Our positioning: Neutral positioning now for gold, too

Equity markets have performed strongly over the course of the year so far. Last month, a strong reporting season in particular provided a tailwind. However, prices came under pressure recently. Rising capital market interest rates and the prospect of tighter monetary policy were likely to have been the main factors. Yields to maturity on 10-year government bonds rose sharply worldwide. In the USA, they are now just under 5 percent, a level not reached since before the financial crisis began. In Europe, they have reached levels last seen before the euro crisis.

Greater focus on debt

One reason for the rise in interest rates may have been renewed inflation fears. The recent escalation in the Middle East pushed up the oil price to over 100 US dollars. At the same time, real interest rates also rose, particularly in the USA. This likely reflects growing concerns about high levels of public debt. The financing requirements in the USA are high: the state has to finance high deficits, while companies also require substantial capital, not least for investment in artificial intelligence. If this high capital demand is met by a lower saving rate and lower capital inflows from abroad, interest rates have to rise until capital demand and supply are rebalanced. For bonds, rising interest rates lead directly to price losses. Financing is becoming more expensive for companies, while future profits are less valuable from today’s perspective. The rise in interest rates has also created headwinds on the equity markets of late.

Equity allocation remains neutral

Nevertheless, we are maintaining our neutral equity allocation. The global economy remains stable despite the difficult environment. In the USA, growth has weakened considerably, but high investment in artificial intelligence continues to support the economy. At the same time, the recovery is continuing in Europe. The stable economic environment is one argument against a more defensive positioning in equities. However, higher interest rates, ambitious valuations and the unresolved debt issue are limiting price potential. The decisive factor will be whether inflationary pressure becomes more broad-based, forcing central banks to maintain their restrictive stance for longer or raise interest rates further. In our view, the opportunities and risks are currently balanced.

Taking profits on gold

However, we believe the risk/reward ratio for gold has changed. Geopolitical and fiscal uncertainties continue to support the precious metal, but higher capital market interest rates are increasing the opportunity costs of investments without ongoing returns. The price trend has also slowed since the highs of the spring. Following the strong performance, we’re therefore taking profits and unwinding our overweight in gold. The long-term benefits of gold as a portfolio diversifier remain intact.

Swiss real estate remains attractive

By contrast, we’re holding firm on our overweight in exchange-listed Swiss real estate funds. Higher long-term interest rates have weighed on prices, but the underlying conditions are providing support. The supply of living space is scarce and demand remains high. The robust Swiss labour market should continue to support population growth and, in turn, demand for living space.

Profit distributions also continue to offer a yield advantage over Swiss government bonds. Despite higher interest rates, Swiss real estate funds remain attractive to us.

Performance of asset classes

Our positioning – Swiss focus