Market overview: investors’ risk appetite returns

There was a mood of optimism on the international financial markets, after growing awareness of risks and uncertainty in recent months. The change in mood is due to improvements on the political front. When risk appetite returns, the markets and asset classes categorized as higher risk benefit most, whereas there is less demand for defensive assets. This pattern was observed last month on equity, bond and foreign exchange markets alike. Equities worldwide and all emerging market asset classes posted strong gains, whereas the Swiss franc, gold and government bonds lagged behind by comparison.

  • Optimism returns to the stock markets – equity prices rise worldwide. Above all, equities that came under strong sales pressure during the second quarter benefited. These included European as well as Asian securities.

    Indexed stock market performance in Swiss francs

    100 = 01.01.2019

    This graphic shows the price performance on the stock markets in Switzerland, worldwide and in emerging markets in Swiss francs over the past 12 months. There was a significant improvement in sentiment worldwide last month. Emerging markets benefited most from the return of investors’ risk appetite, climbing 5 percent. Meanwhile, the Swiss market – which is categorized as defensive – performed poorly by comparison, increasing by 3 percent.
    Source: Refinitiv

    The mood on the global stock markets improved significantly again last month, after the sharp rise in prices came to a halt in the previous month. As in previous months, the brighter mood was again due to political developments. The greatest gains were posted by profit from emerging market equities, which climbed by 5 percent. Meanwhile, defensive stock exchanges, such as Switzerland with a 3 percent increase, performed less well in relative terms.

    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 ratio rose worldwide last month due to higher 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 latest bull market, the valuation of the Swiss market is fluctuating at the top end of the historic data.
    Source: Refinitiv

    The valuation of equities rose worldwide last month measured by price/earnings ratio. This is the result of the recent price gains. The most expensive by some margin is the Swiss market, whose valuation rose during the latest cycle of upturn on the stock market due to greater demand for defensive securities. In contrast, the value of emerging market equities remains low compared to the high before the major financial crisis.

    Momentum of individual markets

    In percent

    : The graphic shows the momentum of 12 key equity markets worldwide. The momentum brought the current 10-day average in line with the average of the past 240 days. Global performance varied significantly last month. Switzerland achieved the greatest momentum, while the other markets posted negative momentum.
    Source: Refinitiv

    The analysis of the price movements on the individual equity markets presents a heterogeneous picture. While Swiss equities recently performed well above the average of the past 240 days, there were significant falls on the Hong Kong and UK equity markets. The Swiss market’s strong momentum is due to high demand for defensive securities.

  • The rally on the international bond markets came to an end last month, after prices had risen for a year. Since the start of the month, the yield to maturity of 10-year government bonds has risen by an average of 0.2 percentage points in industrial nations. Italian securities did not follow this trend, following the formation of a new government.

    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 strong upsurge gave way to a countermovement. The similarity of price performance in the individual countries is striking.
    Source: Refinitiv

    The positive price performance of government bonds, which has had a significant impact on developments since the fourth quarter of 2018, came to a halt last month. Government bonds from major industrial nations, such as the USA and Germany, but also Switzerland, recorded losses. The gains indicated are classified as extremely high by long-term comparison.

    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. They are a key benchmark for interest rate performance. They are on a long-term downward trend which came to a stop last month. More and more European government securities are yielding a negative return upon maturity.
    Source: Refinitiv

    Inversely to the price losses that government bonds suffered last month, yields to maturity rose. Yield to maturity indicates the return an investor achieves when purchasing a bond at the current market price, all interest payments included and with repayment in full upon maturity. The yields to maturity of German and Swiss government bonds are at a historically low level.

    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

    There was little change in the credit spreads last month. These are the additional costs that corporate borrowers have to pay compared to government borrowers with a good credit rating in order to finance loans. The higher the credit spread, the riskier the market deems a borrower. The long-term trend has been on a downward trajectory since the financial crisis. An increase in credit spreads is an economic stress signal. However, there are still no indications of this.

  • The upward trend of listed Swiss real estate funds came to a halt last month, with real estate funds posting slight losses month-on-month. The increase since the start of the year remains at 16 percent. The climate for real estate investments on the Swiss market is not becoming any easier. Due to the continued high level of construction activity, the vacancy rate climbed slightly again this year.

    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, 2019 looks set to be an outstanding one. Despite the slight fall in prices recently, the increase since the start of the year stands at around 16 percent.
    Source: Refinitiv

    The value of exchange-listed real estate funds fell slightly on average last month. While market observers attribute this decline to the raising of capital by existing funds, the slight rise in yields to maturity on bonds may also have played a role. Listed real estate investments have benefited significantly from the fall in interest rates since the start of the year.

    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 fell slightly over recent weeks. While it remains at a historically high level, we believe this is justified in view of the low yields to maturity of bonds.
    Source: Bloomberg, Refinitiv

    The premiums on the properties contained in the funds decreased slightly recently. They now stand at over 25 percent. In view of the historical correlation between these premiums and the level of long-term yields to maturity, the high premiums seem justified at the moment.

    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: Refinitiv

    The supply of property is exceeding demand in Switzerland. This is indicated by the vacancy rate which has continually risen for ten years. In June 2019, it reached 1.66 percent, its highest level since the end of the 1990s. This had an impact on real estate prices. The prices of both apartments and rental properties have fallen recently in transactions. 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 improved sentiment on the equity markets was also evident on the foreign exchange markets. In textbook fashion, there was weak demand for foreign currencies which are deemed to have defensive qualities. This means that the value of the Swiss franc and yen fell against all currencies. The anticipated lack of interest in gold is in line with the pattern outlined – the value of gold fell slightly. Since the start of the year, there has been a rise of around 18 percent measured in Swiss francs.

    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.
    1.18
    Neutral range Range of historically normal fluctuations.
    1.10 – 1.27
    Valuation
    Euro neutral
    Currency pair
    USD/CHF
    Price
    0.99
    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
    1.22
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.46
    Neutral range Range of historically normal fluctuations.
    1.26 – 1.66
    Valuation
    Pound sterling undervalued
    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
    10.29
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    12.12
    Neutral range Range of historically normal fluctuations.
    10.98 – 13.26
    Valuation
    Krone undervalued
    Currency pair
    NOK/CHF
    Price
    11.05
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    13.22
    Neutral range Range of historically normal fluctuations.
    11.91 – 14.53
    Valuation
    Krona undervalued
    Currency pair
    EUR/USD
    Price
    1.11
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.27
    Neutral range Range of historically normal fluctuations.
    1.11 – 1.44
    Valuation
    Euro neutral
    Currency pair
    USD/JPY
    Price
    108.09
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    86.50
    Neutral range Range of historically normal fluctuations.
    71.25 – 101.75
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    7.08
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    6.28
    Neutral range Range of historically normal fluctuations.
    6.05 – 6.51
    Valuation
    Renminbi undervalued

    Source: Bloomberg, Refinitiv

    The optimistic mood on the equity markets has resulted in a fall in the value of the two safe-haven currencies, the Swiss franc and Japanese yen. By contrast, pound sterling performed strongly last month, gaining significantly against the Swiss franc month-on-month. Many emerging market currencies also fared well month-on-month.

    The US dollar is significantly overvalued against most other currencies. This is particularly evident against the Japanese yen at the moment. Over the long term, this should again lead to a depreciation of the dollar and appreciation of the yen. Unfortunately, the exact timing of this correction cannot be predicted.

    Indexed performance of gold in Swiss francs

    100 = 01.01.2019

    This graphic shows the indexed performance of gold in Swiss francs. The price of gold fell slightly after the recent improvement in sentiment on the equity markets. Demand for gold investments is mainly strong during turbulent market conditions. Since the start of the year, there has been a rise of around 18 percent measured in Swiss francs.
    Source: Refinitiv

    Demand for gold investments is mainly strong during turbulent market conditions. For this reason, many investors include gold in their portfolios for security. The price of gold fell slightly after the recent improvement in sentiment on the equity markets. The price for an ounce of gold in Swiss francs has risen by around 18 percent since the start of the year.

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