Market overview: contrasts on the financial markets

The current situation on the financial markets is characterized by contrasts. On the one hand, investors continue to show risk appetite and are moving into higher risk investments such as equities and corporate bonds. The stock markets actually turned in a superb year-end rally. The expansionary monetary policy of the central banks, which are keeping interest rates low, is contributing to this. Meanwhile, the escalation of the US-Iran conflict has shown that investors continue to take flight to safe havens during periods of uncertainty. Gold and the Swiss franc in particular recorded significant rises.

  • Following the terrific end-of-year rally, the momentum of the stock markets slowed a little at the beginning of the year. This was caused in part by geopolitical risks surrounding the US-Iran conflict. The greatest momentum can be observed in the emerging markets.

    Indexed stock market performance in Swiss francs

    100 = 01.01.2020

    This graphic shows the performance of the stock markets in Switzerland, worldwide and in emerging markets in Swiss francs over the past 12 months. Since the beginning of the year, a further upturn has been observed, albeit far more restrained. The Swiss stock market has lagged behind in comparison. By contrast, emerging market equities posted the strongest gains in January.
    Source: Refinitiv

    After a year-end rally with significant gains, prices on the stock markets are continuing to rise at the outset of the new year, albeit at a slower pace. For a beginning to the year, this was a rather cautious start even compared to previous years. On the one hand, this can be attributed to the short-term escalation on the geopolitical front. Following the assassination of an Iranian general by US forces, it was unclear what consequences this move would have. On the other hand, a certain degree of restraint can be assumed given the poor industrial production figures.

    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.  At the beginning of the year, momentum continues to be positive worldwide. This is currently most pronounced in Asia, followed by the Swiss, US and UK stock markets.
    Source: Refinitiv

    Despite a cautious start to the year on the stock markets, momentum remains clearly positive. This was particularly pronounced in Asia in the first weeks of the year. Good figures from industry and a significant easing of the US-Chinese trade dispute have led to optimism on the Chinese stock market. While the US stock markets rose significantly in January, momentum on the Swiss stock market has slowed.

    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 rose against the backdrop of increasing prices last month. There are major differences at regional level. The valuation of the Swiss market, for instance, is at the upper end of the scale in historical terms. The P/E ratio for the world equity index and for emerging market equities indicates values that lie around the long-term average.
    Source: Refinitiv

    Global stock market valuations are rising, as measured by the price/earnings ratio (P/E ratio). The year-end rally has accelerated this development once again. However, as corporate earnings continue to show little growth, P/E ratios are rising. Even though rising prices are currently benefiting the portfolio: the downside is that any fall has the potential to be more serious, which would become particularly evident in a subsequent recession.

  • The new decade is starting with moderately higher prices on government bonds compared to the previous month. At the same time, yields to maturity on 10-year government bonds remain close to their historic lows. If, as expected, interest rates remain at a stable low for 2020, this will have a stronger negative impact on portfolio returns than previously.

    Indexed performance of government bonds in Swiss francs

    100 = 01.01.2020

    This graphic shows the performance of government bonds from Switzerland, the USA and Germany in Swiss francs. Secure government bonds experienced losses worldwide last month as higher risk securities made major gains, with equities leading the way. In the first weeks of trading since the start of the year, however, yields to maturity fell slightly again, resulting in moderately higher prices. US securities performed best, followed by Swiss government bonds. German government bonds fared worst.
    Source: Refinitiv

    While stock markets experienced a real boom at year-end, secure long-term government bonds lost value in the last quarter. Following the threefold reduction in interest rates by the US Federal Reserve, interest rate expectations for 2020 are stable. And the European Central Bank is also expected to continue with its current interest rate policy. If interest rates remain low, the low interest rate environment will have a greater impact on portfolio returns, as it will no longer be possible to benefit from price gains.

    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. 10-year yields to maturity are an important benchmark for interest rate developments. Despite the recent increase, they are still experiencing a long-term downward trend. In Europe, yields to maturity remain in negative territory.
    Source: Refinitiv

    After the sharp drop in the yield to maturity on 10-year government bonds last year, there were signs of a moderate recovery at year-end. However in the first trading weeks of the new year, yields fell again. They are still close to their historical lows. In Europe, yields to maturity remain in negative territory. This is increasingly pushing investors in search of returns into higher risk investments such as corporate and emerging market bonds.

    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. The lower the spread, the less additional interest higher risk borrowers will have to pay compared with secure government issuers.
    Source: Bloomberg, Refinitiv

    At the beginning of the year, risk appetite amongst investors remains high. This is impacting not just the stock markets, but also the markets for corporate and high yield bonds: there is relatively little difference in yields between such risky investments and safe government bonds. In Switzerland, the last time credit spreads were at such a low level was before the financial crisis.

  • Swiss real estate funds continued their upward trend in January. Investors are prepared to pay record-high premiums. The global real estate market, on the other hand, is burdened by rising capital market interest rates.

    Indexed performance of Swiss real estate funds

    100 = 01.01.2020

    The graphic shows the indexed average performance of listed Swiss real estate funds over the past 12 months. Since the low recorded a year ago, a clear growth trend has been observed. This has continued so far into the new year.
    Source: Refinitiv

    Swiss real estate equities and funds got off to a brilliant start in the new year, continuing their upward trend from last year. Only in the last few days have they eased up somewhat. It is possible that investors have used some of last year's earnings to make additional real estate investments. But in exchange they have to pay record-high prices. Real estate funds used the opportunity to raise new money.

    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 real estate properties contained in Swiss real estate funds since 2000. This premium skyrocketed last year and reached new all-time highs in January of this year. This trend shows an inverse correlation with 10-year yields. Despite the current low interest rate environment, the reasons for the high level are not fully apparent.
    Source: Bloomberg, Refinitiv

    Listed Swiss real estate funds continued to rise steeply at the beginning of the year. New highs were achieved. Investors were prepared to pay record prices. Never before has the difference between the intrinsic value of a property and its recorded market price been so high. Thus, despite the current low interest rate environment, the reasons for the prices are no longer fully apparent. However, the comparatively high dividend yield of real estate funds still seems attractive enough not to dampen the strong demand.

    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. Whereas real estate prices have experienced a downward trend over the last five years, the rise in vacancy rates continues unabated.
    Source: Refinitiv

    The vote on the popular initiative for “more affordable housing” is scheduled for 9 February. The initiative requires that the share of public utility housing construction in newly built homes be at least 10 percent nationwide. Proponents hope that this will allow more tenants to benefit from reduced rents. Opponents argue that due to the relatively strict requirements of the initiative, additional housing will also end up being built in areas where there are already high vacancy rates.

  • Currencies

    The geopolitical uncertainties at the turn of the year manifested themselves on the currency markets: the demand for safe haven currencies increased. The pound sterling is already losing ground again.

    Currency pair Price PPP Neutral range Valuation
    Currency pair
    EUR/CHF
    Price
    1.07
    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 – 1.26
    Valuation
    Euro   undervalued
    Currency pair
    USD/CHF
    Price
    0.96
    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 – 1.04
    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.
    1.45
    Neutral range Range of historically normal fluctuations.
    1.25 – 1.65
    Valuation
    Pound sterling neutral
    Currency pair
    JPY/CHF
    Price
    0.88
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.06
    Neutral range Range of historically normal fluctuations.
    0.91 – 1.25
    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.
    12.08
    Neutral range Range of historically normal fluctuations.
    10.93 – 13.23
    Valuation
    Krone undervalued
    Currency pair
    NOK/CHF
    Price
    10.85
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    12.99
    Neutral range Range of historically normal fluctuations.
    11.69 – 14.29
    Valuation
    Krone 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
    110.17
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    87.87
    Neutral range Range of historically normal fluctuations.
    72.31 – 103.42
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    6.88
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    6.30
    Neutral range Range of historically normal fluctuations.
    6.05 – 6.54
    Valuation
    Renminbi undervalued

    Source: Bloomberg, Refinitiv

    At the beginning of the year the focus was on the US-Iran conflict. The calm on the foreign exchange markets was over. Safe haven investments were briefly in demand. This was most evident in the rise in value of the Swiss franc, although it has been appreciating since mid-December. The US dollar has suffered losses since December, but has once again stabilized. The pound sterling has dropped in value again since mid-December, as Boris Johnson insisted that he would accept a hard Brexit. Appreciation of the renminbi in the run-up to the settlement of the US-China trade dispute is also worthy of note.

    Gold

    Gold also benefited from the geopolitical uncertainties and continued its rise that began in the first half of 2019.

    Indexed performance of gold in Swiss francs

    100 = 01.01.2020

    This graphic shows the indexed performance of gold in Swiss francs over the year. While the last two quarters were characterized by a declining demand for safe haven investments such as gold, this has recently changed again abruptly.
    Source: Refinitiv

    While the price of gold still visibly reflected easing fears of a recession in the final quarter, it jumped dramatically to new high levels at the turn of the year. Gold thus also benefited from the demand for safe haven investments. One kilo of gold briefly cost 49,000 Swiss francs. Even though prices have recovered again somewhat from their highs, gold has registered positive price momentum.

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