2022 has proven a challenging year for investors so far. A look at the performance of the major asset classes reveals where the problem lies: prices have tumbled across the board – whether bonds, equities or real estate. Even the price of supposedly secure gold is lower than a few months ago. As a result, almost all investors are experiencing similarly poor performance: even those who opted for a restrained investment strategy with a low equity component lost almost as much as investors with greater risk appetite.

This development is due to the unexpectedly strong rise in inflation. The triggers for all this are well documented: the Ukraine conflict, higher commodity prices and supply bottlenecks. Inflation has dragged capital market interest rates up in its wake. Whereas ten-year Swiss government bonds were still generating negative yield on maturity a year ago, the return now stands at almost 1 percent. However, rising interest rates inevitably lead to lower bond prices and are toxic for the valuation of equities and real estate.

Fortunately, the inflation trend seems to be close to peaking for the time being in the USA. This is partly due to the US economy losing some growth momentum. But it’s also down to a simple basic effect: compared to the previous quarter, oil and gas prices have remained high, but have not risen sharply. Aside from this inflationary trend, which appears to have been broken, the US Federal Reserve is now tackling inflation – better late than never.

In Switzerland, as elsewhere in Europe, economic development and monetary policy are lagging behind the US. This suggests that the key rates will shortly be raised and sounds a note of caution about Swiss franc bonds. However, it is not beyond the realms of possibility that a reversal in US inflation could also have a restraining effect on interest rate hikes here in Switzerland.

Some commentators are already anticipating that capital market interest rates will fall again, based on greater recession risks over recent months. This is premature, in our view. Even though most economists are still not forecasting a recession, this validates our general sense of caution. Showing restraint towards equities and bonds – as in previous months – remains advisable for the time being.

But we have no doubt that most asset classes will bounce back in the long term, despite a difficult start to the year. Investment profiles differentiated by risk appetite will soon also start generating varying yields again. Equities still enjoy the benefit that companies pay dividends when they turn a profit. Real estate generates rental income. As soon as the stress of the current interest rate rises eases, risk premiums on these asset classes can also be expected once again.