The financial markets performed well in the first half-year. Sharp upturns in equity prices, skyrocketing Swiss real estate funds and only slight rises in interest rates despite strong growth figures. Time to take stock: what’s the current situation and where are we heading?

There were clear rays of hope over coronavirus in the first half-year. Even though attempts to tackle the pandemic meant a bumpy start to the year for the global economy, rapid progress on vaccinations and the lifting of restrictions during the spring ensured that a lot of lost ground was made up in the USA and Europe. Both fiscal and monetary policy remained very supportive. State transfer payments not only made up for loss of income, but actually exceeded it. The central banks for the major currency areas continued purchasing securities on a large scale.

Levelling-out of the upturn

The second half of the year will not be shaped by the same optimistic mood. There seems to be increasingly less positive news about coronavirus, as case numbers are rising despite progress on vaccination campaigns. As autumn and cooler temperatures approach in the northern hemisphere, it will become apparent that we will have to deal with coronavirus in one way or another for a long time to come.

In relation to the economic outlook, the leading indicators have been showing for some time that the upturn will not continue at the same pace we have seen lately. Fiscal policy support will be phased out as the economy returns to normal, and money will have to be earned again. Monetary policy will also enter the phase where plans are drawn up to scale back or even halt the purchasing of securities.

Focus on interest and inflation

The euphoria will give way to a new normal. The situation remains uncertain but not unattractive for investors. So far, this has also been due to interest rates. While they rose in the spring, they only increased slightly and then fell again, particularly in the last month. The longer-term US government bonds stood at only a little above January’s level recently. Low interest rates mean high valuations of assets from which bonds, equities and real estate can benefit.

It’s worth bearing two questions in mind: where will long-term interest rates settle in the new normal? In the past, long-term interest has stabilized after every crisis at a lower level than before the crisis. Will this also turn out to be the case after the coronavirus crisis? And if so, how much lower will they be? This question is also related to the second key point: will the very high rates of inflation that are currently being experienced in the USA actually fall again towards the end of the year? There are many indications that this phenomenon is only a temporary effect. However, investors must keep an eye on the residual risk that high inflation develops momentum all of its own.