Due to the rapid hike in interest rates, the value of portfolios containing government bonds in industrial countries has fallen by 5 to 10 percent since year-opening. Concerns over the economy have curbed interest rate rises of late.
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Market overview: Growing uncertainty
The financial markets are increasingly factoring in inflationary concerns. Investors worldwide are showing signs of feeling unsettled. As a result, the financial markets suffered losses last month.
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Indexed performance of government bonds in Swiss francs
100 = 01.01.2022
Source: SIX, Bloomberg Barclays The bond markets are amongst the major losers this year, due to the tighter policy adopted by the US Federal Reserve. By raising interest rates by 0.5 percent for a second time, it is increasingly focusing on reining in inflation. Two further similar interest rate hikes are expected in June and July. The Federal Reserve also looks set to start reducing the size of its balance sheet from June. In light of the slowdown in economic growth, however, the rise in interest rates has levelled off somewhat recently. Due to the weakness of the Swiss franc against the US dollar, the losses on US government bonds had less impact on Swiss portfolios that had not hedged against foreign currency risks.
Trend in 10-year yields to maturity
In percent
Source: SIX, Bloomberg Barclays The yields to maturity on government bonds rose once again last month. 10-year US government bonds broke through the 3-percent barrier. The last time they reached this level was in 2018. A similar trend also emerged in Europe. Swiss federal government bonds with a 10- year term recently reached a yield to maturity of 1 percent, while their German counterparts climbed as high as 1.2 percent. This means that the cost of borrowing has increased significantly.
Credit spreads on corporate bonds
In percent
Source: Bloomberg Barclays Increased risk aversion among investors due to the threat from inflation and greater economic pitfalls is also being clearly reflected on the corporate bond market. As they present a greater default risk than government-issued bonds, a risk premium is factored in. In times of greater uncertainty, this credit spread is usually wider, whereas the credit spreads being demanded narrow during calmer times, due to the risk appetite among investors. Credit spreads have widened significantly again recently. The spread on corporate bonds issued in euros and US dollars currently stands at over 1.5 percentage points once again. Swiss corporate bonds are deemed even more secure, with the spreads at just under 1 percentage point.
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Rising interest rates and continuing inflation produced headwind on the equity markets. Significant price losses were recorded last month.
Indexed stock market performance in Swiss francs
100 = 01.01.2022
Source: SIX, MSCI For a short time, it looked as though the equity markets had left the losses from the start of the Ukraine conflict behind them. But the measures introduced by central banks to combat inflation triggered another major downturn last month. Losses since year-opening stand at around 10 percent. Technology stocks have been particularly badly hit. They had made significant gains even during the coronavirus crisis.
Momentum of individual markets
In percent
Source: MSCI The strong downward trend – driven by concerns over inflation and the economy – left no country untouched last month. The Dutch equity market was particularly severely hit by negative momentum, after its technology heavyweights suffered major losses last month. The situation on the Chinese equity market also deteriorated. This was due to concerns over the impact of tight coronavirus restrictions – around 200 million people in the cities of Beijing and Shanghai are currently in lockdown.
Price/earnings ratio
Source: SIX, MSCI In light of the current high inflation trend and uncertain economic outlook, the potential for further corporate profit growth has been exhausted for the time being. Strong growth had been achieved over the past two years, resulting in a considerable decline in the price/earnings ratio (P/E ratio), despite high equity prices. The average P/E ratio for a Swiss company currently stands at 15, which means that the equity price is 15 times higher than profit.
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Real estate investments were hit by rising interest rates last month, and their price dropped sharply.
Indexed performance of Swiss real estate funds
100 = 01.01.2022
Source: SIX Listed Swiss real estate funds were particularly severely hit by last month’s sell-off. One reason may be that interest rate hikes have made employee benefits institutions and other institutional investors regard government bonds once again as a more attractive asset class compared to real estate funds. Government bonds are now also yielding a positive return again in Switzerland, leading to a decline in willingness to pay for Swiss real estate funds. Their value tumbled by around 5 percent last month and has declined by 8 percent since the start of the year.
Premium on Swiss real estate funds and 10-year yields to maturity
In percent
Source: SIX In times of low interest in particular, investors are willing to pay a premium on the value of the properties contained in the fund. These premiums hit a record high of 50 percent last summer. Following market developments last month, however, premiums have plummeted and currently stand at just over 30 percent. This means that the valuation of Swiss real estate funds remains expensive despite the recent correction, as the current interest rate level would justify a premium of only around 25 percent.
Vacancy rate and real estate prices
100 = January 2000 (left) and in percent (right)
Source: SNB, SFSO Higher interest rates are also making it more expensive to finance property purchases. On a Swiss fixed-rate mortgage with a five-year term, the interest rate has almost doubled from just over 1 percent last year to 2 percent now. Only short-term Saron mortgages, where the interest rate fluctuates on a daily basis, have so far remained at a low level. Fixed-rate mortgages are a more popular option in Switzerland – they predominate over Saron mortgages, with a share of over 80 percent.
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Currencies
The US dollar is making up ground. The Swiss franc and Japanese yen were surprisingly weak, however.
Currency pair Price PPP Neutral range Valuation Currency pair EUR/CHFPrice 1.04PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance. 0.88Neutral range Range of historically normal fluctuations. 0.81 – 0.94Valuation Euro overvaluedCurrency pair USD/CHFPrice 1.00PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance. 0.77Neutral range Range of historically normal fluctuations. 0.68 – 0.87Valuation USD overvaluedCurrency pair GBP/CHFPrice 1.22PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance. 1.31Neutral range Range of historically normal fluctuations. 1.13 – 1.49Valuation Pound sterling neutralCurrency pair JPY/CHFPrice 0.78PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance. 0.98Neutral range Range of historically normal fluctuations. 0.83 – 1.14Valuation Yen undervaluedCurrency pair SEK/CHFPrice 9.88PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance. 10.05Neutral range Range of historically normal fluctuations. 9.09 – 11.02Valuation Krona neutralCurrency pair NOK/CHFPrice 10.15PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance. 11.01Neutral range Range of historically normal fluctuations. 9.84 – 12.19Valuation Krone neutralCurrency pair EUR/USDPrice 1.04PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance. 1.13Neutral range Range of historically normal fluctuations. 0.99 – 1.28Valuation Euro neutralCurrency pair USD/JPYPrice 128.42PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance. 78.99Neutral range Range of historically normal fluctuations. 64.15 – 93.82Valuation Yen undervaluedCurrency pair USD/CNYPrice 6.79PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance. 5.78Neutral range Range of historically normal fluctuations. 5.54 – 6.02Valuation Renminbi undervaluedSource: Web Financial Group
The US dollar is currently heading in only one direction – and that’s up. Compared to a basket of currencies, the price of the US dollar reached its highest level for 20 years. Considering the great economic uncertainty over the outlook for the future, it’s hardly surprising that investors are seeking refuge in the global reserve currency. The two other “safe havens” – the Swiss franc and Japanese yen – fared poorly in recent times, however. The previously strong currencies of the commodity-exporting countries of Canada, Australia and Norway also had the wind knocked out of their sails last month.
Gold
The gold price resisted the downward trend on the financial markets last month and acted as an inflation hedge – to some extent, at least.
Indexed performance of gold in Swiss francs
100 = 01.01.2022
Source: Web Financial Group Last month’s sell-off affected almost all asset classes. Last month’s sell-off affected almost all asset classes, including gold in recent times. After briefly peaking at 2,050 US dollars per troy ounce in March, the price stubbornly remained in a range around 1,950 US dollars for some time. But the strong dollar and rising interest rates have exerted pressure recently, with the price currently standing at around 1,800 US dollars.