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.

  • 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.

    Indexed performance of government bonds in Swiss francs

    100 = 01.01.2021

    This graphic shows the performance of government bonds from Switzerland, the USA and Germany in Swiss francs. The recent euphoria, driven by a brighter economic outlook and the prospect of the pandemic soon being brought under control, spilled over to the bond markets. This meant less demand for secure government bonds, while an increase in inflation forecasts led to further declines in value recently.
    Source: SIX, Bloomberg Barclays

    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

    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. The recent rise in inflation forecasts led to higher yields on US and UK bonds. Swiss and German yields to maturity remain at a similar level.
    Source: SIX, Bloomberg Barclays

    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

    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 rose sharply last March. This means that higher-risk debtors had to pay more interest than secure government issuers when borrowing. The credit spreads on corporate bonds have continued to narrow in the New Year. The decisive factor behind this is the pledge to continue pursuing expansive monetary and fiscal policies.
    Source: Bloomberg Barclays

    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

    This graphic shows the performance of the stock markets in Switzerland, worldwide and in emerging markets in Swiss francs over the past 12 months. The phenomenal recovery rally on the equity markets over recent months seemed increasingly divorced from current economic reality. The US and Swiss stock markets have already returned to their pre-crisis levels, but the emerging markets have also made a strong recovery. This is also continuing at the start of 2021. One record high after another has been reached in the first weeks of the New Year.
    Source: SIX, MSCI

    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

    In percent

    The graphic shows the momentum of 12 key equity markets worldwide. The momentum compares the current 10-day average with the average of the past 240 days. The sense of relief on stock exchanges worldwide last month is also reflected in the positive momentum on individual markets. They are now trading well inside positive territory again. South Korea, Taiwan, China and Canada are leading the way – all four with a value of over 25. As in January, Switzerland is currently lagging behind.
    Source: MSCI

    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.

    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 ratio fell sharply on all three equity markets during the sell-off last March. However, it then benefited from rising prices during the recovery rally. The steep rise in equity prices worldwide also led to a further increase in valuations in February.
    Source: SIX, MSCI

    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

    The graphic shows the indexed average performance of listed Swiss real estate funds over the past twelve months. After recovering from the slump in March, they then trended sideways for weeks. They enjoyed a real boom in November and December and generated yields of around 10 percent for the year. There was an initial, albeit slight, correction in January, with losses of 2 percent.
    Source: SIX

    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

    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. This premium has risen again with the recovery of the Swiss real estate market at the turn of the year.  Even an initial market correction in January only saw premiums fall slightly.
    Source: SIX

    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)

    This graphic shows the vacancy rate of Swiss residential property and the price trend for single-family homes, rental properties and apartments. While rental prices and the real estate prices of apartments have been on a downward trend over the past five years, vacancy rates are continually rising. Economic problems caused by the coronavirus crisis have seen a further rise in vacancies. Rental apartments have been particularly severely hit. There has been a further rise in the price of single-family homes.
    Source: SNB, SFSO

    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.

  • Currencies

    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 pairPricePPPNeutral rangeValuation
    Currency pair
    EUR/CHF
    Price
    1.08
    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
    Valuation
    Euroundervalued
    Currency pair
    USD/CHF
    Price
    0.89
    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
    Valuation
    USD neutral
    Currency pair
    GBP/CHF
    Price
    1.23
    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
    Valuation
    Pound sterling neutral
    Currency pair
    JPY/CHF
    Price
    0.85
    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
    Valuation
    Yen undervalued
    Currency pair
    SEK/CHF
    Price
    10.70
    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
    Valuation
    Krone undervalued
    Currency pair
    NOK/CHF
    Price
    10.50
    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
    Valuation
    Krone undervalued
    Currency pair
    EUR/USD
    Price
    1.21
    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
    Valuation
    Euro neutral
    Currency pair
    USD/JPY
    Price
    104.76
    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
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    6.46
    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
    Valuation
    Renminbi 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.

    Gold

    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

    This graphic shows the indexed performance of gold in Swiss francs over the year. Owing to growing market uncertainty over the spread of coronavirus, there was strong demand for gold as a safe haven. Its value has risen by around 18 percent since 1.1.2020, which means it remains the highest-yielding asset class. After the record high in August, the price per troy ounce predominantly trended sideways. The price of the precious metal has fallen further since the start of the year and is now trading at around 1,820 US dollars per troy ounce.
    Source: Web Financial Group

    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.

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