclusion: The metals price index is an important indicator showing the demand for many industrially manufactured goods. A rising index indicates robust demand and little fear among global investors.

Chart 3: Bond Credit Spreads

Summary: The spread between U.S. corporate bonds and U.S. government bonds is a good gauge of stress levels in the capital market. Interest rate spreads have been falling again for the past two weeks.

Private Alpha Expert Opinion on Central Bank Policy:

In addition to CAESAR’s sober data analysis, we want to give you assessments of current macroeconomic trends and central bank developments in our new “Expert Opinion” section. The incorporation of Modern Monetary Theory (MMT) into the management of central bank policy is unmistakable, so we would like to share with you the assessment of our Private Alpha investment experts who, together with our Advisors, have over 100 years of private banking and investment experience.

MMT is a current of Post Keynesianism. This new form of monetary theory defines that money is created by the state and that currency derives its value from the state having the power to levy taxes to be raised in that currency. Modern Monetary Theory, in our opinion, is the fluid evolution of our monetary system and has become established among the world’s leading central banks. The U.S.’s departure from the gold standard initiated this development, as sufficient liquidity could no longer be provided on the gold standard. Productive resources and labor went unused because there was simply no capital, and so the economy could not grow at its full potential. The Corona pandemic was the blueprint for a second 1929, but the courageous intervention of the Federal Reserve in particular, which provided almost unlimited liquidity, did not allow a runaway depression to even begin.

In epochal crises, the state should always intervene and borrow in order to create new money. Means first choice is to buy up government bonds in order to monetize government debt, i.e. convert it into immediately available cash or account balances. This step was necessary once before Corona, when Mario Dragi famously said “What ever it takes” and in one fell swoop ended the Greek/Euro crisis in the summer of 2012.  Otherwise, the euro would probably have broken apart even then, with devastating economic consequences for all Europeans.

Let’s focus a bit more on other key points of MMT in order to present important conclusions on future valuation levels in our final conclusion.

A sovereign that is indebted in its currency cannot go bankrupt. Argentina and Turkey are currently the best examples of countries that have not followed this basic rule, as most of their sovereign debt is denominated in foreign currencies. Turkey’s debt is mainly foreign denominated in dollars. This means that Turkey must raise dollars to pay its debts. This sets in motion the current rapid downward spiral we are seeing in Turkey. This problem is not occurring for the U.S., Japan, or Europe as a whole. On the contrary, the current debt situation is causing the currency in Europe to weaken relative to the dollar, which in turn has many benefits, especially for export-oriented countries like Germany.

Another important cornerstone of current central bank policy is the monetization of government debt. The central bank can buy government bonds in almost any amount and thus convert bonds into cash. This makes bonds and cash virtually equivalent and slowly reduces the interest rate on bonds toward the interest rate on cash, namely zero percent.

This realization explains the historically falling U.S. interest rates. This trend has been one of the biggest constants over the past 30 years. Since the 1980s, when interest rates of over 15% prevailed, this level has fallen to 1.7% for the 10-year U.S. bond. If we were to extrapolate the trend of falling interest rates into the future, we would reach a bond yield of close to zero percent in 2024/25.

This development may lead to further ‘multiple expansion’ in equities, real estate as well as private equity and venture capital investment. Historically favorable P/E ratios of below 10 will no longer exist. Investors will have to adjust to valuation levels relative to low interest rates. Growth stocks may therefore have P/E ratios of over 30 and are even cheap at this level in some cases. P/E ratios of over 75, such as those of Snowflake, are still difficult to justify, but they show how much investors trust these companies. Many of the investors have not yet forgotten the lessons of the dot.com boom, so even such valuations should be taken seriously, because these companies definitely have the potential to join the ranks of the new “trillion dollar” companies. Jim Cramer, a familiar face on Wall Street has called NVIDIA a new $10 Trillion Company if Metaverse and self-driving cars reach the mass market in the next few years and AI-based GPUs need to be installed everywhere.

Conclusion:

So we think it’s entirely possible that we could grow into whole new valuations in both equities and real estate over the next few years. If, on the other hand, central banks were to abruptly raise interest rates in the lead currency areas in the direction of three to five percent, not only stock prices but also real estate prices would be cut in half.

This should be virtually impossible in 2022. Nevertheless, constant monitoring of all yield curves, money supply developments and inflation data is required. Here we rely on CAESAR to provide us with the most up-to-date evaluations accurately and unerringly on a daily basis.

Performance Review 2021

Private Alpha AI Global Opportunity Fund: DE000A2JQKU8 

Since the Global Opportunity fund switched to strategy V3 on 6/18-21, it has clearly outperformed the MSCI World and even keeps up with the Nasdaq.

Alpha AI Sustainable Zertifiakt: DE000LS9QPW3 

Sustainable and green investments had a tough time in 2021, with the iShares Global Clean Energy ETF losing over 20% for the year, while the Private Alpha AI Sustainable certificate gained 4% for the year.

Alpha AI US leveraged certificate:

Since the inception of the Private Alpha tranche, the AI US Leveraged has outperformed both the S&P 500 and the Nasdaq 100, with a performance of +11% since 9/22-21. (Retail tranche since 4/22/21: +24%).

Alpha AI US 500 Certificate: DE000LS9QPW3 

Over the year, the AI US 500 has returned 28%, while the benchmark S&P 500 has returned just under 26%.

Alpha AI Innovation Leaders Certificate: DE000LS9SMJ3

Since the inception of the Private Alpha tranche on 9/22-21, the AI Innovation Leaders has clearly outperformed its benchmark the Ark Innovation ETF. While Ark has lost 15%, the Private Alpha product has limited the loss to 3%.

Performance Update:

Status 01/10/2022

We wish you a good start into the new year

Your Private Alpha Team