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Created on 22.05.2019

Stock markets in thrall to politics

The economy is weakening, and political risks have increased again recently. Our advice is to take profits made on equities and to moderately reduce the equity component in the portfolio.

After four months of calm, stock market conditions have been turbulent since the start of May. The trade dispute between the USA and China is once again casting a shadow over the markets. The signing of a trade deal – which is what the financial markets expected – failed to materialize. Instead both sides introduced new tariffs in early May, triggering considerable anxiety on the stock markets.

Equity prices under pressure

Chinese equities have been hit hardest by the renewed conflict. Equities traded on the local Chinese exchanges have lost over 10 percent of their value since the end of April. Other Asian securities also got caught up in the storm and suffered high single-digit percentage losses. By comparison, US equities have been affected far less by the dispute. The Swiss equity market proved the least susceptible – the Swiss Market Index even reached a new all-time high at the end of April.

The Swiss equity market proved the
least susceptible.

Defensive position pays off

This means our decision at the start of the year to overweight Swiss equities based on their defensive qualities has paid off. Swiss equities – with their high proportion of companies in defensive sectors, such as pharmaceuticals and consumer staples – have been one of the best-performing asset classes since the start of the year. Their total return stands at almost 20 percent. Our additional investments in gold and Japanese yen as a means of protecting against turbulent equity market conditions have also made a strong contribution to the portfolio’s return amid the recent turmoil.

Moderate reduction in equities


As yet, there is nothing to indicate that listed companies are being hit by the trade tariffs imposed. Company profit levels remain high in almost all regions. But the global economic outlook has increasingly deteriorated over recent weeks and months. Political uncertainty has great potential to cause disruption in this economic climate.

This is why we are advising our customers to slightly reduce their equity component. We are implementing this underweight position by selling eurozone equities. Compared to the Swiss equity market, these equities are more strongly affected by a worsening in the economic environment due to their sector weighting.

Hold emerging market bonds

There is considerably more pessimism on the bond markets at the moment. This is indicated by the long-term yields to maturity on secure government bonds. They always reflect future growth expectations. Yields to maturity on government bonds worldwide have not been this low for 18 months. In Europe they are even hovering around their lowest levels ever measured.

Emerging market bonds also received a boost from this decline in yields as falling yields cause the prices of bonds still outstanding to rise. These investments were unaffected by the wave of selling last month compared with emerging market equities. We see high yield potential in these investments and recommend maintaining an overweight position.

The Chinese equity market is the major loser

Indexed price performance in US dollars

Accessible text: The graphic shows the price performance of the MSCI China Index and the MSCI USA Index over the past year. Chinese equities fell almost constantly from May 2018 to the start of the year, while US equities actually increased in value at times despite the negative year-end return. A similar trend has also emerged in recent days.

Chinese equities have fallen significantly more than US equities recently. We saw a similar trend in the second half of 2018 when Chinese-US negotiations also ground to a halt.

Turbulent equity markets

In May, the first major equity market correction took place since the turbulence at the end of 2018. This was triggered by the escalation in the trade dispute between the USA and China. Emerging market equities, led by Chinese stocks, suffered double-digit percentage losses. In contrast, Swiss equities performed relatively robustly. The prices of secure government bonds, the gold price and the Japanese yen all rose. Swiss real estate funds trended sideways in this climate.

Performance of asset classes in francs

Currencies 1 Month 3 Months
YTD
Currencies
EUR
1 Month
-1,3%
3 Months
-0,8%
YTD

0,1%

Currencies
USD
1 Month
-0,6%
3 Months
0,8%
YTD
2,7%
Currencies
JPY
1 Month
1,1%
3 Months
1,5%
YTD
2,3%

Equities 1 Month 3 Months
YTD
Equities
Switzerland
1 Month
0,9%
3 Months
6,2%
YTD

17,8%

Equities
World
1 Month
-3,0%
3 Months
2,5%
YTD
15,8%
Equities
USA
1 Month
-2,7%
3 Months
3,2%
YTD
17,3%
Equities
Eurozone
1 Month
-4,5%
3 Months
2,6%
YTD
13,4%
Equities
United Kingdom
1 Month
-3,9%
3 Months
1,0%
YTD
13,6%
Equities
Japan
1 Month
-2,5%
3 Months
-0,7%
YTD
8,2%
Equities
Emerging markets
1 Month
-9,4%
3 Months
-4,0%
YTD
6,3%

Fixed Income 1 Month 3 Months
YTD
Fixed Income
Switzerland
1 Month
0,7%
3 Months
1,3%
YTD

2,2%

Fixed Income
Worls
1 Month
-0,1%
3 Months
2,0%
YTD
5,0%
Fixed Income
Emerging markets
1 Month
-0,4%
3 Months
3,2%
YTD
10,6%

Alternative Investments 1 Month 3 Months
YTD
Alternative Investments
Swiss real estate
1 Month
0,0%
3 Months
4,8%
YTD

10,3%

Alternative Investments
Gold
1 Month
-0,4%
3 Months
-3,7%
YTD
2,3%

Our positioning Swiss focus

Liquidity TAA old TAA new
Liquidity
CHF
TAA old
7,0%
TAA new
9,0%
Liquidity
JPY
TAA old
2,0%
TAA new
2,0%
Liquidity
Total
TAA old
9,0%
TAA new
11,0%

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
5,0%
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
5,0%
Equities
Total
TAA old
48,0%
TAA new
46,0%

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
10,0%
Fixed Income
Emerging markets
TAA old
8,0%
TAA new
8,0%
Fixed Income
Total
TAA old
31,0%
TAA new
31,0%

Alternative Investments TAA old TAA new
Alternative Investments
Swiss real estate
TAA old
5,0%
TAA new
5,0%
Alternative Investments
Gold
TAA old
7,0%
TAA new
7,0%
Alternative Investments
Total
TAA old
12,0%
TAA new
12,0%
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