Global interest rate cuts

Global economic development is mixed and less dynamic. While the service sector is recording growth, the manufacturing sector is experiencing a slowdown. On a positive note, there is a trend towards improved corporate earnings, in the US thanks to margin increases. Interest rate cuts are lending support to equities, but geopolitical risks remain quite high by historical standards. Overall, a balanced investment policy appears appropriate. Such a policy includes solid equity investments, for example in Switzerland, as well as high-quality investment-grade bonds and gold. The Swiss franc should contribute to portfolio diversification in the event of political turbulence.

Economic growth is currently mixed across the world’s various countries and regions. In the Eurozone, the economic data coming out of the bloc’s two most important countries, namely Germany and France, is currently weaker than that being posted by the southern European countries, a scenario that has been rather rare in the past. The US economy has begun to normalise following the historically above-average growth recorded during the first half of the year. Although this currently means we are observing less economic momentum, this is not the same as a recession. It is now up to the US Federal Reserve (Fed) to tackle this tendency towards weakening growth, especially in the labour market, by cutting interest rates and amending its monetary policy. A first step has been taken in this regard with the Fed’s 0.5% interest rate cut. Our Investment Committee is responding to the slowdown in global economic momentum with a 1% increase in Swiss equities at the expense of value stocks (more defensive / less cyclical sector weighting within the SLI relative to the global value stock index) and a 2% increase in global investment-grade bonds at the expense of high-yield bonds and cash (each reduced by 1%) in anticipation of further interest rate cuts. In the emerging markets and Japan, economic data does not appear to be moving in a clear direction, with significant differences depending on the country in question. Possible further stimulus measures from the Chinese government will also be of significance for emerging markets over the weeks and months ahead.
 

Equities

The interest rate cuts in the US and Europe are having a positive impact on equities. However, geopolitical risks remain at a historically elevated level. The results posted by US firms are trending better this year than those of their European counterparts and during the past reporting quarter even succeeded in surpassing the expectations of the analyst consensus. A particularly surprising aspect was the growth in earnings relative to sales growth. US earnings growth was at its highest level since 2022. This was chiefly down to a further increase in profit margins. Some defensive sectors, including the healthcare sector, as well as technology firms, posted more positive figures than the market average, while some companies operating in the commodities and real estate industries reported more negative results than had been expected. At 3%, earnings growth in Europe came in beneath that of the US, in part due to the less dynamic nature of the Eurozone economy. The healthcare and financial sectors did, however, stand out with their positive figures. The Investment Committee is maintaining a neutral equity weighting as part of its long-term strategic allocation and continues to especially favour Swiss equities and global high-quality stocks, i.e. companies that exhibit good profitability and relatively low levels of debt.

Slowing economic momentum may lend support to investment-grade bonds over their high-yield counterparts.

Gérard Piasko, Chief Investment Officer

Bonds

Bonds are adjusting to weaker economic data and are likely to be supported by further interest rate cuts following the Fed’s move to reduce key interest rates by 0.5%. While investment-grade corporate bonds exhibit lower additional yields than the historical average, they have a fairly robust fundamental situation and also require less financing than high-yield corporate bonds with higher levels of debt. The Investment Committee has increased investment-grade bonds over high-yield bonds with lower credit quality as well as at the expense of cash. The Swiss National Bank and the European Central Bank (ECB) have cut its key interest rates once more by 0.25%, a move that had also been anticipated by the market consensus. However, the ECB remains cautious in its assessment of the economy and inflation and is dependent on new economic data. The low level of inflation in Switzerland, which again fell by more than expected, is currently lending good support to Swiss investments. The country’s inflation is the lowest of all industrialised nations and has come in even lower than had been anticipated. As is the case with equities, however, the advances made by corporate bonds across all regions mean that a more selective approach and a focus on quality are the order of the day.

Currencies

The importance of the US dollar is often seen as exaggerated. At the same time, however, there is no real competition on the horizon. The vast majority of global trade and the lion’s share of financial transactions are conducted in US dollars, while commodities are also denominated against the greenback, meaning they are traded in US dollars. Although the growth advantage that the US enjoys over Europe and Japan speaks in favour of the greenback, this is countered by the falling interest rate differential, which is nevertheless still considerable. While the Swiss franc has become more volatile, in terms of inflation-adjusted purchasing power parity it now appears clearly less highly valued than was the case at the start of 2024, in part due to the especially low level of inflation in Switzerland by international standards.

Commodities

As is often the case in autumn, the commodity markets find themselves in a phase of marked volatility. This applies, in particular, to cyclical commodities such as copper and oil. Some market participants are expecting changes in the supply situation for crude oil. An increase in US oil production has been observed in recent quarters. However, there has also been a reduction in the supply from OPEC, the Organization of the Petroleum Producing Countries, led by Saudi Arabia. Should it reduce or end its production cuts, the oil supply may rise in 2025, provided the US decides against taking any countermeasures. While price advances have been pronounced in recent quarters, ongoing geopolitical tensions speak in favour of gold.

Contact a client advisor for more information.

^{This publication is intended for information and marketing purposes only, and is not geared to the conclusion of a contract. It only contains the market and investment commentaries of Maerki Baumann & Co. AG and an assessment of selected financial instruments. Consequently, this publication does not constitute investment advice or a specific individual investment recommendation, and is not an offer for the purchase or sale of investment instruments. Maerki Baumann & Co. AG does not provide legal or tax advice. In addition, Maerki Baumann & Co. AG accepts no liability whatsoever for the content of this document; in particular, it does not accept any liability for losses of any kind, whether direct, indirect or incidental, which may be incurred as a result of using the information contained in this document and/or arising from the risks inherent in the financial markets. Maerki Baumann & Co. AG holds a Swiss banking license issued by the Financial Market Supervisory Authority (FINMA).}

^{*Please note that due to German regulatory requirements we are unable to provide the crypto service (Crypto focus module) named in this brochure to our clients domiciled in Germany.}

Editorial deadline: 30 September 2024

Maerki Baumann & Co. AG
Dreikönigstrasse 6, CH-8002 Zurich
T +41 44 286 25 25, info@maerki-baumann.ch
www.maerki-baumann.ch