The equity markets fell sharply worldwide. They have still achieved two-digit gains since the start of the year. The downturn on the Swiss equities market was contained. The East Asian markets posted the greatest losses.
Market overview: No summer relief for the stock exchanges
But the equity markets did not continue to soar last month, as equity prices fell globally. Secure investments were in demand, including gold, government bonds and Swiss francs, all of which posted substantial gains. Higher-risk securities were hit by the increasing signs of weakening momentum in global growth. The precarious political climate – with the trade dispute between the USA and China and the possibility of a disorderly Brexit – also gave investors cause for concern.
Indexed stock market performance in francs
100 = 01.01.2019
Equities slumped significantly worldwide last month. The Swiss market lived up to its defensive reputation in a volatile financial market climate, with Swiss equities posting comparatively low losses. Worst hit were equities in the emerging markets. Swiss equities have still posted gains of over 18% – calculated in Swiss francs – since the start of the year.
The ratio of equity prices to company profits (price/earnings ratio, or P/E) declined worldwide as a result of falling prices. Switzerland is an exception. The P/E is a benchmark for the valuation of corporate securities. This indicates that Swiss equities are expensive by international comparison.
Momentum of individual markets
Falling prices also pushed momentum into negative territory worldwide, after the price trend had achieved positive values in the previous months. The only exception amongst the major equity markets is Switzerland, whose momentum remained positive, contrary to the trend.
The decline in yield from secure government bonds continued apace. Higher-risk securities, such as corporate bonds, also posted gains. The fall in interest rates was particularly sharp in Switzerland. More and more European government bonds are now posting negative yield to maturity.
Indexed performance of 10-year government bonds in francs
100 = 01.01.2019
The rally in the price of government bonds, which began almost a year ago, continued last month. Swiss, German and US government bonds all achieved price gains. Swiss government bonds have topped the ranking list since the start of the year. The gains are a reflection of falling interest.
Trend in 10-year yields to maturity
The yields to maturity of 10-year government bonds – a key benchmark indicating interest rate performance – fell significantly last month in line with the long-term trend. More and more European securities are yielding a negative return if held until maturity. Significant gains have been made since the start of the year, led by US government bonds.
Credit spreads on corporate bonds
In percentage points
The credit spreads of corporate bonds, which have been on a downward trend since the financial crisis in 2008, barely changed last month. This means companies continue to benefit from the sharp decline in interest. The higher the credit spread, the greater the interest costs that borrowers, like companies, have to pay to finance themselves.
The upward trend amongst listed Swiss real estate funds continued over recent weeks. Falling interest rates are continuing to drive up real estate investment prices. The premium on the intrinsic value of the properties contained in the funds rose again recently, but has been higher by historic comparison.
Indexed performance of Swiss real estate funds
100 = 01.01.2019
Whereas 2018 was a challenging year for real estate funds, 2019 looks set to be an excellent one. These investments posted significant gains after the fall in interest rates. Driven by another drop in interest rates, prices climbed again last month. The increase since the start of the year stands at around 17%.
Premium on Swiss real estate funds and 10-year yields to maturity
Falling interest rates fuelled demand for real estate funds and saw the bond-like investments, which are very sensitive to interest rates, achieve further price gains last month. The premium on the intrinsic value of the properties contained in the fund climbed again. At a similar yield level, the premium on 10-year bonds has in the past been much higher.
Vacancy rate and real estate prices
The supply of property is exceeding demand in Switzerland. This is indicated by the vacancy rate. It has risen constantly for ten years. This has had an impact on real estate prices, which have recently fallen in transactions for both apartments and rental properties. Single-family homes are bucking this trend at the moment as they are less suitable for rent and, in turn, less attractive as investment property.
The foreign exchange markets have come back to life after a summer lull. The Swiss franc performed extremely well. The price of gold continued to soar last month, reaching a five-year high.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price1.08 PPP1.19 Neutral range1.10 – 1.27 ValuationEuro undervalued Currency pairUSD/CHF Price0.97 PPP0.93 Neutral range0.81 – 1.04 ValuationNeutral Currency pairGBP/CHF Price1.17 PPP1.46 Neutral range1.26 – 1.66 ValuationPound sterling undervalued Currency pairJPY/CHF Price0.92 PPP1.07 Neutral range0.93 – 1.27 ValuationYen undervalued Currency pairSEK/CHF Price10.18 PPP12.14 Neutral range11.00 – 13.28 ValuationKrona undervalued Currency pairNOK/CHF Price10.94 PPP13.20 Neutral range11.89 – 14.50 ValuationKrone undervalued Currency pairEUR/USD Price1.12 PPP1.28 Neutral range1.11 – 1.45 ValuationNeutral Currency pairUSD/JPY Price105.30 PPP86.28 Neutral range71.08 – 101.48 ValuationYen undervalued Currency pairUSD/CNY Price7.02 PPP6.27 Neutral range6.05 – 6.50 ValuationRenminbi undervalued
Source: Bloomberg, Thomson Reuters Datastream
The foreign exchange markets came back to life. The Swiss franc gained against most currencies: it rose by 2 percent against the US dollar in a month, and by 5 percent against the weak pound sterling. The Swiss currency decreased in value only against the yen, another safe haven. However, the yen remains undervalued, and we recommend buying this currency. The losers included the Chinese renminbi, which weighed down other emerging market currencies.
Measured by purchasing power parity, the US dollar is the most overvalued currency, while the valuation of the Japanese yen is the most favourable of the main currencies. The Swiss franc is slightly overvalued, and the euro remains in the neutral range. Over the long term, we expect the disparities in the valuation of purchasing power parity to even out. Unfortunately, the timing of this correction cannot be predicted precisely.
Indexed performance of gold in francs
100 = 01.01.2019
The upsurge in the price of gold continued over recent weeks. With an increase of over 6 percent, the precious metal’s performance exceeded that of all other asset classes. At 1,500 US dollars per ounce, prices are at their highest level for 5 years.