Our positioning: Cautious and diversified positioning unchanged

The financial markets remained optimistic last month. Most stock markets around the world made gains. Emerging market equities performed particularly well. Sentiment indicators also paint a positive picture. The volatility index, known as the “fear index” on the stock markets, remains low, which indicates little anxiety among investors. The bond market is equally calm. Yields to maturity on government bonds in the industrial nations trended sideways last month, while credit spreads on corporate bonds are at record lows. 

Signs of weakness in the US economy confirmed

The US economic outlook has continued to deteriorate. The latest labour market data underscores the weakness of recent months and points to a greater likelihood of a US economic slowdown. This isn’t good news for US companies. Due to US tariff policy, these firms are increasingly facing rising costs – which are unlikely to be passed on in full to consumers, even though their impact is not likely to be felt until later. This situation has gone largely unnoticed on the markets so far. Instead, there appears to be widespread hope that monetary easing could offset economic weakness. We consider this view to be overly optimistic and are hedging against a possible slowdown in the USA by maintaining our overweight position in US government bonds.

Gold price at new highs and weak US dollar

Investors lack confidence in the market’s strong performance, as reflected in two areas. Firstly, gold, seen as a safe haven and hedge against inflation, reached new record highs several times last month in both US dollars and Swiss francs. Investors clearly want to hedge their bets. Historically, this makes sense. The precious metal has proven to be a good stabilizer in portfolios, especially in times of crisis. Given this trend, our overweighted position has already paid off. We even see further upside potential and are, in turn, keeping this positioning unchanged.

Secondly, the US dollar’s weakness also points to a weak US economy. The currency’s value has fallen significantly since the beginning of the year – by 10 percent on a trade-weighted basis and by more than 12 percent against the Swiss franc. For Swiss investors, this means the US stock market highs seen by many have so far yielded little in local currency terms, as any gains have been offset by the US dollar’s depreciation. In our portfolios with a Swiss focus, this effect is much less pronounced as we also hedge the currency to some extent in our equity allocation.

Regional stock market preferences confirmed

We’re also maintaining our neutral but more regionally diversified equity allocation for now. We continue to prefer global value stocks as well as emerging market equities over the highly valued US stock market. Historically, emerging market equities in particular have benefited from a weak US dollar. This is a pattern that we’ve seen since the beginning of the year. As the US dollar depreciated, the price performance of emerging market equities outperformed the US stock market by over 13 percentage points.

Performance of asset classes

Our positioning – Swiss focus