The Swiss stock exchanges reached new all-time highs. New records have also been set on Wall Street recently. The recovery of equity prices has not been accompanied by growth in company profits, making equities very expensive.
There was a sharp upturn on the stock markets last month. The optimism can be attributed to the political situation as well as the central banks, who continue to signal their support. Equity and bond prices are rising ever higher. Swiss real estate funds and gold posted the highest price gains. The price of an ounce of gold reached its highest level in five years. Meanwhile, there was a summer lull on the foreign exchange markets. There was little movement on the foreign exchange markets. Of the major currencies, it was the pound sterling that fluctuated most, falling by several percent. Elsewhere, the Swiss franc performed slightly better, while the US dollar largely maintained its high valuation.
Indexed stock market performance in francs
100 = 01.01.2019
The bull market in equities continued last month in those regions which had suffered most in May due to the trade dispute that flared up again between China and the USA. These include both the European and Asian markets. The lead taken by Swiss equities over the world’s equity markets narrowed slightly recently. There is still strong demand from investors for defensive Swiss equities though.
Rising prices have also resulted in higher price/earnings ratios. Swiss and US equities, in particular, are now expensive compared to the historical average. The outlook for emerging market equities appears better. They are relatively attractive in historical terms.
Momentum of individual markets
This graphic shows the strength of equity market dynamics at the moment. There is positive momentum on all stock markets. Dynamics are weakest in the UK where the risk of a disorderly Brexit is weighing on prices. In contrast, equity prices stood at well above the average of the past 240 days in the USA, Australia and Switzerland.
The sharp fall in yields on secure government bonds has come to a halt. This means the overvaluations of recent weeks have been corrected somewhat. By contrast, the value of more risky bonds rose significantly over recent weeks. They include corporate and emerging market bonds.
Indexed performance of 10-year government bonds in francs
100 = 01.01.2019
The seemingly unstoppable price rises in secure government bonds look to have paused for the time being. However, the level of price gains since October 2018 is still exceptional. Gains on this scale have only ever occurred during recessions or substantial stock market corrections over the past 20 years.
Trend in 10-year yields to maturity
Government bond yields reached new lows in Europe and Switzerland at the beginning of July. Given the low interest rates, future price gains will be limited in Europe and Switzerland. In the USA, where interest rates remain above those in Europe, the potential for price gains is higher.
Credit spreads on corporate bonds
In percentage points
The premium that companies pay on their bonds compared to governments remains low. This means that companies are benefiting just as much from the fall in yields as governments. The difference between the yields to maturity that governments and companies pay reflects the markets’ risk appetite.
The prices of Swiss real estate funds have risen sharply over recent weeks. Interest rates remaining low has meant investor interest in real estate funds has been high. The premiums on the funds have risen again recently. However, low interest rates justify the high premiums.
Indexed performance of Swiss real estate funds
100 = 01.01.2019
Low interest rates are giving a sharp boost to real estate investments. The prices of listed Swiss real estate funds rose sharply last month. The value of the funds has risen by almost 15 percent on average from the beginning of the year. Some funds have posted year-to-date price gains of up to 25 percent.
Premium on Swiss real estate funds and 10-year yields to maturity
In Switzerland investors pay a premium on the value of the properties contained in the fund. This premium has moved above 20 percent due to the recent price rises of real estate funds. When interest rates were at a similarly low level in 2016, the premiums stood at 25 percent on average.
Vacancy rate and real estate prices
The supply of property is exceeding demand in Switzerland. This is indicated by the vacancy rate, which has continually risen for ten years, having 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 rented and, in turn, less attractive as investment property.
There is a summer lull on the foreign exchange markets. The greatest movement in recent weeks has been in emerging market currencies whose value has risen. The gold price has increased sharply in recent weeks. This has resulted in a gain of 10 percent in francs since the start of the year.
Currency pair Price PPP Neutral range
Currency pairEUR/CHF Price1.12 PPP1.18 Neutral range1.10 – 1.27 Valuationneutral Currency pairUSD/CHF Price0.99 PPP0.92 Neutral range0.81 – 1.04 Valuationneutral Currency pairGBP/CHF Price1.26 PPP1.47 Neutral range1.27 – 1.67 ValuationPound sterling undervalued Currency pairJPY/CHF Price0.92
Neutral range0.93 – 1.27
Currency pairSEK/CHF Price10.48
Neutral range11.03 – 13.31
Currency pairNOK/CHF Price11.46
Neutral range11.83 – 14.42
Currency pairEUR/USD Price1.13 PPP1.28 Neutral range1.11 – 1.45 Valuationneutral Currency pairUSD/JPY Price108.44 PPP85.91 Neutral range70.78 – 101.04 ValuationYen undervalued Currency pairUSD/CNY Price6.92 PPP6.26 Neutral range6.03 – 6.48 ValuationRenminbi undervalued
Source: Bloomberg, Thomson Reuters Datastream
There have been few major fluctuations on the foreign exchange markets over recent weeks. Only the pound sterling suffered further significant losses. As a result, it now seems particularly attractive again. However, the uncertainty still surrounding Brexit is likely to continue to weigh on the UK currency.
The US dollar is the most overvalued currency measured by purchasing power parity. This is reflected in the exchange rate with the euro, for example. The Swiss franc is also quite strong again now. The current exchange rate to the euro is around 6 percent below purchasing power parity. It is anticipated that such valuation differences will even out over the long term.
Indexed performance of gold in francs
100 = 01.01.2019
Thanks to a 5 percent increase, gold was one of the best-performing asset classes last month. The price for an ounce of gold broke through the 1400-dollar mark for the first time since 2014. For technically minded investors, this is an important barrier that was passed.