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Created on 19.07.2019

Our positioning: Looking for new drivers to boost prices

The second half of the year is unlikely to be as brilliant as the first. Interest rates are already low and the economy is faltering. We recommend replacing some equities and bonds with gold and Swiss real estate funds.

The extremely strong performance on financial markets in the first half of 2019 was mainly driven by the fall in interest rates. Central banks worldwide indicated that they will maintain their expansionary monetary policy. They would even step up their support if necessary. That is precisely what financial markets now expect from the US central bank. If the bond markets’ forecast is correct, the US Federal Reserve will cut its key rate by at least half a percentage point by the end of the year.

If interest rates fall, prices rise

If interest rates fall, the prices of financial investments will rise. That is evidently the case with bonds, but also applies to equities, real estate and some other investments. The fact that equity prices have risen by just under 20 percent worldwide since the start of the year – and by some 22 percent in Switzerland – is largely attributable to interest rate cuts and financial markets’ high expectations of the central banks.

Falling interest rates lead to bond price rises

Performance of Swiss government bonds

The graphic shows the price performance and total returns of Swiss government bonds. The prices of Swiss government bonds rose sharply in the first half of the year. Despite negative yields to maturity, this means a gain for investors overall. Rising prices have offset the accumulated loss of yield.
Source: Thomson Reuters Datastream

Prices of Swiss government bonds rose sharply in the first half of the year. Despite negative yields to maturity, this means a gain for investors overall. Rising prices have offset the accumulated loss of yield.

Profit levels not keeping pace

In contrast, equity prices received little support from company profits, which have been stagnating for some time and have even declined in some regions. Companies are also increasingly cautious about their profit forecasts.
Profits are only likely to increase again if the economy picks up significantly. However, this is not what the leading economic indicators currently suggest.

Companies are also increasingly cautious about their profit forecasts.

Cautious positioning of portfolios

This means at the beginning of the second half-year, the financial markets are faced with the conflicting demands of a faltering economy, very low interest rates and high expectations of central banks. This means a repeat of the performance on financial markets in the first half of 2019 is rather unlikely. We can expect short-term setbacks unless the economy picks up. This applies to equity investments in particular. Cautious positioning of the portfolio is also advised in view of the still unresolved geopolitical conflicts currently playing out in the background.

We recommend reducing the equity allocation to slightly below the long-term allocation. In our view, a cautious approach is advisable towards European and UK equities, in particular, which we are underweighting in our portfolios. Instead we prefer Swiss equities. They react less severely to setbacks on the global equity markets and are much sought after by investors due to their defensive characteristics.

In contrast, the low interest-rate environment restricts the yield potential of bonds. As alternatives to secure bonds, we recommend adopting an overweight position in Swiss real estate funds and money market investments. We also consider emerging market government bonds to be attractive. With an average yield of 7 percent, investors can benefit from significantly higher yield potential here. We also advise our customers to hold gold investments and yen in their portfolios. In the past they have proven valuable investments in times of uncertainty.

Gold flying high

The financial markets performed strongly over the past four weeks. Nearly all asset classes generated positive returns last month. On the equity markets, the leading indices in Switzerland and the USA set new records. The positive momentum extended to emerging market investments, which had failed to keep pace with the dynamics on developed markets in the previous months. Swiss real estate funds and gold investments, which we continue to recommend purchasing, also performed well last month.

Performance of asset classes

Currencies 1 month in CHF YTD in CHF
Currencies
EUR
1 month in CHF
-1.1%
YTD in CHF

-1.6%

Currencies
USD
1 month in CHF
-1.1%
YTD in CHF
0.6%
Currencies
JPY
1 month in CHF
-0.8%
YTD in CHF
1.9%

Equities 1 month in CHF YTD in CHF
1 month in LC YTD in LC
Equities
Switzerland
1 month in CHF
0.3%
YTD in CHF
21.3%
1 month in LC

0.3%

YTD in LC
21.3%
Equities
World
1 month in CHF
2.6%
YTD in CHF
19.3%
1 month in LC
3.8%
YTD in LC
18.6%
Equities
USA
1 month in CHF
3.0%
YTD in CHF
21.8%
1 month in LC
4.2%
YTD in LC
21.1%
Equities
Eurozone
1 month in CHF
2.8%
YTD in CHF
16.2%
1 month in LC
4.0%
YTD in LC
18.1%
Equities
United Kingdom
1 month in CHF
0.6%
YTD in CHF
12.7%
1 month in LC
3.2%
YTD in LC
15.2%
Equities
Japan
1 month in CHF
0.9%
YTD in CHF
8.8%
1 month in LC
1.7%
YTD in LC
6.9%
Equities
Emerging markets
1 month in CHF
3.9%
YTD in CHF
12.1%
1 month in LC
5.1%
YTD in LC
11.5%

Fixed income 1 month in CHF YTD in CHF
1 month in LC YTD in LC
Fixed income
Switzerland
1 month in CHF
0.2%
YTD in CHF
3.1%
1 month in LC

0.2%

YTD in LC
3.1%
Fixed income
World
1 month in CHF
-0.4%
YTD in CHF
5.5%
1 month in LC
0.7%
YTD in LC
4.9%
Fixed income
Emerging markets
1 month in CHF
1.1%
YTD in CHF
13.2%
1 month in LC
2.2%
YTD in LC
12.5%

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
3.8%
YTD in CHF
15.6%
1 month in LC

3.8%

YTD in LC
15.6%
Alternative investments
Gold
1 month in CHF
3.6%
YTD in CHF
10.3%
1 month in LC
4.8%
YTD in LC
9.6%

Our positioning – focus on Switzerland

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

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
5.0%
Equities
Total
TAA old
46.0%
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
7.0%
TAA new
7.0%
Alternative investments
Gold
TAA old
7.0%
TAA new
7.0%
Alternative investments
Total
TAA old
14.0%
TAA new
14.0%
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