Our positioning: moderate risk reduction

The economy is slowing down, and sentiment on the financial markets is deteriorating again. We regard another moderate reduction in equity allocation as a necessity. By contrast, Swiss real estate funds should benefit from the interest rate environment.

Following the significant rises in prices during the first half of 2019, sentiment on the markets changed during summer. Over the past few weeks, recession fears caused equity, bond and foreign exchange markets to fluctuate more than at any point so far this year. However, losses on the equity markets were contained. The response of the bond markets to these economic worries was a lot more dramatic, with yields in several areas falling to the lowest levels ever recorded. In Switzerland, investors in some instances had to accept a negative return of 1.1% per year on 10-year Swiss government bonds. 

Prepare portfolios for a weaker economy

There is nothing an investor fears more than a recession. During the last three recessions, the equity markets underwent corrections of an average of 32%. Losses on the equity markets were as high as 50% during the most recent recession. But we have not yet reached that point. As it stands, current economic and sentiment data does not indicate that a recession is on its way. We also believe that the central banks have other methods at their disposal for prolonging the current upturn.

Nevertheless, a little more caution is still advised on the part of investors. The economy has slowed down in many areas. The political climate remains tough and is having an impact on companies’ investment activities, which is in turn having an effect on the economy. Ultimately, the mood on the financial markets has grown increasingly cautious over the past few weeks.

In light of these events, we feel another moderate risk reduction in the portfolio is necessary. We recommend once again slightly reducing your equity allocation and increasing the allocation of international bonds. This restructuring will help make your portfolio slightly more robust overall and less susceptible to future fluctuations on the equity markets, which are to be expected in the current economic climate.

Why there is nothing an investor fears more than a recession

Performance of bonds and equities before and during the US recessions

The graphic shows the performance of equities and bonds before and during a recession in the USA. During the last three recessions, equities lost a third of their value on average. Emerging market equities posted even greater losses. Government bonds, meanwhile, are deemed secure and tend to increase in value during recessions.

During the last three recessions, equities lost a third of their value on average. Emerging market equities posted even greater losses. Government bonds, meanwhile, are deemed secure and tend to increase in value during recessions. 

Reduction in equities from emerging markets

The fall in interest over the last few months has increased the demand for securities from solid companies with business models that are not very dependent on economic trends. Equities from economically sensitive companies are performing significantly worse. Swiss equities have benefited from this, while equities from emerging markets have suffered. If the global economy does not gain momentum, we do not expect any changes to this trend. For this reason, we will continue to overweight Swiss equities, but we now also recommend underweighting equities from emerging markets. Given that the political situation in the UK remains complicated and that a no-deal Brexit is highly likely, we will also continue underweighting British equities.

The distribution yields of real estate funds are attractive.

Low interest makes real estate funds an attractive prospect

Although we recommend more cautious portfolio positioning, we also believe that the current climate offers opportunities with Swiss real estate funds. Based on the lower Swiss interest rate, we feel the distribution yields of real estate funds, which average 2.7%, are attractive prospects. We recommend increasing the weighting of these so you can benefit from interest at a record low. 

Record rally for government bonds

Reignited recession concerns had an especially large impact on the bond markets last month. The decline in yields caused one of the biggest increases in bond prices we have ever seen. The price of gold has also benefited from investor uncertainty, whilst low interest rates have boosted the prices of Swiss real estate funds. Meanwhile, equity investments that are heavily dependent on economic trends have experienced a downturn. 

Performance of asset classes

Currencies 1 month in CHF YTD in CHF
Currencies
EUR
1 month in CHF
–2.0%
YTD in CHF

–3.6%

Currencies
USD
1 month in CHF
–1.0%
YTD in CHF
–0.4%
Currencies
JPY
1 month in CHF
0.8%
YTD in CHF
2.7%

Equities 1 month in CHF YTD in CHF
1 month in LC YTD in LC
Equities
Switzerland
1 month in CHF
–0.8%
YTD in CHF
20.3%
1 month in LC

–0.8%

YTD in LC
20.3%
Equities
World
1 month in CHF
–5.4%
YTD in CHF
12.8%
1 month in LC
–4.5%
YTD in LC
13.2%
Equities
USA
1 month in CHF
–4.7%
YTD in CHF
16.1%
1 month in LC
–3.7%
YTD in LC
16.5%
Equities
Eurozone
1 month in CHF
–7.4%
YTD in CHF
7.7%
1 month in LC
–5.5%
YTD in LC
11.6%
Equities
United Kingdom
1 month in CHF
–8.2%
YTD in CHF
3.5%
1 month in LC
–5.3%
YTD in LC
9.0%
Equities
Japan
1 month in CHF
–4.2%
YTD in CHF
4.2%
1 month in LC
–5.0%
YTD in LC
1.5%
Equities
Emerging markets
1 month in CHF
–9.1%
YTD in CHF
1.9%
1 month in LC
–8.2%
YTD in LC
2.3%

Fixed income 1 month in CHF YTD in CHF
1 month in LC YTD in LC
Fixed income
Switzerland
1 month in CHF
4.1%
YTD in CHF
7.4%
1 month in LC

4.1%

YTD in LC
7.4%
Fixed income
World
1 month in CHF
1.3%
YTD in CHF
6.9%
1 month in LC
2.3%
YTD in LC
7.3%
Fixed income
Emerging markets
1 month in CHF
–0.1%
YTD in CHF
13.1%
1 month in LC
0.9%
YTD in LC
13.5%

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
6.2%
YTD in CHF
22.7%
1 month in LC

6.2%

YTD in LC
22.7%
Alternative investments
Gold
1 month in CHF
6.6%
YTD in CHF
17.6%
1 month in LC
7.6%
YTD in LC
18.0%

Our positioning – focus on Switzerland

Liquidity TAA old TAA new
Liquidity
CHF
TAA old
7.0%
TAA new
5.0%
Liquidity
JPY
TAA old
2.0%
TAA new
2.0%
Liquidity
Total
TAA old
9.0%
TAA new
7.0%

Equities
TAA old TAA new
Equities
Switzerland
TAA old
28.0%
TAA new
28.0%
Equities
USA
TAA old
8.0%
TAA new
8.0%
Equities
Eurozone
TAA old
3.0%
TAA new
3.0%
Equities
United Kingdom
TAA old
0.0%
TAA new
0.0%
Equities
Japan
TAA old
2.0%
TAA new
2.0%
Equities
Emerging markets
TAA old
5.0%
TAA new
3.0%
Equities
Total
TAA old
46.0%
TAA new
44.0%

Fixed income TAA old TAA new
Fixed income
Switzerland
TAA old
13.0%
TAA new
13.0%
Fixed income
World
TAA old
10.0%
TAA new
12.0%
Fixed income
Emerging markets
TAA old
8.0%
TAA new
8.0%
Fixed income
Total
TAA old
31.0%
TAA new
33.0%

Alternative investments TAA old TAA new
Alternative investments
Swiss real estate
TAA old
7.0%
TAA new
9.0%
Alternative investments
Gold
TAA old
7.0%
TAA new
7.0%
Alternative investments
Total
TAA old
14.0%
TAA new
16.0%
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