Market overview: Equity investors unsettled by fears of recession

It seemed for a long time that US industry would escape the global trend towards an economic slowdown. In October, though, sentiment in the US industrial sector fell sharply. This has hit equity markets hard. However, the gloom raises hopes that the Federal Reserve will continue cutting key rates, which should give the markets a boost. Such hopes are justified. On the currency market, the dollar continued to soar last month. On a trade-weighted basis, its valuation is at its highest level since summer 2017. The Swiss franc performed steadily.

  • Fears over the US economy weigh on global equity markets. Cyclical equities remain under pressure; strong demand for securities relatively resistant to economic fluctuations

    Indexed stock market performance in Swiss francs

    100 = 01.01.2019

    This graphic shows the performance of the stock markets in Switzerland, worldwide and in emerging markets in Swiss francs over the past 12 months. Global equity markets suffered a loss of around 1 percent last month. Amid concerns over the US economy, which have dominated events since the last quarter, emerging market equities have been the worst hit, whereas the Swiss market has fared better than the world equity index since July.
    Source: Refinitiv

    Ongoing concerns over the state of the US economy have weighed on global equity markets since the summer. Investors are avoiding cyclical equities, which are highly sensitive to economic developments, and are generating very high demand for securities in companies that have limited dependency on economic cycles. The Swiss equity market, which is seen as defensive internationally, has not displayed this quality recently.

    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 slightly worldwide last month due to lower equity prices. There are still major differences at regional level. Due to the increased demand for high-quality securities, which was a key factor in the several-year-long bull market, the Swiss market’s valuation is at the top end of the historical data. By contrast, the P/E ratio for the global equity market is fluctuating around its long-term average.
    Source: Refinitiv

    Equities became slightly cheaper last month as measured by their price/earnings ratio (P/E ratio) due to a slight fall in prices. Yet Swiss equities remain expensive in historical terms, while the valuations of the global equity market and emerging markets are in line with their long-term average. The price/earnings ratio is a measure of how cheap or expensive equities are in relation to company profits generated. The higher the P/E ratio, the more expensive a market is.

    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 figure fluctuated significantly last month. Only Switzerland and Japan achieved positive momentum, whereas it was negative on all other markets.
    Source: Refinitiv

    The level of dynamism currently on the equity markets depends on the momentum. This compares the average of the past 10 days to the past 240 days. The picture is mixed, but a negative dynamic clearly predominates. Only Japan and Switzerland are currently showing positive momentum.

  • The price trend on the global bond markets last month was far less in sync than in previous quarters. The yields to maturity of government bonds fell in the USA, while yields in Europe rose. This is particularly the case in Switzerland: the yield to maturity of 10-year Swiss government bonds has increased by 0.5 percentage points since the low point in August.

    Indexed performance of 10-year government bonds in Swiss francs

    100 = 01.01.2019

    This graphic shows the performance of government bonds from Switzerland, the USA and Germany in Swiss francs. The continual upward trend has given way to more volatile performance. It is clearly evident that the trend is less synchronous.
    Source: Refinitiv

    The price trend on the global bond markets was in sync for a long period of time. This pattern has been less evident in recent weeks: while yields to maturity fell in the USA, yields climbed in Europe. This rise was particularly evident in Switzerland. The yield to maturity on 10-year Swiss government bonds – an important measure of the interest rate trend – rose by 0.5 percentage points compared to the low point in the summer.

    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 developments. These yields are on a long-term downward trend. In Europe, yields to maturity are well into negative territory.
    Source: Refinitiv

    Yields to maturity remain at particularly low historical levels despite the recent increases in Europe and especially in Switzerland. This is a problem for long-term investors, such as pension funds. This is above all the case in Europe, where yields to maturity are negative. Higher yields are currently only available on higher-risk debt instruments. However, these more attractive yields also entail the risk of greater price fluctuations.

    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 Swiss francs. These credit spreads have been low for years. There was little movement last month. Companies are therefore benefiting significantly from the general fall in interest rates.
    Source: Bloomberg, Refinitiv

    The premium that companies pay on their bonds compared to governments with a strong credit rating remains at historically low levels. This applies to both the USA and Europe. This means that companies are benefiting just as much from the fall in yields as governments. The small difference between the yields to maturity of government and corporate bonds indicates that investors regard corporate bonds as low risk.

  • Demand for Swiss real estate remains strong: both real estate equities and funds are reaching record levels. Real estate funds remain attractive with an average dividend yield of 2.7 percent.

    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. There has been a clear upward trend since autumn 2018. Since the low point a year ago, total returns stand at around 20 percent.
    Source: Refinitiv

    Demand for real estate investments remains strong. The prices of real estate funds and equities have hit record levels in Switzerland. Commodity prices and gold performed less strongly. The attacks on the Saudi oil industry only had a short-term impact on crude oil prices.

    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 the properties contained in Swiss real estate funds. This premium has soared over recent weeks. However, we believe this historically high level is justified in view of the low yields to maturity of bonds.
    Source: Bloomberg, Refinitiv

    The premium of real estate funds rose to 28 percent last month. This means the premium that investors pay on the properties contained in Swiss real estate funds is approaching historically record high levels again. However, given the current interest rate levels, the premium is justified due to a high average dividend yield of 2.7  percent.

    Vacancy rate and real estate prices

    This graphic shows the vacancy rate of Swiss residential property and the price trend for single-family homes, rental properties and apartments. While property prices have been falling for years, the trend of higher vacancy rates continues unabated.
    Source: Refinitiv

    The supply of property is exceeding demand in Switzerland. This is indicated by the rising vacancy rate and falling prices: both apartments and rental properties have decreased in value. In contrast, there has been an ongoing rise in the prices of single-family homes, which are less suitable for rent and as investment property.

  • The dollar rose slightly against all major currencies again last month. Little change in the franc: the Swiss currency remained steady. The gold price boom has been temporarily interrupted. The price of gold remains unchanged month-on-month.

    Currency pair Price PPP Neutral range Valuation
    Currency pair
    EUR/CHF
    Price
    1.10
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.19
    Neutral range Range of historically normal fluctuations.
    1.11 – 1.27
    Valuation
    Euro undervalued
    Currency pair
    USD/CHF
    Price
    1.00
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    0.93
    Neutral range Range of historically normal fluctuations.
    0.81 – 1.05
    Valuation
    USD neutral
    Currency pair
    GBP/CHF
    Price
    1.26
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.46
    Neutral range Range of historically normal fluctuations.
    1.25 – 1.66
    Valuation
    Pound sterling neutral
    Currency pair
    JPY/CHF
    Price
    0.92
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.07
    Neutral range Range of historically normal fluctuations.
    0.93 – 1.27

    Valuation
    Yen undervalued
    Currency pair
    SEK/CHF
    Price
    10.17
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    12.11
    Neutral range Range of historically normal fluctuations.
    10.97 – 13.25
    Valuation
    Krona undervalued
    Currency pair
    NOK/CHF
    Price
    10.99
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    13.23
    Neutral range Range of historically normal fluctuations.
    11.91 – 14.55
    Valuation
    Krona undervalued
    Currency pair
    EUR/USD
    Price
    1.10
    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 – 1.44
    Valuation
    Euro undervalued
    Currency pair
    USD/JPY
    Price
    108.56
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    86.61
    Neutral range Range of historically normal fluctuations.
    71.32 – 101.90
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    7.10
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    6.29
    Neutral range Range of historically normal fluctuations.
    6.05 – 6.52
    Valuation
    Renminbi undervalued

    Source: Bloomberg, Refinitiv

    The dollar continued to soar last month. On a trade-weighted basis – an important measure – the valuation is at its highest level since summer 2017. The Swiss franc performed steadily, while the Nordic currencies – the Norwegian krone and Swedish krona – both remain under pressure. By contrast, the pound sterling increased significantly in value.

    Currencies can be valued based on purchasing power parity. In terms of purchasing power parity, many currencies are currently undervalued against the Swiss franc. Of the currencies shown in the table above, the Swiss franc is only valued as neutral against the dollar, which is also significantly overvalued. The Norwegian krone and Swedish krona are significantly undervalued.

    Indexed performance of gold in Swiss francs

    100 = 01.01.2019

    This graphic shows the indexed performance of gold in Swiss francs. The upward trend in the gold price was interrupted last month.  Since the start of the year, there has been a rise of around 18 percent measured in Swiss francs.
    Source: Refinitiv

    The upward trend in the gold price was interrupted last month. But the precious metal, seen as a safe haven, remains one of the winners since the start of the year, rising by around 18 percent.

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