Our positioning: The air’s getting thinner

Share prices continued to climb last month,   with many markets hitting new all-time highs. However, optimism has faded considerably since the end of October. This is likely due in part to third quarter earnings reports. Although companies in the S&P 500, the US leading index, recorded double-digit earnings growth, this was mainly due to tech stocks, especially those companies that are benefiting greatly from the AI boom. This concentration is a growing concern and it no longer  seems  sufficient to surpass earnings expectations to trigger a new price surge.

AI investments under scrutiny

Specifically, the focus is gradually turning to two issues: how companies make money with artificial intelligence and how the investments required are financed . On the latter   question, investors seem to want to separate the wheat from the chaff. Companies that are relying heavily on the AI trend but can’t finance this from their current business and are raising  debt capital  to do so have come under considerable   pressure recently. US software group Oracle, which has financed a huge share of its AI investments with external debt, lost almost 30 percent last month. Tech  company Meta, which has also borrowed to finance some of its investments, saw its shares fall by around 15 percent. 

We’ve already been underweighted towards the expensive, tech-heavy US stock market for some time  and have focused instead   on global value stocks. This positioning has recently paid off  . We continue to see increased downside potential on the US stock market and are sticking to this diversifying approach.

Emerging market investments remain attractive

We’  re far more positive about emerging market investments. They are one of the best-performing asset classes this year. Emerging market equities rose by over 15 percent measured in Swiss francs,   while emerging market bonds are also among the stronger investments, gaining almost 9 percent. The US dollar is likely to have been a major contributor as these investments have particularly benefited historically  from the currency’s weakness. As the US dollar remains overvalued against many  emerging market currencies and the US government favours a weaker dollar,  additional downside potential has emerged despite its recent stabilization  and is likely to provide emerging market investments with additional tailwinds. With this in mind, we’re now overweighting emerging market bonds, supplementing our existing overweight in emerging market equities excluding China. At the same time, we’re critically monitoring   ever-rising US debt levels and financing the increase  in emerging market bonds by  unwinding our overweight position in US government bonds.

Gold and real estate continue to impress

We’re continuing to overweight gold and Swiss real estate in our portfolio. Gold is likely to remain attractive given the geopolitical uncertainties, stubbornly high inflation in the USA and the US dollar’s downside potential. Measured in Swiss francs, it is by far the most successful asset class this year, gaining around 40 percent. Swiss real estate funds also remain attractive relative to the money market, especially as the recent weak GDP figures and declining inflationary pressure have increased the likelihood of negative interest rates returning again.

Performance of asset classes

Our positioning – Swiss focus