Investment Brochure
Executive Summary
The Capital Markets Today
Methodology
The methodology for the analysis forthcoming in this brochure is to analyse various indexes constituted with types of financial securities. Indexes measure the price performance of a “basket” of securities (such as similar bonds or similar equities) using a standardised metric or methodology. For the purpose of analysing high quality and reliable statistical data, as well as credibility, Backters has used Standard & Poor’s Dow Jones Indices.To find out more about S&P, see: https://www.spglobal.com/spdji/en/about-us/. The standardised metric or methodology that S&P uses is specific to each index. Detailed methodologies can be found on each index page. For example, if you were analysing the S&P Total Market Index, you could find the methodology document for that index on that page: https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-us-indices.pdf. Therefore, investors that have any query as to the calculations or statistical methods incorporated in this document have the resources of S&P (which are all publicly available) at their disposal.
Furthermore, Backters has made use of Investing.com to collect historical data on equity indices. Investing.com was chosen because of its ease of data extraction and variety of data available compared to its competitors. To find out more about Investing.com, please visit: https://www.investing.com/.
* Any further technical financial terms e.g. “return” will be explained in the Glossary of Terms.
Equities
Western Equities
Since the first wave of government-imposed lockdowns in March 2020, financial markets have been (surprisingly) stronger than ever. The Western large cap equities, the S&P 500 (+29%), the FTSE 100 (+12%) and the STOXX 600 (+21%) are all up this year and historically trading stochastically around record highs. This was supported in mid to small-cap equity markets, with the Russell 2000 index performing well alongside its large cap counterparts over the past 18 months or so. Strong return opportunities exist in large equities and small to mid cap equities in the current markets.
U.S. Large Cap Equities
Source: Investing.com, Backters Analytics
U.K. Large Cap Equities
To assess this group of equities, the FTSE 100 index was analysed. The FTSE 100 contains the top 100 U.K. listed companies by market capitalisation with more weighting given to larger members of the index. Assessing the performance of the index over 2021 (04/01/21 to 31/12/21):
Source: Investing.com, Backters Analytics
European Large Cap Equities
Following their U.S. and U.K. counterparts, the STOXX 600 has risen from a level of 401 points to 487 points as of 31/12/21, generating an annual return of 21% if you held this market portfolio between this time period.
U.S. Small and Mid Cap Equities
To assess this group of equities, the Russell 2000 index was analysed. The Russell 2000 contains the smallest 2000 U.S. listed companies of the Russell 3000 Index (which represents approximately 97% of all U.S. incorporated securities) by market capitalisation with more weighting given to larger members of the index. Assessing the performance of the index over 2021 (04/01/21 to 31/12/21):
Source: Investing.com, Backters Analytics
The Russell 2000 has risen from a level of 1,945 points to 2,245 points as of 31/12/21, generating an annual return of 15% if you held this market portfolio between this time period.
Eastern Equities
In the Asia equity markets, the Shanghai Composite and Nikkei 225 Indexes are up just over 4% and 6% respectively this year whilst Hong Kong’s Hang Seng Index is down -15% this year. In contrast to their Western counterparts, the Chinese markets in particular have been affected this year by the ongoing crisis concerning Evergrande and the Real Estate sector, which is likely to have a contagion effect on the entire Chinese economy, which in turn could influence the economic performance of highly correlated markets, including Western ones. According to research by the Corporate Finance Looking at the correlation between the Hang Seng and Shanghai Composite with other major indices from January 2015 to November 2021: Correlations: Shanghai Composite and the Hang Seng vs. Global Exchanges from January 2015 to Present.
| Index Name | S&P 500 | Nikkei | Mumbai | FTSE | CAC 40 | DAX | MOEX | TSX | ASX 200 | XLK |
| Shanghai Comp. | 0.47 | 0.47 | 0.32 | 0.33 | 0.36 | 0.42 | 0.18 | 0.38 | 0.32 | 0.44 |
| Hang Seng | 0.61 | 0.54 | 0.51 | 0.51 | 0.51 | 0.49 | 0.39 | 0.29 | 0.41 | 0.55 |
As observed above, both major Chinese stock markets have significant correlation to a number of global markets. This is important to note as any adverse market shocks occurring in these markets could generate a less than proportionate yet tangible impact on international markets. The increasingly interventionist approach from Chinese regulators in particular on their capital markets, such as on the aforementioned Real Estate crisis but also on other issues such as pressuring companies to delist in the West and relist at minimum on the Hong Kong Stock Exchange, is likely to generate further market uncertainty in the coming years.
Chinese Equities
To assess this group of equities, the Shanghai Composite index was analysed. The Shanghai Composite contains all the companies listed on the Shanghai Stock Exchange. Assessing the performance of the index over 2021 (04/01/21 to 31/12/21):
Source: Investing.com, Backters Analytics
The Shanghai Composite has risen from a level of 3,502 points to 3,639 points as of 31/12/21, generating an annual return of 4% if you held this market portfolio between this time period. Additionally, the Hang Seng index was analysed. The Hang Seng Index contains 60 of the largest companies listed on the Hong Kong Stock Exchange and is used as a broad measure of the performance of Hong Kong – an extension of China. Assessing the performance of the index over 2021 (04/01/21 to 31/12/21):
Source: Investing.com, Backters Analytics
The Hang Seng Index has fallen from a level of 27,472 points to 23.397 points as of 31/12/21, generating an annual return of -15% if you held this market portfolio between this time period.
Japanese Equities
To assess this group of equities, the Nikkei 225 index was analysed. The Nikkei 225 index is an index that measures the performance of the 225 largest companies listed on the Tokyo Stock Exchange. Assessing the performance of the index over 2021 (04/01/21 to 31/12/21):
Source: Investing.com, Backters Analytics
The Nikkei 225 Index has risen from a level of 27,258 points to 28,791 points as of 31/12/21, generating an annual return of 6% if you held this market portfolio between this time period.
Summary
| Portfolio/Product | % Annual Return |
| Backters | 48% |
| S&P 500 | 29% |
| STOXX 600 | 21% |
| Russell 2000 | 15% |
| FTSE 100 | 12% |
| Nikkei 225 | 6% |
| Shanghai Composite | 4% |
| Hang Seng | -15% |
As noted above, comparing Backters one year annualised return (144% / 3) with the annual return of major equity markets around the world, Backters offers investors a significantly higher rate of return relative to diversified market portfolios containing large to mid and small cap equities around the world.
Fixed Income
When assessing fixed income, the assumption has been made that the investor holds these portfolios of bonds until maturity which would mimic the investors redemption period for USDBK. As these bonds can be publicly traded, they can benefit from capital appreciation as well as fluctuations in the yield to maturity on the bonds. In this section, their returns will be judged solely on yield to maturity.
Western Fixed Income
Over the past 18 months, the bond markets have traded flat in the West and have experienced moderately positive returns in the East. Looking at the S&P 500 Bond Index, which tracks the performance of bonds issued by the constituents of the S&P 500, the index has yielded a return of 2.61% in the year to 12/01/22. Additionally, the S&P Eurozone Investment Grade Corporate Bond index, which tracks the performance of low-risk debt issued by over 4,097 corporations based within the Eurozone, yielded a return of 0.55% in the year to 12/01/22.
US Fixed Income
To assess U.S. Fixed Income, the S&P 500 Bond Index was analysed. The S&P 500 Bond Index is the bond counterpart to the S&P 500 and measures the performance of U.S. corporate debt issued by constituents in the iconic S&P 500. It has over 6,000 constituent bonds offering a par-weighted coupon of 3.65% over a weighted average maturity of approximately 12 years. Assessing the performance of the index over 2021 (04/01/21 to 31/12/21):
Source: Investing.com, Backters Analytics
The S&P 500 Bond Index has fallen from a level of 539 points to 535 points as of 31/12/21. As bonds are liabilities, a reduction in their market value increases their yield to maturity (effective rate of return on fixed income) which is positive for investor returns and currently stands at 2.61% as of 12/01/22. To read more on yield to maturity, visit the Glossary of Terms.
European Fixed Income
To assess European Fixed Income, the S&P Eurozone Investment Grade Corporate Bond Index was analysed. The S&P Eurozone Investment Grade Corporate Bond Index measures the performance of debt issued by any investment-grade corporation denominated in EUR, regardless of domicile and market of issuance. It has over 4,155 constituent bonds offering a par-weighted coupon of 1.37% over a weighted average maturity of approximately 6 years. Assessing the performance of the index over 2021 (04/01/21 to 31/12/21):
Source: Investing.com, Backters Analytics
The S&P Eurozone Investment Grade Corporate Bond Index has fallen from a level of 243 points to 240 points as of 31/12/21. The yield to maturity on this index currently stands at 0.55% as of 12/01/22.
Eastern Fixed Income
In the Asian bond markets, the Pan Asia Bond Index was used. The index measures the performances of issuances by 22,140 different local currency denominated bonds issued by corporations and governments in ten different Asian countries. Whilst the performance of Investment Grade debt in Asia has outperformed its Western counterparts, from a historical perspective yields on Investment Grade and High-Yield bonds at the corporate and sovereign level (on a global scale) are historically low. Assessing the performance of the index over 2021 (04/01/21 to 31/12/21):
Source: Investing.com, Backters Analytics
The S&P Pan Asia Bond Index has risen from a level of 131 points to 136 points as of 31/12/21. The yield to maturity on this index currently stands at 3.04% as of 12/01/22.
Summary
| Portfolio/Product | % Annual Return |
| Backters | 48% |
| S&P Pan Asia Bond Index | 3.04% |
| S&P Eurozone Investment Grade Corporate Bond Index | 0.55% |
For this asset class, there are multiple considerations. For one, the average maturities on some of these bonds are considerably longer than the redemption period on USDBK as noted in each analysis. Bonds with longer maturities tend to offer lower annual coupons which translate into lower yields. Furthermore, as these bonds are considered “investment grade” or listed by large corporations, these companies are in a position to offer a lower cost of capital (interest rate) to attract investors to purchase their debt. So, investors should expect considerably lower returns than what Backters offers. On the contrary, it is the gap between the return on USDBK and bond products issued by large, creditworthy companies around the world that Backters believes sets them apart from traditional competition.
Cryptocurrency
In recent years, similar to Equities and Bonds, S&P Dow Jones have developed a series of Cryptocurrency focused indices that provide an indication of crypto-specific performance. Whilst similar indices have been developed by Bloomberg, Nasdaq and other major financial data providers, the S&P Cryptocurrency Broad Digital Market Index was chosen because it tracks the performance of digital assets listed on recognised open digital exchanges that meet minimum liquidity and market capitalisation criteria covered by Lukka, a institutional crypto asset and software data provider. By doing so, the index reflects broader performance in Cryptocurrency assets such as NFTs, ICOs and smaller cryptocurrencies rather than just the performance of major cryptocurrencies such as Bitcoin or Ethereum. Assessing the performance of the index over 2021 (04/01/21 to 31/12/21):
Source: Investing.com, Backters Analytics
The S&P Cryptocurrency Broad Digital Market Index has risen from a level of 1,956 points to 4,510
points as of 31/12/21, generating an annual return of 131% if you held this market portfolio between this time period.
Portfolio/Product | % Annual Return |
Backters | 48 |
Cryptocurrency Broad Digital Market Index | 131% |
Whilst the Cryptocurrency Broad Index posted higher returns than Backters this year, adjusting that figure for risk, the risk adjusted return for the index was 31%, 17% lower than the return Backters is offering. Considering the majority of the products included in the portfolio are reliant on speculative trading for capital appreciation, Backters believes its offering combines the high growth potential demonstrated in the cryptocurrency market with a grounded yet aggressive investing strategy in real assets discounting the speculative risk associated with cryptocurrency assets and reflected in S&P’s index.
The macroeconomic Environment
Consumer Saving
With low-risk securities struggling to capitalise returns for investors over the past year, there have been many macroeconomic factors that are influencing these markets and many factors that may affect them in the future.
Consumer savings throughout the pandemic have been at record levels in major Western countries, including the U.K. and U.S. This has been a direct result of various fiscal support schemes, including furlough schemes, that have meant a majority of consumers within these economies have continued to earn disposable incomes without having the capacity to spend them given lockdowns and nationwide restrictions. This has contributed to rapid post-lockdown economic recovery and is likely to have a short term impact on positive economic growth and this in turn will benefit business and equity markets.
Monetary Policy
Addressing monetary policy, inflation has been a critical part of security analysis since the outbreak of COVID-19. In response to economic crises, Central Banks (or governments depending on the jurisdiction) tend to adjust their monetary policy to alleviate pressure on businesses and consumers in a time where the economy is struggling. Classically, this involves cutting “base” interest rates (the rate at which commercial banks can borrow money from the Central Bank overnight) which leads to a domino effect on commercial interest rates – if banks can borrow money cheaper, they can lend money at cheaper rates as well.
Looking at the U.S. “Federal Funds rate”, the interest rate set by the U.S. Federal Reserve between 01/01/19 and 01/12/21:
Source: Investing.com, Backters Analytics
With the outbreak of the pandemic, Central Banks cut their interest rates close to 0.0%. This was to encourage lending at the institutional level as well as influence a reduction in interest rates at the commercial level, so that the cost of borrowing for businesses and individuals during periods of economic lockdown was feasible. It should be noted that the European Central Bank and Bank of England, as well as most other major Central Banks, have imitated the trend shown in the graph above.
Another relatively novel measure falls under an umbrella of measures known as “Quantitative Easing”. Hitherto referred to as QE, these measures involve the institutionally large scale purchasing of sovereign issued debt and sometimes highly credit worthy corporate debt. Having been introduced to remedy the fallout of the Financial Crisis in 2008, QE has had a particularly phenomenal impact on encouraging financial markets to rebound during economic crises. Intuitively, this makes sense. If the Central Bank is giving the government and investors or other institutions who hold these securities hundreds of billions of dollars, these institutions are going to have stronger balance sheets and continue to operate smoothly with the idea that these businesses in turn will be able to provide similar levels of support to mid to small cap companies on a transactional basis.
Inflation
A combination of these two particular tools of monetary policy has allowed markets to rebound to a degree, at the consequence of a large increase in the money supply and subsequent rises in the price level (increase in the rate of inflation) across multiple economies – notably seen in the U.S. and the U.K.
In fact, inflation is currently running at its highest level in over 40 years in the United States. Looking at the rate of inflation between 01/01/19 and 01/12/21:
Source: Investing.com, Backters Analytics
Again, inflation rates worldwide have followed a similar pattern to the graph above.
The higher the price level is in an economy, the less your dollar or pound can buy in goods and services. In a financial context, this makes it relatively more expensive to purchase securities and dilutes the value of the income an investor receives from a stock dividend or a bond coupon. Hence, high levels of inflation can damage an investors’ real returns.
Given the current high levels of inflation, this only exacerbates the erosion of returns on large-cap equities and investment grade debt. It is expected that in the coming months Central Banks and governments will begin to taper their QE programmes and raise interest rates to slow down the rate of inflation having observed substantial economic recovery since the lifting of lockdowns and successful vaccination programmes. However, such measures are likely to be delayed if widespread COVID-19 infection repeats similar to the outbreak of the Delta Variant – which could cause a delay in economic recovery and subsequent current monetary policy measures across the East and West to be sustained.
Fiscal Policy
The final aspect of the macroeconomic environment to address are the fiscal policies of the government, particularly in the West. Major Western governments (including the European Commission) have financed post-COVID economic recovery using debt (selling sovereign bonds) and using borrowed money to finance furlough schemes, cuts in taxation and much more. Of course, all borrowed money has to be paid back. Although fiscal deficits vary from country to country, the most notable example of the extreme level of borrowing currently being observed can be attributed to the United States, whose national debt ceiling recently had to be increased by $2.5 trillion in a congressional vote to avoid a credit default.
Summary
With interest rates close to their zero bound and the inflation rate climbing at a rate not seen since the 1970’s and 80s’, this is (and will continue to) erode the power of investor capital. In fact, anybody who holds deposits in cash is facing close to 10% of their purchasing power being eroded in one year alone. This is not dissimilar to the confiscation of 10% of insured bank deposits by the Cypriot government in 2013 for savings above $100,000 to pay for their economic bailout.
The boom in consumer savings will, of course, adjust over time as economies transition to normal conditions and the rapid economic recovery observed will not last forever. Furthermore, taxation by governments is likely to increase in order to pay for the exorbitant borrowing by governments throughout the early phases of the pandemic.
What all of this means is that the macroeconomic environment, without a significant reversal in monetary policy, has put a tremendous amount of pressure on investors to invest their capital in assets and financial securities that can outpace inflation at such a high level in a situation where interest rates are so low, with the compounded effect of higher taxes and reduced consumer spending also affecting incomes, capital gains and the overall economy.
This makes the need to look for alternative investments in this timeframe even more paramount for investors. As such, Backters offers investors an opportunity in this environment to access high growth combined with minimal cost relative to traditional assets of which their performance is directly related to the jurisdiction within which they are issued.
Backters’ Investment Mandate
The Competition
Having performed an analysis of the capital markets in 2021 and the macroeconomic environment within which they are embedded, it is clear that asset managers and investors need to diversify their portfolios into higher yielding assets in order to accumulate large returns. Equities have performed strongly but the question remains for how much longer will they sustain record levels of valuation, and at what cost is it to the investor to purchase a market portfolio? Bonds meanwhile have generated negligible returns to investors worldwide upon observation of major bond indices. The volatility of cryptocurrency assets, as demonstrated in the analysis of the S&P Cryptocurrency Broad Digital Market Index, asks an investor to consider what their risk appetite is for products that are based on speculative principles rather than investing principles.
A growth Opportunity
The markets have witnessed a bullish cycle since the outbreak of COVID-19 fuelled by government and central banking policy. This has led valuations of companies in particular to reach record highs:
Source: Yale University, Robert Shiller, Backters Analytics
Looking at U.S. Equities in particular, they currently have higher valuations than prior to the Wall Street Crash of 1929 based on their cyclically adjusted price/earnings ratios. These ratios, known as “CAPE”, look at the ratio between a firm’s stock price relative to its ten-year moving average of earnings (adjusted for inflation). The CAPE is approaching the Price to Earnings ratios seen immediately prior to the Dotcom crash in the early 2000’s, implying that valuations are imminently close to valuations observed during the Dotcom bubble and are already beyond other asset bubbles in history.
Of course, the growth in valuations in the equities market is not sustainable. Eventually, a market correction will occur and as these valuations continue to reach record highs investors should ask themselves for how much longer will they continue to rise? Markets cannot grow faster than the economy forever as the compounding nature of this growth could see them become more individually valuable than the aggregate wealth of the economy over a period of time – an illogical proposition.
Consequently, Backters believes many traditional asset classes are either underperforming or have been overperforming for too long; they are at the end of their growth cycle. Meanwhile, the capability of Blockchain technology and the emergence of decentralised finance is just beginning. This provides investors with an opportunity to endorse and invest in a high growth opportunity.
“Intermediation is Dead”
Furthermore, Blockchain is your broker. No longer will your investments be transacted through clearing houses and centralised exchanges with the emergence of the secure, efficient and revolutionary technology upon which Backters is built upon.
Liquidity Friendly
Typically, high growth assets (as traditionally defined) involve highly illiquid investments, usually undertaken in the private markets. This makes sense as the growth phases observed by companies especially occur during the private stage of their life cycle and defines what makes Private Equity and Private Debt so lucrative to investors – access to those high returns. However, these asset classes are also highly illiquid. Without a deep secondary market to sell existing positions to other private equity funds, private equity funds cannot realise positive cash flows from their investments until they exit the investment themselves, typically during the back end of the fund life cycle and illustrated brilliantly by the “J-curve” of private equity cash flows. This presents a critical challenge for investors who do not have access to the net present value of their investments for years to come.
Again, the technology that underpins Backters gives investors a much shorter redemption period with similarly competitive returns than those offered by Private Equity and Private Debt, offering investors a relatively high liquid, high return investment opportunity.
Summing Up
Backters seeks to offer a solution to the problems aforementioned and more. It offers investors an alternative asset allocation strategy that gives them a chance to engage in decentralised finance and the Blockchain revolution. It simultaneously offers investors a product that engages with its partners in deriving returns from real, tangible assets. This provides a bridge between traditional, neoclassical finance and the decentralised emergence of blockchain solutions. There is never a guarantee of sustainable return in the volatile world of cryptocurrency and there is never a guarantee of high return in the traditional markets. Backters guarantees its investors a consistent high return on investment by combining the elements of these asset classes into one hybrid product.
Glossary of Terms
Asset class – A group of assets that exhibit similar functions, features or characteristics
Alternative Investments – An investment into an asset class that does not fall under the umbrella of public equity, fixed income or cash
Budget Deficit/Fiscal Deficit – the difference between a government’s spending and borrowing over the fiscal year
Capital Markets – A financial market in which long-term debt or equity-backed securities are bought and sold
Credit Default – The failure to repay debt under the agreement in which the transaction was made
Contagion – the spread of an economic crisis from one market or region to another and can occur at both a domestic or international level
Correlated – a statistical term describing the degree to which two variables move in coordination with one another
Coupon – A coupon payment on a bond is the annual interest payment that the bondholder receives from the bond’s issue date until it matures
Cost of Capital – The rate of return someone must offer in order to raise capital, i.e., how much interest must someone offer in order to raise the required amount of money
Diversification – the practice of spreading your investments around so that your exposure to any one type of asset is limited
Disposable Income – income remaining after the deduction of taxes
Fixed Income – A name for the long-term bond or debt market. Termed “fixed income” as that is what investors receive for purchasing these products
Fiscal Policy – The use of government spending and tax policies
Furlough Scheme – A furlough is a temporary paid leave of employees due to special needs of a company or employer, which may be due to economic conditions of a specific employer
High Yield – High-yield bonds (also called junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds
Index – measures the price performance of a basket of securities using a standardized metric and methodology
Investment Grade – An investment grade is a rating that signifies that a municipal or corporate bond presents a relatively low risk of default. To be considered an investment grade issue, the company must be rated at ‘BBB’ or higher by Standard and Poor’s or Moody’s. Anything below this ‘BBB’ rating is considered non-investment grade
Inflation – A sustained increase in the price level of an economy
Inflation Rate – the speed or rate of which price levels are increasing over time
Liquidity token – a token that allows for the exchange of a less liquid asset for that of another more liquid one
Large Cap – Refers to a company with a market capitalization value of more than $10 billion
Liabilities – something a person or company owes, usually a sum of money
Macroeconomic – a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole
Maturity – maturity or maturity date is the date on which the final payment is due on a loan or other financial instrument
Market Portfolio – A portfolio consisting of a weighted sum of every asset in the specified market, with weights in the proportions that they exist in the actual market
Mid Cap – The term that is used to designate companies with a market value between $2 and $10 billion
Monetary Policy – Monetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied. It usually involved the adjustment of the money supply or the interest rate
National Debt – the total amount of debt owed at a point in time by a government or sovereign state to lenders
Par Weighted Coupon – the average interest paid on an index of bonds if they were trading at par (initial) value
Publicly listed equity – shares of companies sold on public exchanges
Publicly listed bond – bonds of companies sold on public exchanges
Purchasing Power – the amount of goods and services that can be purchased with a unit of currency
Quantitative Easing – A monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to inject money into the economy to expand economic activity
Rate of Return – the annual income from an investment expressed as a proportion (usually a percentage) of the original investment
Redemption Date – the the date on which liquidity tokens are exchanged for USDT
Redemption Period – the amount of time between redemptions dates
Security – a tradable financial asset
Small Cap – a company with a market capitalization of between $300 million and $2 billion
Sovereign Bonds – a debt obligation (bond) issued by a national government to support government spending
Speculation – the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major value
Yield to Maturity – the total rate of return that will have been earned by a bond when it makes all interest payments and repays the original principal