Harsh medicine

Website Disclaimer October 2024

Important Legal Information & Terms of Use

By using the Cape Capital website (“Website”), you declare that:

You are a qualified investor according to Art. 10 para.3 of the Swiss Collective Investment Scheme Act (CISA) and/or a professional or institutional investor according to Art. 4 of the Financial Services Act (FinSA).
You are domiciled in Switzerland
You have understood and agree to the following Important Legal Information and Terms of Use (together “Conditions”)

By clicking “Accept all” you acknowledge and accept the following Important Legal Information and Terms of Use:

‍

About this Website

‍

The content of this Website (including microsites) has been prepared by Cape Capital AG, with its registered address at Utoquai 55, 8008 Zurich, Switzerland (“Cape Capital”), duly registered at the commercial register of the Canton of Zurich with number CHE-109.617.147. and contains the views and opinions of the particular individuals and is for general information and marketing purposes only. All copyrights and other rights, included but not limited to logos and registered trademarks relating to the entire content of the Website are reserved exclusively to Cape Capital or the specifically designated right holders. Any use, in particular the reproduction or publication in full or in part is permitted only with the prior written consent of Cape Capital. Cape Capital may from time to time suspend the operation of this Website for repair, maintenance or improvement work, or in order to update or upgrade its content or functionality. Cape Capital may also change the format, content and/or access of this Website at any time at its sole discretion without notice. Although Cape Capital believes that information provided on this Website is based on reliable sources, content on this Website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. Therefore Cape Capital cannot assume responsibility for the quality, correctness, timeliness or completeness of the information contained herein. Unless otherwise stated, the numbers/figures on the Website are unaudited.

‍

Regulatory Status & Ombudsman

‍

Cape Capital is a regulated asset manager of collective assets according to the Federal Act on Financial Institutions of 15 June 2018 (FinIA) and supervised by the Swiss Financial Market Supervisory Authority FINMA, Laupenstrasse 27, CH-3003 Bern, Switzerland (FINMA). The Website contains information about various collective investments (“Funds”) which may have been registered or otherwise notified for distribution and marketing in the jurisdiction you have selected. Please note, that such registration or notification does not mean that the Funds are suitable for all investors and their investment objectives, financial situation and risk profile. As an asset manager of collective assets, Cape Capital is, among others, subject to the rules under the Swiss Financial Services Act (FinSA), the Swiss Collective Investment Schemes Act (CISA) and the Swiss Financial Institutions Act (FinIA).Cape Capital is affiliated to the following Ombudsman according to FinSA: Finanzombudsstelle Schweiz (FINOS), Talstrasse 20, CH-8001 Zurich, Switzerland. For further information, please refer to the General Client Information Document available on the Website which forms an integral part of these Conditions.

‍

No Solicitation, Offer, Recommendation or Advice

‍

Nothing contained on this Website constitutes a solicitation, an offer or a recommendation to buy or sell any Cape Capital Funds or other financial instruments, nor does it constitute any form of personal investment advice which takes into account your personal circumstances. Cape Capital does not provide investment, legal, tax or other advice through this Website and nothing herein should be construed as such advice. Cape Capital does not represent that any Cape Capital collective assets or financial instruments mentioned on this Cape Capital website are suitable for any investor. Investment or other decisions should be made solely on the basis of the relevant product and/or service documents (prospectus/offering memorandum, fund contract/articles, key information documents, financial reports) of the respective collective investment. If not a Cape Capital client, it is strongly recommended to contact a professional financial advisor, tax consultant or other qualified expert in order to determine whether an investment in a Fund or other financial instrument corresponds to the specific requirements and preferred level of risk of the investor.

‍

US Persons

‍

Any collective investment schemes mentioned on this Website may, unless explicitly stated otherwise, not be offered, sold or delivered to United States (U.S.) citizens or persons resident or incorporated in the U.S. and/or other natural or legal persons whose income and/or returns, regardless of origin, are subject to U.S. income tax, as well as persons who are considered to be U.S. persons pursuant to Regulation S of the U.S. Securities Act of 1933 and/or the U.S. Commodity Exchange Act, in each case as amended from time to time.

‍

Risk Considerations

‍

The provision of financial services and investments in Funds and other financial instruments involve opportunities but also bear risks, including the risk that the value of investments and the income therefrom may fall or rise and investors may not get back the full amount invested or may even lose all of their investment. Investors should ensure to have fully understood such risks before taking any investment decisions. Cape Capital strongly advises to consult the brochure “Risks Involved in Trading Financial Instruments” of the Swiss Bankers Association (SBA) as well as the relevant documents of the respective Fund or financial instrument and to seek professional investment advice before taking any decision to invest. Investors should note, that these Conditions do not represent a complete statement of risks associated to a Fund or a financial instrument. Past performance is no indication of current or future performance. Performance data do not include commissions and costs incurred by investors when subscribing or redeeming Fund shares.Investments, in particular collective investments in private equity, venture capital and other illiquid assets involve an above-average degree of risk, including the risk that losses may even exceed the original investment and should be seen as long-term in nature.

‍

No Warranties

‍

The use of this Website, including any information accessed, downloaded or otherwise obtained through the Website is at your own risk. This Website, together with all content, information and materials contained therein, is provided “as is” and “as available”, without any representations or warranties of any kind, whether express or implied, with respect to the Website, and all information and functionalities contained therein.

‍

Limitations of Liability

‍

IN NO EVENT SHALL CAPE CAPITAL BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE, CONSEQUENTIAL OR OTHER DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF DATA, BUSINESS OR PROFITS) ARISING OUT OF OR IN CONNECTION WITH THESE CONDITIONS, THIS WEBSITE, THE INABILITY TO USE THIS WEBSITE OR ANY INFORMATION OBTAINED OR STORED THERFROM. Cape Capital excludes any liability for any loss, damage or alteration of any kind including but not limited to transmission to losses, delays, misunderstandings, unauthorized interception by third parties, duplication or fraud, except in the event of gross negligence on the part of Cape Capital. Any transmission or download of information is entirely at your own risk.

‍

Use of Links

‍

The hyperlinks on the Website are only provided for information and convenience purposes. Cape Capital is not responsible for the content of external websites that link or are accessible from this Website. Cape Capital does not assume any responsibility or liability with respect to any website accessed via this Website. Please note that when you click on any external website’s hypertext link you will leave this Website. You should review the privacy statements of such websites carefully before you provide any personal or confidential information.

‍

Electronic Communication Channels

‍

The use of electronic communication channels, in particular unencrypted e-mails and text messages, is associated with various risks which may include, but are not limited to, the risk of transmission errors, alterations or duplications, the risk of interception or manipulation of content and the risk of introducing malicious software (malware) by unauthorized third parties. By using such electronic communication channels, you accept these risks and agree to bear any resulting losses or damages.

‍

Data Protection and Privacy Settings

‍

Cape Capital has established a Cape Capital Privacy Notice, which forms an integral part of these Conditions. It explains how personal data is collected and processed at Cape Capital, including this Website. Cape Capital uses cookies to personalize and improve site experience. You can at any time change or withdraw your consent from the Cookie Declaration on the Website. Your consent applies to the following domains: capecapital.com. Your current state: Consent accepted or Consent rejected. Manage your consent.

‍

Applicable Law and Jurisdiction

‍

The access and use of this Website, and these present Conditions are governed by substantive Swiss law with the exclusion of the conflict of law principles. The place of jurisdiction is Zurich, Switzerland.

Last Update: October 2024

Your preference will be securely stored for the next 30 days.

Decline Accept All

To access the website, the terms and conditions need to be accepted.

View terms

Präferenzen

Datenschutz ist uns wichtig, daher haben Sie die Möglichkeit, bestimmte Speicherarten zu deaktivieren, die für das grundlegende Funktionieren der Website möglicherweise nicht erforderlich sind. Das Blockieren von Kategorien kann sich auf Ihre Erfahrung auf der Website auswirken. capecapital.com

Alle Cookies akzeptieren

Danke! Deine Einreichung ist eingegangen!

Hoppla! Beim Absenden des Formulars ist etwas schief gelaufen.

Michael Lienhard—Cape Capital’s Head of Fixed Income—searches for opportunity in an altogether painful market environment

If there’s one thing investors can learn from bond markets today, it’s that the world has changed. Throwing free money at our problems may have seemed like the right approach post-2008, but it’s no cure for surging inflation; nor will it heal deep-rooted, systemic problems like high debt/GDP ratios or climate change.

The diagnosis, in a nutshell

‍

On the one hand, there’s the question of what to do when surging inflation comes along as it has done in 2022. As the cooler weather pushes thoughts of record-breaking heat waves to the back of people’s minds and pulls the cost-of-living crisis to the fore, both elected people pleasers and unelected technocrats have difficult decisions to make.

On the other hand, there’s the ‘big’ question that asks what central banks should do about climate change. It matters because they are gargantuan holders of bonds—courtesy of the auspiciously named ‘quantitative easing’ experiments (bond buying) that’s occurred since 2008. It should come as no surprise that the lids have been lifted on those bond portfolios and the contents have been found wanting. Fossil fuel and industrial companies typically need more debt than ‘cleaner, greener’ technology companies.

‘Gilty’ consciences and canaries

‍

What happened recently in the UK government bond (gilt) fiasco serves as a canary in the coalmine for the rest of the financial system. Bond markets are highly sensitive to changes in currency fluctuations, inflation expectations and economic growth. The gilt event destabilised all three, resulting in the fastest policy U-turn by a UK government in its first month on the job.

The misguided fiscal intervention by now ex-new Prime Minister Liz Truss and her (now ex) finance minister Kwasi Kwarteng aimed to boost economic growth by cutting top earners’ taxes. The market response sent sterling reeling and UK gilt markets sank in value. A few days of chaos were enough for the Bank of England to intervene.

Monetary and fiscal policies need to work in tandem in order to achieve financial stability. If they don’t, this increases the risk of a phenomenon I call a ‘monetary-fiscal feedback loop’. This happens when supportive fiscal policy partially offsets a tighter monetary policy. As consumers find themselves in a weaker position given the higher food & energy prices governments are inclined to go the path of least resistance, or better: highest degree of popularity, and announce their supportive measures. While it screens intuitive to support your people when needed the disadvantageous side-effects may dominate the benefits. In fact, the fiscal measures strengthen the position of the consumers while a weaker consumer is needed to keep core inflation in check. Central Banks have no other choice than rising rates as long as core inflation is elevated as their credibility is at stake which in turn weakens consumers (higher mortgage costs etc.). There is a real risk that this fiscal-monetary ping-pong continues until people accept the pain of higher rates in combination with waiving fiscal support, as a newly-inked article in The Economist put, 'it would be a mistake to accumulate debts simply in order to put off hard choices, using up fiscal space that may be needed in future crises—not just climate change, but also unforeseen disasters such as pandemics.' In addition, fiscal stimulus leads to additional government bond supply right at the time where central banks have stopped buying. Hence, 'economic' buyers have to step in and they demand a higher compensation for the risk they are taking. 'Bond Vigilantes' are back in town.

The crisis school of management

‍

Believe it or not, these are exciting times for active bond investors—the entrepreneurs and adventurers amongst us know that crises breed opportunities.

For one (simple) thing, price declines mean there’s higher upside potential from here. For myself and my team, the question I ask myself is, how we can accelerate performance by steering through today’s pain and maximising upside potential whilst staying true to the philosophy we instil at Cape Capital?

Yes, it is possible to be bullish on the fixed income asset class in a recessionary environment if you select the right securities whose future expectations are bright. This requires a close eye on fundamentals, the regulatory environment and playing to the team’s niche expertise.

Which issuers will likely express resilience through these tricky times? Those will be the quality companies with strong balance sheets and cash flows —the higher quality credit issuers whose names you would recognise and support. Moving down the capital structure of high-quality issuers and investing in the subordinated bonds to achieve a ‘sweet spot’ higher risk/return profile is another hunting ground of opportunity.

Aside from being an opportunist, it is vital to be a student in a crisis—so what should investors learn from this one?

Pain, peanuts and perspectives

‍

The world has changed and economic sirens are ringing as central banks keep tightening monetary policy until something cracks. Indeed, it needs to. Meanwhile, we seem to be facing insurmountable systemic issues such as inflation, geopolitical turmoil, climate change, inequality and more.

‍

The question I raised earlier, on what central banks should do about climate change whilst inflation rages on, needs answering. Critics recently accused the ECB’s new green shift as ‘a distraction’ from their core task of maintaining stable prices and their intention to decarbonise the central bank’s bond portfolio as mere 'peanuts'.

‍

Yet, as the UK shows, radical swings can be dangerous and irresponsible when the global financial system hangs on a thread. If we are to demand central banks to take more action on climate change, then they should do so with extreme caution and with their primary mandate of stabilising prices at the fore—change is a process, not an event.

‍

My last lesson to investors then is one of perspective. Pain is coming, but it need not be unwelcome. When I was a younger man, I liked to travel long distances by bicycle. I remember one trip from Zurich to the North Cape, Norway. Riding for eight or nine hours every day gives you a lot of time to think (especially in the latter days when the lactic build up was real). I started to calculate how many times I had to press the pedal to get to 4000km and unsurprisingly my calculation lead to an extremely high number which made the distance feel even bigger. So, one cycle, let's say 10m, looks like 'peanuts'.

‍

You can then think about how many peanuts in a row would be between Zurich and the North Cape—I would say one peanut is probably two centimetres, so that means, for 4000 kilometres, roughly 200 million peanuts lined up on the road. If you visualise that in front of you, that’s a huge challenge.

‍

But, in turn, if one peanut is roughly two cubic centimetres of volume and then I take all the peanuts on the road between Zurich and the North Cape, group them all together into one cube and look at it, it’s not that big, it’s just one big house full of peanuts—that’s it.

‍

It's just a different perspective.

‍

This story has a link to the challenge that’s levelling in today’s financial market and especially in fixed income. Fixed income is not the asset class that makes huge steps. It is an asset class characterised by graduality, repetition and certainty—very similar to a long bicycle trip.

‍

I managed to go to the North Cape based on the above principle. My advice to investors then is to step back and see these insurmountable problems through this different perspective until they don’t only look manageable, but more like opportunities for change.

‍

My hope is that financial actors everywhere, including central banks, governments, investors and predominantly politicians with an average legislature shorter than the average bond duration to tackle their various challenges in this way—counting the peanuts one at a time and remembering the long-term goal that makes the pain worthwhile.

In this article

Michael Lienhard

Head of Fixed Income at Cape Capital

Written by

Michael Lienhard

Head of Fixed Income at Cape Capital

‍

Important Legal Information & Terms of Use

About this Website

Regulatory Status & Ombudsman

No Solicitation, Offer, Recommendation or Advice

US Persons

Risk Considerations

No Warranties

‍

Limitations of Liability

‍

Use of Links

Electronic Communication Channels

Data Protection and Privacy Settings

‍

Applicable Law and Jurisdiction

To access the website, the terms and conditions need to be accepted.

The diagnosis, in a nutshell

‘Gilty’ consciences and canaries

The crisis school of management

Pain, peanuts and perspectives

Michael Lienhard

Head of Fixed Income at Cape Capital

Michael Lienhard

Head of Fixed Income at Cape Capital

More like this

The financial system and its fantasies

Willard Ahdritz 'With digital, everyone thought the music industry was dead'