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.

  • 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.

    Indexed performance of government bonds in Swiss francs

    100 = 01.01.2022

    This graphic shows the performance of government bonds from Switzerland, the USA and Germany in Swiss francs. Swiss and German government bonds in particular have suffered price losses since last October.
    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

    The graphic shows the performance of yields on 10-year government bonds in Switzerland, the USA and Germany. 10-year yields to maturity are an important benchmark for interest rate developments. A strong downward trend can be observed over the long term. However, we’ve seen a trend reversal towards rising interest rates since early 2020, and this became more pronounced last month.
    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

    This graphic shows the difference between the yields to maturity on government and corporate bonds in US dollars, euros and Swiss francs. These credit spreads have gone up since the start of the year. This means that higher-risk debtors have to pay more interest than secure government issuers when borrowing.
    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.

  • 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

    This graphic shows the performance of the stock markets in Switzerland, worldwide and in emerging markets in Swiss francs over the past 12 months. Although the equity markets briefly made up the losses incurred since the outbreak of war, there was another major sell-off last month.
    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

    The graphic shows the momentum of 12 key equity markets worldwide. Momentum compares the latest price level with the average figures from the past six months. Equity markets around the world lost momentum compared to the previous month.
    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

    The graphic shows the price/earnings ratio (P/E ratio) for the stock markets in Switzerland, worldwide and in emerging markets since 2000. The P/E ratios of the three markets have declined considerably since summer 2020 thanks to rising corporate earnings.
    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.

  • 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

    The graphic shows the indexed average performance of listed Swiss real estate funds over the past 12 months. Significant price falls have been recorded since year-opening.
    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

    This graphic shows the yield to maturity of 10-year Swiss government bonds and the premium on real estate properties contained in Swiss real estate funds since 2000. While interest rates have increased sharply this year, premiums remain at a high level.
    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)

    This graphic shows the vacancy rate of Swiss residential property and the price trend for single-family homes, rental properties and apartments. While prices for residential apartments and single-family homes in particular have climbed considerably since the start of the pandemic, rental property prices have dropped. The vacancy rate fell again for the first time last year, having previously risen continuously for ten years.
    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.

  • Currencies

    The US dollar is making up ground. The Swiss franc and Japanese yen were surprisingly weak, however.

    Currency pairPricePPPNeutral rangeValuation
    Currency pair
    EUR/CHF
    Price
    1.04
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    0.88
    Neutral range Range of historically normal fluctuations.
    0.81 – 0.94
    Valuation
    Euro overvalued
    Currency pair
    USD/CHF
    Price
    1.00
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    0.77
    Neutral range Range of historically normal fluctuations.
    0.68 – 0.87
    Valuation
    USD overvalued
    Currency pair
    GBP/CHF
    Price
    1.22
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.31
    Neutral range Range of historically normal fluctuations.
    1.13 – 1.49
    Valuation
    Pound sterling neutral
    Currency pair
    JPY/CHF
    Price
    0.78
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    0.98
    Neutral range Range of historically normal fluctuations.
    0.83 – 1.14
    Valuation
    Yen undervalued
    Currency pair
    SEK/CHF
    Price
    9.88
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    10.05
    Neutral range Range of historically normal fluctuations.
    9.09 – 11.02
    Valuation
    Krona neutral
    Currency pair
    NOK/CHF
    Price
    10.15
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    11.01
    Neutral range Range of historically normal fluctuations.
    9.84 – 12.19
    Valuation
    Krone neutral
    Currency pair
    EUR/USD
    Price
    1.04
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.13
    Neutral range Range of historically normal fluctuations.
    0.99 – 1.28
    Valuation
    Euro neutral
    Currency pair
    USD/JPY
    Price
    128.42
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    78.99
    Neutral range Range of historically normal fluctuations.
    64.15 – 93.82
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    6.79
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    5.78
    Neutral range Range of historically normal fluctuations.
    5.54 – 6.02
    Valuation
    Renminbi undervalued

    Source: 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

    This graphic shows the indexed performance of gold in Swiss francs over the year. The gold price briefly rose to 2,050 US dollars at the start of the Ukraine conflict, but has since fluctuated at around 1,950 US dollars per troy ounce.
    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.

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