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.
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.
Indexed stock market performance in Swiss francs
100 = 01.01.2020
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
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.
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
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
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
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
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
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
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.
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 pairEUR/CHF Price1.07 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 ValuationEuro undervalued Currency pairUSD/CHF Price0.96 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 ValuationUSD neutral
Currency pairGBP/CHF Price1.26 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 ValuationPound sterling neutral Currency pairJPY/CHF Price0.88 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 ValuationYen undervalued Currency pairSEK/CHF Price10.17 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 ValuationKrone undervalued Currency pairNOK/CHF Price10.85 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
ValuationKrone undervalued Currency pairEUR/USD Price1.11 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 ValuationEuro neutral Currency pairUSD/JPY Price110.17 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 ValuationYen undervalued Currency pairUSD/CNY Price6.88 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 ValuationRenminbi 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 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
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.