Our positioning: A return to strategic alignment

Capital market interest rates remain high, and actually rose again in the USA last month. Yields to maturity on 10-year government bonds are over 5.2 percent. A significant part of the rise in interest rates is due to higher real returns, likely because of high capital requirements in the USA. Inflation continues to provide a degree of uncertainty. The longer energy prices remain elevated, the more likely that higher production and transport costs will feed through to core inflation. This means there’s a greater risk that central banks will need to remain restrictive for longer or raise interest rates again, particularly in Europe and Japan. 

Secondary stocks and gold under pressure

This challenging interest rate environment affected the equity markets again last month. Higher interest rates make financing more expensive and reduce the present value of future profits, which puts pressure on secondary stocks in particular. They are often more dependent on external financing and are, in turn, more sensitive to rising financing costs. The Russell 2000 US value index lost 3 percent last month. It’s actually more than 8 percent down from its peak in mid-August, while capital market interest rates have risen significantly since then. The tech-heavy S&P 500 index, by contrast, is at its August levels, as tech stocks have largely been able to withstand the headwinds so far.

The rise in real interest rates may have created headwinds for gold, too, as it makes interest-bearing investments relatively more attractive. The precious metal lost over 5 percent last month, supporting our decision to take profits in September and unwind our overweight position.

Robust economy supports equity allocation

Interest rate pressure is being offset by the still robust global economy. High levels of AI investment are supporting growth in the USA, while the recovery is continuing in Europe. Impressive corporate results so far over the course of the year, particularly in the tech sector, may also explain why tech-heavy markets have largely been able to withstand interest rate pressure so far. At the same time, they give us confidence in the upcoming reporting season, for which earnings expectations remain high. In terms of expected profits, valuations appear less ambitious and still don’t give us any reason to reduce our equity allocation. However, continued interest rate pressure and the high dependence of US growth on AI investments are arguments against an increase, which is why we are maintaining our neutral equity allocation.

Swiss real estate funds moved to neutral

In contrast, the risk/reward ratio for Swiss real estate funds has deteriorated. The yield to maturity on 10-year Swiss government bonds remains at 0.5 percent, which is over 20 basis points above the year-opening level. While we gave greater weight to the supporting fundamental factors in September, the focus is now on increased capital market interest rates and the prospect of further rate hikes by the Swiss National Bank. Both factors are reducing the relative attractiveness of real estate funds. Although the scarce supply of living space and persistently high demand continue to provide support, we believe they are no longer sufficient to justify an overweight. With this in mind, we’re taking profits and reducing our position to neutral. This means we now have a neutral positioning in all asset classes.

Performance of asset classes

Our positioning: Swiss focus