Market Comment

Market Comment

The Market Comment is published monthly and sheds light on current topics from the investor's point of view.

Market Comment

Similar, but different – 2020 compared to 2008

The coronavirus crisis may appear to have peaked, but it is not over. Due to the longer-term consequences, a recovery phase could prove both weaker and shorter than after previous crises. After all, the cause of this crisis is obviously very different to that of other crises – such as in 2008, for example. This makes combating the crisis much more difficult this time, at least until a reliable vaccine is available in sufficient quantities. Defensive diversification remains the order of the day, as both bonds and gold are likely to be beneficiaries of the longer-term consequences of this unusual crisis.

Market Comment

A “black swan”

The health of the global population is probably facing its most serious threat since the Spanish flu, while economies and financial markets are exposed to a so-called “black swan” – a rare and unpredictable phenomenon that can have unexpected consequences. The growing risk is that the coronavirus crisis will last longer, or prove more severe, than the market consensus has so far expected. There is wisdom behind Winston Churchill’s remark: “If you are going through hell, keep going.”. We believe that a cautious positioning in the financial markets remains the appropriate stance.

Market Comment

Three dimensions of the virus impact on the global economy

Unfortunately coronavirus remains the dominant market theme. Because a phenomenon of this magnitude has not yet been seen in the era of globalization, its repercussions cannot be estimated and quantified with any great degree of precision. While possible scenarios can be discussed, they should not be interpreted as forecasts. The repercussions of the virus for the global economy are playing out in three dimensions. While the negative economic impact of the outbreak should be offset by actions taken by governments and central banks, the strength of their response will be key. Either way, gold continues to serve the purpose of diversification, while at the same time benefiting from a further decline in interest rates.

Market Comment

“5 minutes with CIO Gérard Piasko”

Particularly in turbulent times such as these, we believe it is important to provide regular information about the fragile state of the financial markets and our current investment policy. In the first ever publication of our video “5 minutes with CIO Gérard Piasko” (only available in German), our Chief Investment Officer provides information about the economic changes we currently face, and explains the trends of the key asset classes against the backdrop of geopolitical developments.

Market Comment

Virus volatility

The spread of the coronavirus that originated in China is dominating the headlines. Although equity markets have improved, its impact should not be underestimated. While China‘s economy and stock market have bounced back from reverses in 2003, a comparison with SARS 17 years ago is hardly valid, as China is now around four times as important to the global economy as it was back then. Furthermore, the measures taken by China will have greater repercussions this time for the global and above all the Chinese economy. And finally, China‘s share of the business done by numerous major Western companies is also incomparably greater than it was 17 years ago. 

Market Comment

The Swiss Economy and the Challenges of 2020

It is true that the various factors relevant to Switzerland’s economic momentum are not all pointing in the same direction right now. But an improvement in Swiss economic growth in 2020 would not come as a surprise to us, particularly in the event of a further de-escalation of the US–China trade conflict. Special factors such as international sporting events, which count as “services imports” for Switzerland, will have an additional positive impact in 2020. Swiss consumer spending has improved, and the leading indicators of industrial activity point to a stabilization, just as they do in other countries.

Market Comment

A first look into 2020

Any initial outlook for the impending 2020 economic year must remain provisional for the time being, as a great deal will depend on the details of the planned trade agreement between the US and China, which is not yet in the bag. The financial markets are optimistic that trade tariffs will be reversed, but perhaps it will just be a case of no additional tariffs being imposed. Accordingly, we are seeing a few – albeit hardly conclusive – signs of stabilization in global manufacturing activity. That said, this sector remains very much dependent on a convincing trade agreement. Another important question is whether the global services sector and consumer spending, both of which have proved robust up until now, can retain their momentum. We would not be surprised if global economic growth were to continue to lag behind its historic potential and trend sideways for a while. 

Market Comment

US and Europe – significant differences persist

Although European equities have made up some ground on their US counterparts this year, they lag well behind US equity markets in a long-term comparison. There are a number of key reasons why Eurozone stocks in particular have underperformed American equities over the longer term. And even if some of these factors change, we are still not expecting the kind of dramatic turnaround that would threaten the long-term superiority of US stock market performance. Below we highlight the important differences between the US and Europe – from both an economic and an equity market perspective. 
 

Market Comment

The “Japanization” of Europe?

Quantitative monetary easing, falling interest rates, low valuations of banking stocks and “financial repression” – all these developments now evident in Europe are familiar to us from many years ago in Japan. The conclusion is that cash is becoming even less attractive, and that without diversified risks it is unlikely that positive returns will be possible. 

Market Comment

20 years on from 1999 – a comparison of economic cycles

The US economic cycle has reached a ripe old age in the last few weeks. To be precise, it has become the oldest, i.e. the longest, in the history of economics. This has seen it surpass the cycle of the 1990s. Below we highlight some of the parallels and differences compared to the latter cycle. The 1990s cycle is remembered for ending with an increase in the valuations of global equities thanks to interest rate cuts. However, these were ultimately not enough to prevent an economic downturn, hence the subsequent correction.

Market Comment

Geopolitics, (cheaper) money and gold

A number of traditional “safe haven” investments such as gold have racked up price gains in recent weeks. US Treasuries, the Japanese yen and the Swiss franc have likewise been in vogue with investors against a backdrop of increasing uncertainties. In our view, broad diversification across all asset classes makes sense given the various unresolved geopolitical rivalries and tensions. A dialogue is a fine thing, but it is not the same as a deal – the geopolitical rivalry between the US and China remains very much in place after the G20 summit in Osaka, as do the simmering tensions between Iran and the US.

Market Comment

Geopolitics, (cheaper) money and gold

A number of traditional “safe haven” investments such as gold have racked up price gains in recent weeks. US Treasuries, the Japanese yen and the Swiss franc have likewise been in vogue with investors against a backdrop of increasing uncertainties. In our view, broad diversification across all asset classes makes sense given the various unresolved geopolitical rivalries and tensions. A dialogue is a fine thing, but it is not the same as a deal – the geopolitical rivalry between the US and China remains very much in place after the G20 summit in Osaka, as do the simmering tensions between Iran and the US.

Market Comment

Equities or bonds – which asset class is right this time?

Despite a rise in volatility, equity markets remain much higher than at the beginning of 2019. On the other hand, bond yields have declined since the start of the year all around the world. As a general rule, these two economic indicators develop in parallel against a backdrop of an expanding economy. The fact that they are not doing so raises the question of which asset class is right – equities or bonds? 

Market Comment

Equity markets hit by intensification of trade dispute

As we recently explained, the combination of low volatility (anticipating a “perfect world”) and expensive stock market valuations at the end of April was not a realistic reflection of the economic fundamentals.  These pointed to – and continue to point to – a global economy of doubtful strength, with weaknesses particularly apparent in the emerging markets and Europe. Moreover, the markets had already factored in a rosy, tension-releasing trade deal between the US and China. Yet anyone who has read Trump’s book “The Art of the Deal” can hardly have been surprised by his announcement of another ramping-up of tariffs against China, from 10% to 25%. A correction in equity markets, which in some cases were at record highs (such as the US) or had recorded significant rises since the fourth quarter of 2018 (such as the emerging markets, particularly China, but also cyclical sectors) comes as no surprise to us. We had prepared for such a scenario by scaling down our equity weighting in April, specifically our exposure to the emerging markets.

Market Comment

MinVol Equities for less quiet markets

The sharp decline in volatility since the start of the year once again suggests a certain insouciance on the part of the financial markets, as expected volatility also lies far below historical averages. The above-average rise in equity markets in 2019 to date is another sign of pronounced market optimism – despite the fact that US yield curves are increasingly becoming inverted. While this does not mean that all equity markets are bound to decline imminently, a higher weighting of less volatile stocks (so-called MinVol equities) at the expense of those with higher volatility only makes sense now. A sharp rise in equity market volatility over the next few months would not surprise us, as the economic slowdown does not yet show any signs of being halted. The US yield curve inversion only strengthens us in that view.

Market Comment

Potential repercussions of a Sino-US trade agreement

The financial markets are increasingly anticipating at least a partial solution to the trade conflict between the US and China. But the devil lies in the detail. In the event of a positive resolution to the dispute, those commodities and equities that are more heavily dependent on China or on Asian supply chains could benefit, while the US dollar could weaken somewhat. The potential for disappointment in the event of the trade conflict continuing should not be underestimated, however.

Market Comment

Economic slowdown speaks for defensive stocks with growth potential

The US central bank (Fed) has made a change in its monetary policy: it has decided to take greater account of the development of the global economy and financial markets. The same is also true of the European Central Bank (ECB), which is hardly likely to be able to push through an interest rate increase this year. When central banks start to align policy with the likelihood of economic slowdown, investors should prepare themselves for precisely such a scenario. In phases of global economic weakness, defensive equities with growth potential that enjoy relatively more stable dividend and income development – as well as exhibiting lower volatility than other equities – become increasingly interesting.

Market Comment

Less liquidity = more volatility

In the first half of December we warned of an imminent rise in market volatility. Volatility can increase for different reasons. On the one hand there are structural reasons: less liquidity in the markets, less monetary liquidity, geopolitical risks. On the other there are also cyclical factors like the economic slowdown. Investors who like less volatility should not dismiss equities altogether as valuations have now fallen. Instead they can adopt a more defensive approach through the greater use of equities that are less market-sensitive or by giving a greater weighting to so-called safe havens like US government bonds and gold. 

Market Comment

Limits of globalization

Given the sharp rise in volatility in the financial markets in 2018, an obvious question arises: What is the underlying reason for the increase in uncertainty that is driving this phenomenon? Could globalization finally be coming up against its limits?

Market Comment

Financial markets remain political

Given all the political uncertainties in the world right now, it is easy to become pessimistic – perhaps too easy. In fact, the fundamentals suggest the market decline in October should be categorized as a classic autumn correction, not a recession-induced bear market. But geopolitical developments, above all the US-China conflict over trade but also other unresolved issues, can be expected to keep global financial market volatility (on both sides) higher than normal.

Market Comment

Trump's trade war and the global economy

One politician is dominating the financial markets this year like no other: US President Trump – and his trade war with major exporting nations. In order to deliver on his electoral promise to "make America great again" and improve the chances of the Republican Party emerging victorious from the midterm congressional elections on November 6, Donald Trump has gone the extra mile – but he is also risking a great deal. Above all, his decision to increase the volume of goods with punitive tariffs imposed on China by a factor of five is responsible for the difference between the performance of US equities (upwards) and that of the emerging markets (downwards), as well as the disappointing performance of European equities. With these initiatives, Trump has extended the economic growth difference advantage enjoyed by the US. However, with escalating the trade conflict he is courting the risk of the global economy taking a hit in 2019. This could be to the detriment of US interests, too.

Market Comment

Ten years after Lehman

Ten years after the collapse of Lehman Brothers, the US has global leadership on a scale not seen since President Reagan. Even if Trump is obviously not Reagan, he has provided significant assistance to US markets and the US economy – though not to other regions. Trump's surprising announcement that he is considering increasing the volume of punitive Chinese tariffs by a factor of five has pushed down emerging-market and European shares, but has lent further support to US equities – a segment in which we have long held an overweight stance. In fundamental terms, the US economy has improved dramatically since September 2008. Unemployment in the US is the lowest in 50 years, whereas in Europe, for example Italy, the unemployment is still higher than it was in the US ten years ago.

Market Comment

Focus on US equities

We would like to elaborate on our focus on US equities and explain why we remain overweight in this segment compared to global equities. Even if it loses some momentum over the next few months, the US economy continues to exhibit above-average growth. US corporate earnings have once again exceeded the market's high expectations for the second quarter, with more than 80% of companies surprising on the upside. Valuation methods do not suggest US equities are overly expensive, particularly not in relation to US bonds. The American stock market can therefore cope with higher interest rates – as long as these are accompanied by solid economic growth, as this would have the effect of boosting corporate earnings. Our US equities module offers promising performance and a diversified way of gaining exposure to the world’s leading equity market, which also boasts the strongest earnings growth of any region.

Market Comment

Commodities and inflation in upward trend

In late phases of the global economic cycle, production capacity is generally heavily utilized, which is why more resources are required – such as labour, but also commodities. Historically, this has often led to higher rates of inflation due to higher commodity prices. Higher import prices against a backdrop of the escalating trade conflict and US sanctions against Iran could have the effect of exacerbating increases in commodity price inflation. Investors can counter rising inflation and commodity prices with a commodities focus module.

Market Comment

No Italian Summer?

Italy finally has a new government. But the new coalition's policy plans put it on a path to confrontation with the EU, as Italy feels it has been left in the lurch. The realization of these electoral promises could trigger a massive increase in Italy's budget deficit, as well as turbulence in the eurozone. European equities now come with higher risks attached.

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