One of the most momentous political events is approaching: the United States of America is about to elect its next President and a new House of Representatives, along with part of the Senate. The Democratic candidate, former Vice President Joe Biden, is heading into this electoral battle with an agenda that tends towards the social democratic/green end of the spectrum, whereas Donald Trump is campaigning on the basis of conservative positions such as less regulation and tax cuts. True, electoral promises often fall by the wayside after the election itself, but the different plans of the two candidates are still relevant. From the investor’s perspective, in the event of no clarity emerging over the actual winner, US equities could remain volatile for weeks, while economic activity could be influenced by uncertainty.

Over the course of time, the market focuses on various themes, depending on what is making the headlines at any particular time. One market theme that has recently receded into the background somewhat is inflation. Part of our investment strategy approach involves analysing themes that are not the current focus of attention, as these may be underestimated. One issue that could become more prominent over the next few months is the debate over inflation, particularly in the event of economic data improving. In such a scenario, the emphasis could shift from sovereign bonds more to their corporate counterparts.

In the meantime, all the major financial markets have risen. How should you position yourself with bonds, currencies and equities now? Our Chief Investment Officer explains the reasons in the new video “3 minutes with CIO Gérard Piasko”. (only available in German)

The flood of monetary liquidity, which has assumed gargantuan dimensions over the last few months, is designed to support both the global economy and financial markets. However, the level of fiscal support for the economy, the increase in government indebtedness and the bond purchase programmes of central banks amount to a monetization of government debt and what is known as “financial repression”. 

Following a prolonged period in which the Federal Reserve (Fed) provided the greatest degree of economic stimulus of any of the world’s key central banks and the European Central Bank (ECB) adopted a less expansionary stance, the latter has now ratcheted things up dramatically since June. The announced increase in the injection of liquidity from EUR 750 bn to EUR 1,350 bn will provide the Eurozone with emphatic economic and market support. 

The global economy may be having a tough year, but equity markets have calmed and are trending upwards. The dramatic further opening of the monetary floodgates by central banks and governments is creating a wave of liquidity that can flow into the real economy and/or the financial markets. Both of these things are likely to happen. Swiss equities and the Swiss franc have always been a byword for stability and historically attractive growth.

The financial markets have clawed back: monetary and fiscal support packages have been rolled out. Where equities are concerned, Swiss shares are currently interesting. Our Chief Investment Officer explains the reasons in the new video “3 minutes with CIO Gérard Piasko”. (only available in German)

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.

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.

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.

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.

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. 

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.

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. 

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. 
 

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. 

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.

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.

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.

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? 

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.

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.

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.

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.

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.