The global trend of rising interest rates continued last month. This was mainly driven by continued high inflation in both the USA and Europe. The US Federal Reserve (Fed) responded by raising the key rates by 0.75 percentage points – the steepest hike since 1994. The European Central Bank (ECB) also announced an interest rate rise for July, as well as the end of some bond-buying programmes. Reining in inflation is now the priority for central banks. An economic slowdown is increasingly being anticipated. While the leading economic indicators still paint a bright picture, the tide is slowly starting to turn. Demand for goods has already fallen in the USA, and higher interest rates are causing a slowdown on the real estate market. Consumer confidence is particularly concerning, tumbling to an all-time low in the wake of high inflation. The likelihood of a recession has increased further – and not just in the USA. Upward pressure on interest rates looks set to persist worldwide for the time being, however, despite recession risks. This means that defensive positioning in the portfolio remains advisable. 

Swiss interest rates rise

Following in the footsteps of the Fed and the ECB, the Swiss National Bank (SNB) has also joined the fight against inflation. It has raised its policy rate by 0.5 percentage points to –0.25 percent, the first time in 15 years that it has taken such action. Through this clear reversal of policy, the SNB was also responding to higher inflation, which climbed to 2.9 percent in May. In anticipation of an interest rate rise, we decided to reduce the position of Swiss bonds in our portfolios last month. This decision proved justified. 10-year interest rates went up by 0.7 percentage points in June alone, causing the price of Swiss bonds to fall by around 5 percent. In light of the high inflation rates, we are maintaining an underweighted position in bonds in our portfolios. 

Tough environment for equities

Last month’s sharp interest rate hike resulted in losses for global bond markets – but also for equity markets and Swiss real estate funds, too. Down –5 percent, US equities fell slightly more sharply than their European counterparts. Only Chinese equities generated a positive return, despite the fact that the economic situation in China remains challenging. The recent relaxation of regulatory pressure on tech companies may have aided a recovery. The outlook for the equity markets remains bleak, however, especially in the USA and Europe. Both persistent upward pressure on interest rates and the greater risks of recession are creating a tough environment for equities. In response, we are now underweighting US equities as well as European equities. 

Gold is a stabilizing factor, and Swiss real estate funds are fairly valued

Gold proved robust, despite rising interest rates and a strong US dollar, and continued to stabilize the portfolio. Gold also remains attractive from a diversification perspective, which can reap rewards in an environment that is still unsettled. That’s why we’re retaining our slightly increased gold allocation.

The steep rise in interest rates in Switzerland also resulted in a sustained correction for Swiss real estate funds. In our view, these assets are now valued fairly, which means that neutral positioning in their allocation is advisable.  

Performance of asset classes

Our positioning – Swiss focus