An increase in inflation forecasts has seen interest rates rise in the USA. The credit spreads on corporate bonds remain remarkably low at the start of the year.
Market overview: Equity market rally enters the next phase
A euphoric mood amongst investors is continuing to drive global equity markets to new record highs. Investments that offer strong returns are proving popular, regardless of the risks involved. Emerging market equities and corporate bonds are benefiting as a result. The value of government bonds is falling due to an increase in inflation forecasts.
Indexed performance of government bonds in Swiss francs
100 = 01.01.2021
Joe Biden’s plans for a third stimulus package worth 1.9 billion US dollars are giving investors hope of further upward impetus for US economic growth. As a result, the implicit inflation forecasts on the bond market recently climbed well above the five-year average of 1.8 percent, and a slight rise in interest rates could not be prevented, despite further strong interventions from the US Federal Reserve. From a Swiss investor’s perspective, this led to a yield loss of just under 2 percent on 10-year US bonds. Losses were also recorded on Swiss and German bonds, falling 2 and 1.5 percent respectively since the start of the year.
Trend in 10-year yields to maturity
Higher inflation forecasts resulted in greater yields on government bonds, particularly in the USA and UK. While yields to maturity on 10-year US bonds remain at just above 1.1 percent, long-term bonds with a 30-year term generated a yield of 2 percent once again. There was also a sharp upturn in yield on UK bonds, which have risen by almost 40 basis points since the start of the year, to just under 0.5 percent. Italy is bucking this trend. After a government crisis in January, it seems to have found a solution – at least for the time being – with a unity government led by the former ECB President Mario Draghi. The yield to maturity on Italian 10-year bonds quickly fell to below 0.5 percent.
Credit spreads on corporate bonds
The positive mood on the market is clearly reflected by the credit spreads on corporate bonds. These spreads narrowed further in February, as investors seeking returns are differentiating less and less based on the risk profile of investments. A spread of less than 1 percent is currently being demanded on the market for US and German corporate bonds. The risk is deemed even lower for Swiss companies. The decisive factor behind this is the pledge to continue pursuing expansive monetary and fiscal policies.
Euphoric global equity markets continued to break records in February. This is enticing many new investors to the market, but is also causing extraordinary price fluctuations on some securities.
Indexed stock market performance in Swiss francs
100 = 01.01.2021
There’s no end in sight for the rally on the equity markets – its pace actually quickened in February. Above all, emerging market equities have skyrocketed since the start of the year, climbing by an impressive 11 percent measured in Swiss francs. The key factor behind this was the strong performance of the Chinese equity market, which hit a new five-year high. But the US equity market also remains buoyant. This is not only highlighted by the new record highs, but also by the remarkable rise in the number of new shareholders entering the market. At times, this has also resulted in extraordinary price fluctuations for some securities, such as GameStop shares, which increased tenfold in value within a few days, before plummeting again in equally dramatic fashion.
Momentum of individual markets
The euphoric mood is also indicated by the strength of momentum in individual countries. Four countries – South Korea, Taiwan, China and Canada – currently have a value of over 25. Canada’s equity market, which remained below its pre-crisis level for longer than other markets, also enjoyed a rally recently, taking it to a new all-time high. UK and Swiss equities are – once again – lagging behind. The former suffered from the appreciation of pound sterling last month, owing to its focus on exported goods. In the current buoyant mood, there is less demand on the rather conservative Swiss equity market.
The strong price gains over the first two months of the New Year are continuing to drive up valuations on global equity markets. The global average reached a valuation level last achieved during the 2009 financial crisis. But if the record-low interest rates are factored in, the current valuation levels appear less extreme. Greater risk appetite amongst investors saw emerging market equities post strong price gains. Measured in Swiss francs, they are around 10 percent up on the year-opening level, causing the price/earnings ratio to rise sharply. The valuation of Swiss equities, meanwhile, is attractive in comparative terms, as they failed to keep pace with other markets.
After a slight correction in January, the performance of Swiss real estate investments has stabilized again. However, the asset class remains overvalued.
Indexed performance of Swiss real estate funds
100 = 01.01.2021
After a very strong 2020 with an impressive year-end rally, there was a turn in momentum in January and an initial correction in indexed Swiss real estate investments. Prices briefly fell by 2 percent, but have since stabilized again and are currently standing at slightly below their year-opening level. The ongoing lockdown in Switzerland and related uncertainty over the future outlook may have been a factor in the minor correction.
Premium on Swiss real estate funds and 10-year yields to maturity
After the year-end rally pushed premiums on indexed Swiss real estate funds to new record levels of 35 percent on average, this trend came to an end in January. However, premiums still remain high. Only in March last year were they higher for a short time. As the ten-year yield is up slightly since the start of the year, the premiums being demanded still lie above the fair value. With this valuation level, a fall in prices would not be a surprise.
Vacancy rate and real estate prices
100 = January 2000 (left) and in percent (right)
Switzerland entered the New Year in an ongoing lockdown. To cushion financial losses in business, the city of Zurich has agreed support worth 20 million Swiss francs to help with rental payments. Based on the city of Basel’s three thirds model, the city of Zurich is paying a third of the rent of businesses affected, provided a reduction in rent of at least two thirds has been agreed with the landlord. This aims to prevent businesses, which have been forced to close due to coronavirus restrictions or have suffered significant declines in revenue, from going bankrupt.
The US dollar’s downward trend has come to a halt for the time being, and the currency has even gained slightly since the start of the year. However, exchange rates are stable overall.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price1.08 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.18 Neutral range Range of historically normal fluctuations.1.09 – 1.26 ValuationEuroundervalued Currency pairUSD/CHF Price0.89 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.92 Neutral range Range of historically normal fluctuations.0.80 – 1.03 ValuationUSD neutral Currency pairGBP/CHF Price1.23 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.43 Neutral range Range of historically normal fluctuations.1.23 – 1.63 ValuationPound sterling neutral Currency pairJPY/CHF Price0.85 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.06 Neutral range Range of historically normal fluctuations.0.89 – 1.22 ValuationYen undervalued Currency pairSEK/CHF Price10.70 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.12.32 Neutral range Range of historically normal fluctuations.11.11 – 13.53 ValuationKrone undervalued Currency pairNOK/CHF Price10.50 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.12.85 Neutral range Range of historically normal fluctuations.11.47 – 14.23 ValuationKrone undervalued Currency pairEUR/USD Price1.21 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.28 Neutral range Range of historically normal fluctuations.1.11 – 1.45 ValuationEuro neutral Currency pairUSD/JPY Price104.76 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.86.72 Neutral range Range of historically normal fluctuations.71.29 – 102.15 ValuationYen undervalued Currency pairUSD/CNY Price6.46 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.6.38 Neutral range Range of historically normal fluctuations.6.13 – 6.63 ValuationRenminbi neutral
The US dollar’s downward trend has come to a halt since the start of the year, and it has even made slight gains. The losers include emerging market currencies. For example, the Brazilian real and South Korean won recorded losses of 3 and 2 percent respectively against the US dollar. The highly encouraging economic recovery in China has seen the value of the renminbi appreciate. This is trading at just under 6.5 against the US dollar. Pound sterling also rose in value, but is at the bottom end of the neutral range against the Swiss franc. Valuations on the currency market have recently been subdued overall.
There is little demand for gold, due to the greater risk appetite amongst investors at the moment. The precious metal’s value fell again.
Indexed performance of gold in Swiss francs
100 = 01.01.2021
The value of gold has fallen again slightly since the start of the year. In light of the euphoric mood on the markets, this comes as little surprise, as the precious metal is seen as a safe-haven investment during crises. The price per troy ounce currently stands at around 1,820 US dollars. In contrast, silver has been making headlines recently, briefly climbing to 29 US dollars per troy ounce after being targeted speculatively by retail investors.