Fears over the US economy weigh on global equity markets. Cyclical equities remain under pressure; strong demand for securities relatively resistant to economic fluctuations
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.
Indexed stock market performance in Swiss francs
100 = 01.01.2019
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.
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
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
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
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
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
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
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
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 pairEUR/CHF Price1.10 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 ValuationEuro undervalued Currency pairUSD/CHF Price1.00 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 ValuationUSD neutral
Currency pairGBP/CHF Price1.26 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 ValuationPound sterling neutral Currency pairJPY/CHF Price0.92 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
ValuationYen undervalued Currency pairSEK/CHF Price10.17 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 ValuationKrona undervalued Currency pairNOK/CHF Price10.99 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
ValuationKrona undervalued Currency pairEUR/USD Price1.10 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 ValuationEuro undervalued Currency pairUSD/JPY Price108.56 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 ValuationYen undervalued Currency pairUSD/CNY Price7.10 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 ValuationRenminbi 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
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.