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.

  • 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.

    Indexed stock market performance in francs

    100 = 01.01.2019

    This graphic shows the price performance on the stock markets in Switzerland, worldwide and in emerging markets in francs over the past 12 months. In contrast to the price gains in previous months, significant losses were recorded. Swiss securities performed best by comparison.
    Source: Thomson Reuters Datastream

    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.

    Price/earnings ratio

    The graphic shows the price/earnings ratio (P/E) for the stock markets in Switzerland, worldwide and in emerging markets since 2000. The P/E dipped last month in view of falls in equity prices worldwide. Switzerland is an exception.
    Source: Thomson Reuters Datastream

    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

    In percent

    The graphic shows the momentum of 12 key equity markets worldwide. Momentum fell into negative territory worldwide last month. Only Switzerland recorded positive momentum, while the other markets were in negative territory.
    Source: Thomson Reuters Datastream

    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

    This graphic shows the performance of government bonds from Switzerland, the USA and Germany in Swiss francs. The significant upward trend, which has lasted almost a year, has now continued at an accelerated rate after a sharp downturn in the previous month.
    Source: Thomson Reuters Datastream

    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

    In percent

    The graphic shows the performance of yields on 10-year government bonds in Switzerland, the USA and Germany, an important benchmark for interest rate performance. This is on a long-term downward trend which accelerated again recently. More and more European government securities are yielding a negative return upon maturity.
    Source: Thomson Reuters Datastream

    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

    This graphic shows the difference between the yields to maturity on government and corporate bonds in US dollars, euros and francs. These so-called credit spreads have been at low levels for a number of years. They changed little last month.
    Source: Bloomberg, Thomson Reuters Datastream

    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

    The graphic shows the indexed average performance of listed Swiss real estate funds over the past 12 months. Whereas 2018 was a volatile year for this form of investment, this year looks set to be an outstanding one. The increase stands at around 17% after the latest price gains.
    Source: Thomson Reuters Datastream

    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

    In percent

    This graphic shows the yields to maturity of 10-year Swiss government bonds and the premium that investors in Switzerland pay for listed real estate funds. This premium has risen significantly since the start of the year, but has in the past been much higher at a comparable interest level. The fall in interest rates justifies a higher premium.
    Source: Bloomberg, Thomson Reuters Datastream

    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

    This graphic shows the vacancy rate of Swiss residential property and the price indices for single-family homes, rental properties and apartments. Both the vacancy rate and the price indices have been rising for a decade. Yet apartment and rental prices have fallen slightly over recent years.
    Source: Thomson Reuters Datastream

    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 pair
    EUR/CHF
    Price
    1.08
    PPP
    1.19
    Neutral range
    1.10 – 1.27
    Valuation
    Euro undervalued
    Currency pair
    USD/CHF
    Price
    0.97
    PPP
    0.93
    Neutral range
    0.81 – 1.04
    Valuation
    Neutral
    Currency pair
    GBP/CHF
    Price
    1.17
    PPP
    1.46
    Neutral range
    1.26 – 1.66
    Valuation
    Pound sterling undervalued
    Currency pair
    JPY/CHF
    Price
    0.92
    PPP
    1.07
    Neutral range
    0.93 – 1.27
    Valuation
    Yen undervalued
    Currency pair
    SEK/CHF
    Price
    10.18
    PPP
    12.14
    Neutral range
    11.00 – 13.28
    Valuation
    Krona undervalued
    Currency pair
    NOK/CHF
    Price
    10.94
    PPP
    13.20
    Neutral range
    11.89 – 14.50
    Valuation
    Krone undervalued
    Currency pair
    EUR/USD
    Price
    1.12
    PPP
    1.28
    Neutral range
    1.11 – 1.45
    Valuation
    Neutral
    Currency pair
    USD/JPY
    Price
    105.30
    PPP
    86.28
    Neutral range
    71.08 – 101.48
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    7.02
    PPP
    6.27
    Neutral range
    6.05 – 6.50
    Valuation
    Renminbi 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

    This graphic shows the indexed performance of gold in Swiss francs. After trending sidewards in the first half-year, the precious metal sprang back to life and has since gone from strength to strength. Its value has risen by around 17 percent since the start of the year.
    Source: Thomson Reuters Datastream

    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.

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