The bond markets faced major challenges last year, suffering sharp losses worldwide. However, there has been an upturn on the bond markets since the turn of the year.
Market overview: Steady nerves were needed in 2022
2022 was a turbulent year, not least on the financial markets. So far, 2023 has got off to a much more promising start.
Indexed performance of government bonds in Swiss francs
100 = 01.01.2023
The bond markets recorded sharp losses in 2022. The value of 10-year bonds issued by western industrial nations fell by between 10 and 20 percent over the course of the year. The UK was a negative outlier, posting losses of over 30 percent measured in Swiss francs. The appreciation of the US dollar led to an upturn in the performance of US equities measured in Swiss francs, which were trading at just 10 percent below their year-opening value by the end of the year. Since the turn of 2023, there has been a tangible sense of relief at entering a new calendar year. Bond markets are up, with the exception of Japan.
Trend in 10-year yields to maturity
Yields to maturity climbed from one record high to the next last year. While the trend in the industrial nations was almost uniform over the first three quarters, differences emerged in the final quarter. In the USA and UK, yields to maturity hit new record highs by autumn before falling again, while they continued to rise in Europe. By the end of the year, yields on 10-year government bonds in Germany and Switzerland had reached their highest level since 2011.
Credit spreads on corporate bonds
The spreads demanded on corporate bonds experienced strong momentum last year. During the first half of the year, investors were concerned about high rates of inflation and the impact of geopolitical conflict. As a result, spreads in the eurozone briefly soared to over 2 percent. The situation eased significantly during the second half of the year, which led to the spreads on Swiss corporate bonds falling back below the 1-percent mark.
Despite a recovery rally on the equity markets in the fourth quarter of 2022, the losses from the start of the year could not be recouped. This means that the hopes and expectations for 2023 are all the greater.
Indexed stock market performance in Swiss francs
100 = 01.01.2023
After painful losses last year, the equity markets made a strong start to 2023. There’s great optimism that inflation and risks of recession are behind us. In the first two weeks of the new year alone, global equity markets rose by 5 percent, while emerging markets – driven by gains made by Chinese equities after the reopening of the country – were up by almost 8 percent. But the likelihood of a downturn remains high.
Momentum of individual markets
A trend reversal emerged on the equity markets in the final quarter of 2022. Thanks to the strong start to the year, momentum has remained in positive territory. While China – the worst-performing nation, alongside Brazil, for a long period – is now also displaying positive momentum, Brazil is still lagging behind in last place. Brazilian equities in the retail sector came under particular pressure owing to the challenging political situation. Leading the way are the European equity markets, which have shown great ambition over recent weeks.
The ratio of equity prices to profit, known as the price/earnings ratio (P/E ratio), is a frequently used benchmark for equities. If the P/E ratio is disproportionately high, the equity is considered expensive. After major corrections to P/E ratios last year, driven by rising corporate profits and falling equity prices, there has been upward momentum again over recent weeks. This means that equities are becoming expensive again. The global average currently stands at 18. The most expensive at present are Indian equities, with a P/E ratio of 26.
Real estate investments were also not spared by the turbulent market conditions last year. By international comparison, Swiss real estate funds performed well, even achieving gains in December.
Indexed performance of Swiss real estate funds
100 = 01.01.2023
The huge rise in capital market interest rates last year also took its toll on the real estate markets. The value of US real estate equities declined by 25 percent, while their European counterparts fell by almost 40 percent. Swiss real estate investments escaped relatively lightly: exchange-listed real estate equities were down by around 4 percent and real estate funds by 15 percent. The new year has started well, with gains of just under 3 percent.
Premium on Swiss real estate funds and 10-year yields to maturity
The premiums on the Swiss real estate market remain relatively low. While the prices of exchange-listed real estate investments rose slightly worldwide last month, the upturn in Switzerland was minimal. The premiums – the supplement paid on the inventory values of the properties – remain at a very low level compared with the long-term average.
Vacancy rate and real estate prices
100 = January 2000 (left) and in percent (right)
Both rents and residential property prices rose sharply again at the end of the year. The Swiss National Bank’s change in interest rate policy has had little impact on the real estate market so far. This may be due to the fact that the number of vacant apartments in Switzerland has decreased significantly over the past two years. As at 1 June, there were around 61,000 vacant apartments throughout Switzerland, which is 17,000 fewer than in 2020, the year of COVID-19.
Three-month SARON and 10-year yields to maturity
Interest rates on long-term mortgages in Switzerland fell slightly again recently. This is because yields to maturity on bonds have decreased slightly. Mortgage rates are based on bond yields. Variable Saron mortgages may become more expensive if the Swiss National Bank raises its key rate again, as market participants expect.
The strengthening of the US dollar had a major impact on the currency markets in 2022. This trend did not reverse until winter, when cyclical and emerging market currencies made gains at the turn of the year.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price1.01 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.79 Neutral range Range of historically normal fluctuations.0.73 – 0.86 ValuationEuro overvalued Currency pairUSD/CHF Price0.93 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.76 Neutral range Range of historically normal fluctuations.0.66 – 0.86 ValuationUSD overvalued
Currency pairGBP/CHF Price1.13 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.19 Neutral range Range of historically normal fluctuations.1.03 – 1.36 ValuationPound sterling neutral Currency pairJPY/CHF Price0.72 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.94 Neutral range Range of historically normal fluctuations.0.79 – 1.09 ValuationYen undervalued Currency pairSEK/CHF Price8.90 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.9.79 Neutral range Range of historically normal fluctuations.8.80 – 10.78 ValuationKrona neutral Currency pairNOK/CHF Price9.37 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.10.53 Neutral range Range of historically normal fluctuations.9.41 – 11.66 ValuationKrone undervalued Currency pairEUR/USD Price1.09 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.04 Neutral range Range of historically normal fluctuations.0.91 – 1.18 ValuationEuro neutral Currency pairUSD/JPY Price129.32 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.81.27 Neutral range Range of historically normal fluctuations.64.92 – 97.61 ValuationYen undervalued Currency pairUSD/CNY Price6.74 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.5.61 Neutral range Range of historically normal fluctuations.5.28 – 5.94 ValuationRenminbi undervalued
Source: Web Financial Group
The first three quarters of 2022 were dominated by a greatly strengthened US dollar. Hardly any currencies were able to defend their position against the dollar. It was not until autumn that the tide turned and the dollar was no longer able to maintain its dominant position. In January, the US currency hit a 6-month low against the euro and a 9-month low against the Swiss franc. However, the dollar still remains heavily overvalued against the franc.
The cyclical currencies experienced an upturn at the start of the year. Above all, the Australian, New Zealand and Canadian dollars made gains. Some emerging market currencies were also caught up in the optimism, including the Thai baht.
Gold produced a year-end spurt and recently broke through the mark of 1,900 US dollars per ounce.
Indexed performance of gold in Swiss francs
100 = 01.01.2023
In light of the high inflation trend globally, many investors were disappointed by the performance of the gold price last year, as it fell almost continuously after a brief rally in spring. However, there was an abrupt change in trend in November, and the price per troy ounce rose from 1,625 US dollars to over 1,900 US dollars recently. As recent publications show, the Chinese central bank may have been a driving factor in this development. It bolstered its gold reserves by 32 tonnes in November alone.