- After hitting lows in March, global equity markets rebounded in Q2 led by the US, but the MSCI ACWI index remained negative for the year. Emerging markets and large caps performed well in July. - While equity markets recovered, the global economy is suffering with the US GDP shrinking 32.9% annually in Q2 and Germany's GDP decreasing 10.1%. - US equity markets have become very expensive with little room for error should economic and earnings recovery not materialize as expected. Global fixed income markets did well as central banks lowered rates to support economies.

1. Roger Beutler, CAIA rogerbeutler@yahoo.com 858-205-4244
Investment Brief August 2020
After hitting lows in March, global equity markets, led by U.S. markets, came roaring back in the 2nd quarter and continued their
winning streak through July. Year-to-date, the MSCI ACWI remained in negative territory, returning -1.29% through July in
USD-terms, with the weakening USD adding 30 bps. to the return. Emerging markets and large/mega caps posted especially
impressive results in July. Growth continued to crush value across the board with outperformance increasing with the increase of
market capitalization. The Russel Top 200 Growth Index outperformed the Russel Top 200 Value Index by a gigantic 37.9% for
the year ending July. While equity performance has bounced back quickly, the global economy is suffering. The U.S. GDP shrunk
32.9% on an annual basis in 2Q 2020, a 9.5% decrease from the prior quarter. Over in Europe, Germany’s GDP decreased by
10.1% in 2Q or 34.7% annualized, though due an emergency unemployment scheme, the unemployment rate didn’t spike. While
the bounce back of equity markets has been a boon for investors, equities in the U.S. have become very expensive and all but a
V-shaped recovery of earnings and the economy could lead to a major correction in the near-term future. Global Fixed Income
markets generally fared well in 2020 as the central banks lowered rates to support the economies caught up in the Covid-19
pandemic. The impact was especially stark in the most liquid and safe parts of the fixed income markets as investors searched
to de-risk their portfolios amid increased volatility. The BB US Agg Gov’t Treasury Long Index return 26.33% YTD through July,
while the BB US Agg Credit Long Index returned 12.37% in the same period. Globally, the BB Global Agg ex. US Index returned
5.19% YTD.
Global Equity
U.S. equity markets were getting expensive before the
correction in March and like other markets around the world,
came roaring back on hopes of a V-shaped recovery of
economies, unprecedented aid by governments and low
interest rates, not to forget, the prospect of quickly finding a
vaccine allowing us getting back to normal. But what if the
economy and earnings don’t recover as expected? U.S. equity
markets at this point are overvalued with no room for error; the
best one can hope for is that predictions already priced in
come true and the market doesn’t tank. With a PE ratio of
close to 22, U.S. equity markets are more expensive than they
have been since 2001. Back in 2008, the market tanked 49%
while the GDP shrunk 4%. In 2020 the market decreased by
34% and quickly recovered, while the real GDP declined
10.6% in Q1 and Q2 of 2020.
Source: Guide to the Markets 3Q 2020, J.P. Morgan Asset Management
Of course, the historic stimulus package in the form of the
CARES Act and the Federal Reserve expanding its balance
sheet at a rapid clip to offer liquidity to the markets, initially
boosted confidence. First quarter earnings per share growth
fell 49% compared to one year prior, mostly due to margin
contraction according to JP Morgan’s Guide to the Market.
Annual EPS growth in the second quarter fell by 44%, of which
10.7% was due to a decrease in revenues. Even optimistic
analyst forecasts don’t see earnings of the S&P 500
experience any annual growth until the 1Q21 at best.
Source: Don’t Let the Stock Market Rally Mask Reality, The Wall Street Journal,
July 31, 2020
However, not all sectors are created equal. While a few
sectors might be able to post positive earnings growth in 2020,
most will be in the red or dark red. Tech and communication
services are the clear driver of performance in the S&P 500,
making up over 38% of the index. The Russel 1000 Growth is
even more concentrated with over 54% of the index allocated
to these two sectors. While the energy sector was a victim of
the oil price war and lost close to 38.7% YTD dragging down
the equally weighted index, going forward an allocation to an

2. Roger Beutler, CAIA rogerbeutler@yahoo.com 858-205-4244
equal weight index might offer some protection considering the
continued elevated volatility levels.
Source: Guide to the Markets 3Q 2020, J.P. Morgan Asset Management
Compared to other equity markets, the U.S. markets recovered
faster from their lows in March. However, U.S. equity markets
at this point are also relatively rich compared to other markets.
A sliding USD has helped some markets but fundamentals in
many markets provide more potential upside than the equity
markets in the United States.
Source: Guide to the Markets 3Q 2020, J.P. Morgan Asset Management
1 Ben Inker GMO, Morningstar Long View Podcast 7/29/20
Especially emerging markets remain compelling. GMO’s Ben
Inker recently pointed out, “…while I’ve waited for the world to
fall back in love with emerging [markets], I am getting paid very
nicely to wait.”1
Global Fixed Income
U.S. fixed income indices posted positive returns through July
in 2020, even the BB US Agg Corporate High Yield index
managed to return 71 basis points in 2020 despite an
increasing default rate.
Source: Guide to the Markets 3Q 2020, J.P. Morgan Asset Management
International fixed income markets posted competitive returns
for U.S.-based investors in 2020, often helped by a weakening
US-dollar. Fixed income markets were supported by two rate
cuts by the Federal Reserve Bank in 2020 and the Fed’s
commitment to keep rates low for as long as needed. The
pandemic had a significant impact on retailers, with 43 retailers
filing for bankruptcy protection as of August 3rd.2 Despite an
increase in default rates, the high-yield market remains
attractive and liquid, aided by the Fed’s bond buying program
to support companies through the pandemic. High-yield bond
issuance increased 50% in the first 5 months of the year
compared to 2019 according to Refinitiv. The shift to high-yield
bonds is also due to lack of investor demand in the leveraged
loan space. The biggest buyer of leveraged loans, CLOs, have
been wary to add new lower-rated loans to their portfolios amid
uncertainty of the economic outlook and cash flows, leading to
downgrades and ultimately failing overcollateralization tests.
The impact on the leverage loan market of the weakening
demand was an increase in OIDs or higher margins paid by
the borrowers, combined with stricter lending standards, all
making leveraged loans relatively less attractive for borrowers
compared to issuing high-yield bonds. While there is less
investor demand for leveraged loans, it also offers the
opportunity to selectively add to leverage loan exposure with
very a competitive risk/reward ratio. That said, “…in the
2 As pandemic stretches on… CNBC, August 3, 2020

3. Roger Beutler, CAIA rogerbeutler@yahoo.com 858-205-4244
search for survivors, liquidity is king…. We continue to
approach both the high-yield and the bank loan sectors with
caution.”3
Global Private Equity
While the impact of the Covid lockdown on equity markets in
the form of a correction and subsequent miraculous rally was
quickly felt by investors, private equity investors experience a
more drawn out impact. While headlines of doom and gloom
surfaced immediately, not all hope is lost. Of course, in times
of market distress and increased volatility, liquidity is king as
investors are looking for safe havens to de-risk their portfolios.
“The numbers through April show that the corona virus
pandemic has put the brakes on buyouts, exits, fund-raising
and returns. 4 With private equity returns lagging public
returns, funds just recently published 1st quarter returns which
are only partially reflecting the impact of the lockdown. The
CA Private Equity Index returned 1.98%, 11.40% and 13.19%
for the 1-year, 3-year and 10-year period ending March 31,
2020, respectively. These returns compare favorably to the
MSCI ACWI modified public market equivalent returns
of -11.03%, 1.97% and 6.93% for the same time frames. CA’s
US Private Equity Index managed to outperform its public
equivalent counterparts by 349 to 1022 basis points for the last
1 – 10 years. 5 Again, the numbers are likely somewhat
skewed as the swift correction of public equity markets in
March are likely not fully reflected in private market returns.
While private equity markets came to a halt with the lockdown,
at least temporarily, it’s not all bad news. Frist, private equity
investments are by nature not hands-off investments and GPs
will have to work even more so with their portfolio companies
to help them through this crisis. Second, going into the crisis
there was plenty of dry powder waiting to be invested on the
sidelines.
Source: Guide to the Markets 3Q 2020, J.P. Morgan Asset Management
3 High-yield and Bank Loan Outlook, May 2020, Guggenheim.
4 Covid-19 Hits Private Equity: The Early Data Is Not Pretty, May 15, 2020
5 Private Equity Index and Selected Benchmark Statistics, March 31, 2020,
Cambridge Associates
While the exit environment has been difficult across the board,
the fundraising and investing landscape has thawed. Multiples
for U.S. buyouts have come off their highs in 2019 but remain
elevated. The remaining high entry multiples, combined with
less leverage, will make it challenging to deliver on expected
returns at this point.
Source: Private Market Environment 2nd Quarter 2020, Pathway Capital
Management
Source: Private Market Environment 2nd Quarter 2020, Pathway Capital
Management
In terms of new commitments, LPs for the most part will
continue to invest with existing managers and well-known
entities as their ability to conduct due diligence continues to be
limited by travel restrictions, work from home policies and
partial lockdowns. Fundraising in the first half of 2020, while
not at the level of 2019, has been decent compared to prior
years. Fundraising was helped by the closure of CVC’s 8th
fund, coming in at over Euro 21 billion.6
6 Private Market Environment 2nd Quarter 2020, Pathway Capital Management

4. Roger Beutler, CAIA rogerbeutler@yahoo.com 858-205-4244
Global Real Assets
To no surprise, real estate deal activity measured by deal
value and volume in the United States was down by almost
50% in the first half of 2020 compared to the second half of
2019, with declines occurring across sectors according to Tim
Bodner, U.S. real estate deals leader at PwC.7 The NCREIF
ODCE Index posted its first negative quarter in 2Q 2020 since
Q4 2009, posting a return of -1.75% net of fees. Leverage
among open end core equity funds in the United States inched
up slightly but remains in the low 20s. Similar to private equity,
the full impact of the pandemic is not reflected in the 1st quarter
returns of private real estate funds. The CA Real Estate Index
declined 6.85% in 1Q20 compared to its benchmark, FTSE
NAREIT All Equity, with a return of -23.44%. The full impact
of the Covid lockdown and recession will be felt in the coming
quarters but could be drawn out for years. Not just the retail
and office sectors but also apartments could be negatively and
potentially permanently impacted. While working from home
will hardly be permanent for most office workers, just a
reduction of 10-20% will have a significant impact on office
space demand. While a decrease in demand will not be felt
immediately, it will put pressure on pricing of lease renewals,
NOI and ultimately cap rates. The fallout from retail
bankruptcies will likely be quicker to work itself out and space
will either be released to other tenants or repurposed. The
apartment sector in big cities will see some headwind as
people might look to move to the suburbs, especially if they
can work from home 1 or 2 days per week. NYC, the initial
Covid hotspot, has seen median rents fall 4.8% in June,
compared to June 20198. Rent defaults due to the lockdown
might eventually decrease NOI as well. Investors looking to
generate income might find attractive opportunities in the
transportation sector. Yields in the transportation sector are
relatively high compared to current offerings in fixed income
and core real estate. Additionally, transportation assets
provide diversification benefits by offering uncorrelated income
streams. While the spot market for transportation assets is
volatile, a core plus strategy rather than an opportunistic or
value-added strategy can provide a steady income stream in
the high single digits, paid on a quarterly basis. Backed by 5
to 15 years take-or-pay leasing agreements with
multinationals, core plus transportation strategies offer an
attractive way to get credit exposure of the counter party, often
priced 500-600 basis points above the corresponding
corporate bond offering.9
Roger Beutler, CAIA worked in banking and finance since starting his career in the early 90s in Switzerland. He was a Director
of Investments for a $2 billion foundation, where he was responsible for the foundation’s private market investments comprising
of over $500M in private equity and real estate commitments. Prior, Beutler led the sub-adviser selection for a family of mutual
funds and held positions in the investment consulting industry. Beutler graduated from the University of Applied Science in Berne,
Switzerland, majoring in Banking and Finance.
This article is for informational purposes only and does not constitute an offering of investment services. This article in no way
constitutes the provision of investment advice. Information in the article is not an offer to buy or sell, or a solicitation of any offer(s)
to buy or sell the securities mentioned herein. For further information, please contact me at 858-205-4244.
7 Nareit’s REIT Report Podcast, July 31, 2020
8 New York Rents Fall as Vacancies Rise, New York Times, July 9, 2020
9 Transportation – A port for current income during a pandemic, Center
for Investment Excellence, August 6, 2020