End-of-year letter from the Partners

Dear Sir, Madam,

2023 will be remembered as a year of transition.

In a constantly changing world – geopolitically, economically, technologically and socially – we remain resolutely focused on our core mission: to support our clients as closely as possible with their needs, helping them to preserve and grow their assets over the long term.

In this letter, we provide a brief review of the highlights from the past year, our outlook for 2024 and an overview of the latest developments in our service offering.

Market review for 2023 and outlook for 2024

2023 was a story of containing inflation with high interest rates. The Federal Reserve and the European Central Bank have taken rates to levels not seen since 2007. We believe 2024 will be about the impact of restrictive financial conditions as they filter into every area of the global economy, slowing activity at first, as well as potential relief from rate cuts later in the year. With the disinflation process now firmly underway, major central banks should be able to move to easing policy by mid-2024, while watching for risks of a second wave of inflation. That should lead to a gradual improvement in growth prospects in the second half of 2024.

The strength of the US economy has confounded expectations and a long-expected recession has not materialised so far, yet we cannot exclude the possibility of a deterioration in 2024. However, in a presidential election year, and given expected resilience in consumer and government spending, our main scenario remains a soft landing for the world’s biggest economy.

Europe’s economies have stalled more quickly than the US, while the European Central Bank kept raising borrowing costs to stamp out inflation, in our view overtightening policy. We expect only a limited economic rebound in 2024. Higher oil and natural gas prices could act as a catalyst to reignite inflation, although this is not our core scenario.

China, for many years the motor for global growth, disappointed investors with its post-pandemic recovery and subsequent stimulus. While the country’s near-term growth momentum is improving, long-term prospects matter more for investors. Given uncertainties over the ambition of China’s fundamental reforms and its ongoing maturing to a middle-income economy, we believe we are shifting to a new, lower growth regime.

We will be monitoring geopolitical dynamics and risks linked to financial stability very closely as we enter the new year. Global alliances and trade are fracturing, raising the risk of higher prices, protectionism and unwinding some of the benefits of globalisation. With the US presidential election in the spotlight, we will also be paying close attention to the impacts on US fiscal policy, global trade, and foreign policy.

Investment strategy and portfolio positioning

We maintain a neutral exposure to risk within our multi-asset portfolios, balancing the positives from recent economic resilience and disinflation against the expected delayed effects from higher borrowing costs. Geopolitical tensions will remain a source of risk next year, with potential cross-asset implications.

In the late stages of economic cycles, equity markets can offer positive returns, but volatility is a common feature. The year ahead of us will very likely be no different. Corporate valuations are at or close to their long-term averages, and earnings revisions in 2023 for many developed markets have been positive. However, against a background of high borrowing costs that increase the debt burden on households and companies, earnings expectations for 2024 may prove too optimistic. We maintain a broadly neutral allocation to equities, focusing on companies that are better able to withstand slowing growth and tight financial conditions.

After a third consecutive year of weak fixed income returns, government bond yields have reached levels not seen since 2007 and relative valuations mean high grade bonds are increasingly competitive alternatives to risky assets such as equities and high yield. As global growth slows, and investors anticipate the end of the US central bank’s rate hiking cycle, we retain an overweight allocation to quality fixed income, including US Treasuries and investment grade credit. We are more cautious on the high yield segment, where we favour higher-rated issuers.

In currency markets, the US dollar continues to benefit from its domestic economic growth and yield advantages. This leaves room for it to appreciate further against the major currencies in the months ahead, and we have an overweight bias in portfolios. We continue to favour the Swiss franc, have turned more neutral on the euro and remain cautious on sterling.

Sustainable investment: seizing the opportunities of a world in transition

The environmental transition is a reality. It is accelerating. We see it as the driving force behind an economic transformation on a scale equivalent to the industrial revolution, unfolding at the speed of the digital revolution. As asset managers, our role is to anticipate the transition pathways of our main economic systems. We need to identify those companies that will likely emerge as winners from the ongoing transition, through the transformation of their business models or the introduction of new technological solutions.

Our approach is underpinned by a major fundamental research effort aimed at gaining a better understanding of the nature of the transitions underway. Earlier this year, we created holistiQ Investment Partners. This collaboration, launched in partnership with leading climate transition consultancy Systemiq, will focus exclusively on sustainable investment. It will comprise a wide range of experts, from analysts and engineers to scientists and portfolio managers.

We have also designed a new discretionary offering, the CLIC^®1 mandate, for our private clients keen to align their portfolio with the ongoing transition.

Lombard Odier fiduciary investments

The rise in short-term interest rates is prompting many clients to take advantage of attractive rates of return on liquid assets in portfolios invested in fiduciary deposits. To meet this demand and broaden our range of counterparties, this year we launched our own fixed-term fiduciary investment. This offering is only available to our clients with assets deposited in our bank in Switzerland or Singapore.

Bond portfolios: reap the benefits of today’s high long-term rates

Low long-term interest rates have made bonds less attractive since the financial crisis of 2008. However, rates currently available on long-dated bonds are leading investors to rediscover the benefits of the asset class. Many are looking to lock in a certain level of return by constructing bond portfolios held to maturity. We favour high-quality issuers for this type of portfolio.

Private assets: sources of long-term returns and diversification

For investors with a long-term investment horizon, we maintain a positive view of the opportunities offered by private assets across business cycles. This asset class offers significant potential for diversification and access to some sectors that are no longer sufficiently represented across public stock markets. Over the last 15 years, we have developed a real expertise in this area, with more than 30 specialists now dedicated to this asset class.

Our offering is broad and diversified, spanning private equity, venture capital, real estate, infrastructure and private debt. Private assets are not suitable for everyone. Their illiquid nature means that investors need to have a good understanding of how the asset class works. If you have an interest in private assets, and applicable regulations allow it, we can help you build diversified portfolios tailored to your personal circumstances.

Strengthening our wealth management expertise

Our ambition as private bankers is to help you preserve and grow your wealth and that of generations to come. Our expertise in wealth and succession planning enables us to align the structuring and management of your assets with your long-term objectives.

LO Generations: a family approach across generations

We help many of our clients to develop their strategy for succession, estate planning and family governance. As a family-run business, we know that tailored advice that considers the specific characteristics of each family is the key to a smooth and enduring succession. Our LO Generations programme is aimed at the younger generations of the families we work with. It runs events and meetings, offering the Next Gen the chance to discover and discuss topics ranging from entrepreneurship and investment to climate change and art, with guest speakers and internal experts.

Building a long-term strategic allocation to achieve your financial objectives

Investment performance and the ability to achieve one's financial objectives over the long term depend primarily on a clearly defined strategic allocation. To help our clients define such an allocation, we have developed a proprietary approach called 'Your Wealth Outlook’. This approach, supported by an iterative and intuitive IT solution, provides interesting simulation tools to help structure the discussions.

Tax-efficient management

We have always sought to offer our clients portfolio management tailored to their tax situation. Our tax-efficient management approach has been under continuous development for over ten years and is now deployed in more than ten jurisdictions.

My LO: offering our clients the best digital experience

Our My LO digital solution provides a secure overview of your portfolio performance, market movements and our latest analyses on your phone or tablet at any time.

We added a host of new features in 2023:

• Online payment²: make payments and transfers to more than 40 countries directly from My LO easily and securely.
• Electronic signature: thanks to the My LO Sign mobile application, you can now electronically sign some documents directly in your My LO space to make your administrative processes as straightforward as possible.
• Digital call-back: every time you send your banker a payment instruction, you can now receive a confirmation of authorisation directly in your My LO Sign app. This allows you to validate the transfer from your mobile phone in complete security.

If you do not yet have access to My LO, please contact your relationship manager, who will be able to help you set it up.

One Roof: our vision of the bank of the future

Construction work continues on our new lakeside headquarters in Geneva. Designed by the renowned architects Herzog & de Meuron, this building, with its open, transparent lines will give us a new environment in which to welcome you. By 2025, our clients will be able to benefit from all our services and expertise under one roof.

The new head office will meet the highest environmental standards. It will help us to take a major step forward in our 2030 plan to reduce our own greenhouse gas emissions.

Regulatory changes

We monitor regulatory changes affecting the financial sector very closely. We would like to remind you that relevant regulatory documentation is always available on a dedicated page on our website: www.lombardodier.com/legal-information. Any changes affecting you will be sent separately by post.

Consistently solid fundamentals

We have always applied a philosophy of sound prudence to the management of both our activities and our balance sheet. The financial stability of our Group was once again recognised by the Fitch rating agency, which confirmed our AA- rating with a stable outlook. This is the best possible rating for a group of our size.

Total client assets under management at 30 June 2023 were CHF 308 billion. Our capital ratio of 30% makes Lombard Odier one of the best capitalised banking groups in Europe. Our balance sheet is liquid and conservatively invested.

Annika Falkengren will retire on 31 December 2023 after seven years with the Group in a variety of cross-disciplinary functions…. The College of Partners extends its warmest thanks to Annika for her invaluable contribution to the Firm.

Changes to the Partners

We are delighted that Alexandre Meyer will become a Lombard Odier Managing Partner from 1 January 2024. Based in Geneva, he fully embodies the values of our Firm. During his 25 years with the Group, Alexandre Meyer has played a vital role in the success of Lombard Odier Investment Managers, the Group's asset management unit, where he was until recently Chief Operating Officer. His strategic vision, expertise and personal qualities will be key to the Group's continued growth.

Annika Falkengren will retire on 31 December 2023 after seven years with the Group in a variety of cross-disciplinary functions. Annika has expressed her wish to embark on a new phase in her life by joining several boards of directors. The College of Partners extends its warmest thanks to Annika for her invaluable contribution to the Firm. We look forward to maintaining close ties with her in the future. From 1 January 2024, the Managing Partners will therefore be Hubert Keller, Frédéric Rochat, Denis Pittet, Alexandre Zeller, Jean-Pascal Porcherot and Alexandre Meyer.

Philanthropy: helping the most vulnerable and supporting our clients in their projects

This year, we were once again eager to help those in need. Our end-of-year philanthropic initiatives therefore focused on local organisations supporting vulnerable people. The Fondation Lombard Odier supported charitable projects in many of the countries where we operate.

We also ran emergency campaigns this year, following the earthquakes that hit Turkey and Syria first, and later Morocco. Our employees and the Fondation Lombard Odier contributed to the collective humanitarian effort through donations to the Red Cross network.

Fondation Philanthropia, the foundation that provides an umbrella for our clients' philanthropic projects, celebrated its 15^th anniversary. Since 2008, it has received more than CHF 138 million and facilitated the creation of more than 40 funds. Through almost 1,300 distributions totalling CHF 75 million, its activities have enabled more than 400 organisations around the world to benefit from the generosity of our philanthropic clients. One of the foundation's most emblematic endeavours is undoubtedly the ambitious restoration project undertaken at the Palace of Versailles around the Latona Fountain, the Grand Trianon and the Royal Chapel. For its historic support of the palace and these major projects, the foundation was awarded the prestigious accolade, "Grand Mécène de la Culture" by the French Ministry of Culture.

Our best wishes for 2024

We would like to thank you warmly for your support over the past year, and we send you, your families and your loved ones our best wishes for a happy, successful and healthy 2024.

Yours faithfully,

Lombard Odier Group

  Frédéric Rochat, Managing Partner         

   Denis Pittet, Managing Partner        
 

¹ Circular, Lean, Inclusive and Clean
² This new functionality is available to our clients whose assets are held in Switzerland or Europe.