Our positioning: Hopes and fears on the stock markets

Another significant decline in the leading indicators for the US economy sent shock waves through the stock markets again at the beginning of October. Political developments give hope for once.

The situation at the start of the final quarter of the year remains challenging for investors. Several factors are holding back the markets at the moment: the unresolved trade dispute between China and the USA, uncertainty over Brexit and, in the background, the increasingly gloomy economic outlook.

Investors had a shock at the start of the quarter. The ISM Manufacturing Index – a sentiment barometer for US industry watched closely by the financial markets – fell to its lowest level in ten years. At the same time, companies in the US services sector also indicated less optimism which has again sparked fears among investors of a recession for the world’s largest economy.

Hopes once again rest on the central banks.

Hope remains as long as negotiations continue

Hopes once again rest on the central banks. This applies in particular to the Federal Reserve, which has greater room for manoeuvre to cut rates than the world’s other major central banks as its key rates are well into positive territory. The next key rate cut in the US is expected at the end of October.

Hopes have risen recently on the back of the resumed negotiations between the governments of China and the US, on one hand, and the European Union (EU) and the UK, on the other. In the course of these negotiations, the value of the pound sterling has risen by around 4 percent against the Swiss franc. However, there is no sign of a clear solution to the trade dispute nor the UK’s exit from the EU yet. If agreements are reached, it also remains unclear whether we can expect a sustained global economic upturn and, if so, how rapid it would be.

Cautious positioning maintained

As long as the economic signals remain negative, we expect the anxiety on the financial markets to continue. We also expect the particularly high fluctuations to continue. This suggests the portfolios should be kept defensively aligned. In our portfolios, we are implementing this defensive strategy with positions in Japanese yen and gold investments. We also believe a slight underweighting in the equity allocation is the right strategy in the current environment.

Real estate funds overweighted

In this climate, we view Swiss real estate funds as attractive. The annual distribution yield of these funds currently stands at just under 3 percent. That is significantly higher than the yield to maturity of a 10-year Swiss government bond at -0.7 percent. This adequately offsets the higher risk of real estate funds compared to government bonds in our view. While real estate funds usually respond moderately to equity market fluctuations, major equity market corrections also have an adverse impact on this asset class.

Attractive distribution yields of real estate funds

Distribution yields of real estate funds compared to the yield to maturity of 10-year Swiss government bonds

The graphic shows the average distribution yield of real estate funds compared to the yield to maturity of 10-year Swiss government bonds. While the yields on Swiss government bonds have decreased sharply in recent years, real estate funds still pay out around 3 percent on average.

While the yield to maturity on 10-year Swiss government bonds has decreased sharply in recent years, real estate funds still pay out around 3 percent on average.

Correction on the Swiss capital market continues

In terms of the index values of the individual asset classes compared to the previous month, there are no major changes in value. This paints a picture of peace and stability. However this is misleading. The equity markets in particular have undergone sharp fluctuations over recent weeks. On the bond markets, the performance of Swiss interest rates is most noteworthy. Nowhere have long-term yields risen more sharply over the past two months and first half-year gains melted away to such a great extent as in Switzerland.

Performance of asset classes

Currencies 1 month in CHF YTD in CHF
Currencies
EUR
1 month in CHF
0.2%
YTD Year-to-date: since the start of the year in CHF

–2.5%

Currencies
USD
1 month in CHF
0.5%
YTD Year-to-date: since the start of the year in CHF
1.5%
Currencies
JPY
1 month in CHF
0.1%
YTD Year-to-date: since the start of the year in CHF
3.0%

Equities 1 month in CHF YTD in CHF
1 month in LC YTD in LC
Equities
Switzerland
1 month in CHF
–0.9%
YTD Year-to-date: since the start of the year in CHF
22.6%
1 month in LC Local currency

–0.9%

YTD Year-to-date: since the start of the year in LC Local currency
22.6%
Equities
World
1 month in CHF
–0.7%
YTD Year-to-date: since the start of the year in CHF
17.6%
1 month in LC Local currency
–1.2%
YTD Year-to-date: since the start of the year in LC Local currency
15.9%
Equities
USA
1 month in CHF
–0.8%
YTD Year-to-date: since the start of the year in CHF
20.4%
1 month in LC Local currency
–1.3%
YTD Year-to-date: since the start of the year in LC Local currency
18.6%
Equities
Eurozone
1 month in CHF
–0.5%
YTD Year-to-date: since the start of the year in CHF
14.1%
1 month in LC Local currency
–0.7%
YTD Year-to-date: since the start of the year in LC Local currency
17.1%
Equities
United Kingdom
1 month in CHF
0.2%
YTD Year-to-date: since the start of the year in CHF
9.5%
1 month in LC Local currency
–1.0%
YTD Year-to-date: since the start of the year in LC Local currency
10.6%
Equities
Japan
1 month in CHF
2.1%
YTD Year-to-date: since the start of the year in CHF
12.2%
1 month in LC Local currency
2.0%
YTD Year-to-date: since the start of the year in LC Local currency
8.9%
Equities
Emerging markets
1 month in CHF
–0.4%
YTD Year-to-date: since the start of the year in CHF
7.1%
1 month in LC Local currency
–0.9%
YTD Year-to-date: since the start of the year in LC Local currency
5.5%

Fixed income 1 month in CHF YTD in CHF
1 month in LC YTD in LC
Fixed income
Switzerland
1 month in CHF
–0.9%
YTD Year-to-date: since the start of the year in CHF
4.3%
1 month in LC Local currency

–0.9%

YTD Year-to-date: since the start of the year in LC Local currency
4.3%
Fixed income
World
1 month in CHF
0.5%
YTD Year-to-date: since the start of the year in CHF
8.1%
1 month in LC Local currency
–0.0%
YTD Year-to-date: since the start of the year in LC Local currency
6.4%
Fixed income
Emerging markets
1 month in CHF
–0.1%
YTD Year-to-date: since the start of the year in CHF
15.6%
1 month in LC Local currency
–0.6%
YTD Year-to-date: since the start of the year in LC Local currency
13.8%

Alternative investments 1 month in CHF YTD in CHF
1 month in LC YTD in LC
Alternative investments
Swiss real estate
1 month in CHF
1.3%
YTD Year-to-date: since the start of the year in CHF
22.9%
1 month in LC Local currency

1.3%

YTD Year-to-date: since the start of the year in LC Local currency
22.9%
Alternative investments
Gold
1 month in CHF
1.0%
YTD Year-to-date: since the start of the year in CHF
18.3%
1 month in LC Local currency
0.6%
YTD Year-to-date: since the start of the year in LC Local currency
16.5%

Our positioning – focus on Switzerland

Liquidity TAA old TAA new
Liquidity
CHF
TAA old Tactical asset allocation: short- to medium-term positioning
5.0%
TAA new Tactical asset allocation: short- to medium-term positioning
5.0%
Liquidity
JPY
TAA old Tactical asset allocation: short- to medium-term positioning
2.0%
TAA new Tactical asset allocation: short- to medium-term positioning
2.0%
Liquidity
Total
TAA old Tactical asset allocation: short- to medium-term positioning
7.0%
TAA new Tactical asset allocation: short- to medium-term positioning
7.0%

Equities
TAA old TAA new
Equities
Switzerland
TAA old Tactical asset allocation: short- to medium-term positioning
28.0%
TAA new Tactical asset allocation: short- to medium-term positioning
28.0%
Equities
USA
TAA old Tactical asset allocation: short- to medium-term positioning
7.0%
TAA new Tactical asset allocation: short- to medium-term positioning
7.0%
Equities
Eurozone
TAA old Tactical asset allocation: short- to medium-term positioning
3.0%
TAA new Tactical asset allocation: short- to medium-term positioning
3.0%
Equities
United Kingdom
TAA old Tactical asset allocation: short- to medium-term positioning
1.0%
TAA new Tactical asset allocation: short- to medium-term positioning
1.0%
Equities
Japan
TAA old Tactical asset allocation: short- to medium-term positioning
2.0%
TAA new Tactical asset allocation: short- to medium-term positioning
2.0%
Equities
Emerging markets
TAA old Tactical asset allocation: short- to medium-term positioning
3.0%
TAA new Tactical asset allocation: short- to medium-term positioning
3.0%
Equities
Total
TAA old Tactical asset allocation: short- to medium-term positioning
44.0%
TAA new Tactical asset allocation: short- to medium-term positioning
44.0%

Fixed income TAA old TAA new
Fixed income
Switzerland
TAA old Tactical asset allocation: short- to medium-term positioning
13.0%
TAA new Tactical asset allocation: short- to medium-term positioning
13.0%
Fixed income
World
TAA old Tactical asset allocation: short- to medium-term positioning
12.0%
TAA new Tactical asset allocation: short- to medium-term positioning
12.0%
Fixed income
Emerging markets
TAA old Tactical asset allocation: short- to medium-term positioning
8.0%
TAA new Tactical asset allocation: short- to medium-term positioning
8.0%
Fixed income
Total
TAA old Tactical asset allocation: short- to medium-term positioning
33.0%
TAA new Tactical asset allocation: short- to medium-term positioning
33.0%

Alternative investments TAA old TAA new
Alternative investments
Swiss real estate
TAA old Tactical asset allocation: short- to medium-term positioning
9.0%
TAA new Tactical asset allocation: short- to medium-term positioning
9.0%
Alternative investments
Gold
TAA old Tactical asset allocation: short- to medium-term positioning
7.0%
TAA new Tactical asset allocation: short- to medium-term positioning
7.0%
Alternative investments
Total
TAA old Tactical asset allocation: short- to medium-term positioning
16.0%
TAA new Tactical asset allocation: short- to medium-term positioning
16.0%
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