Greater volatility?

Investment Policy, November 2020

Greater volatility?

The onset of the colder season brings new challenges for governments and financial markets alike. A balance needs to be struck between protecting the health of the population on the one hand and supporting the economy on the other, which is extremely difficult. The increasingly gloomy consumer sentiment – possibly compounded by social tensions – is leading to greater fluctuations in financial markets. Against this backdrop, we are focusing on investments with defensive character and lower sensitivity to overall market movements. 

The data emerging from many countries is clear: the economic recovery is stalling, and economic uncertainty is once again on the rise. A key reason for this is the cautious behaviour of consumers, who are tending to save more in the face of rising unemployment. Partial and regional measures to contain the proliferation of coronavirus have been needed due to rising numbers of infections, and these are likely to weigh more heavily on the services side of the economy than on the production side. But combating the virus also means that further economic stimulus is likely to be needed. A further ramping-up of the asset purchase programme of the European Central Bank (ECB) could give European financial markets greater potential to catch up on their American counterparts.

Equity markets continue to exhibit volatility, pulled in different directions by a variety of drivers. Positive aspects include a higher dividend yield compared to historically low fixed-income yields, particularly in the sovereign segment. Meanwhile, the dividend yield available on European equities is higher than that on US stocks, which –when combined with the handsome valuation of the US equity market – could be to the latter’s disadvantage. Less positive for equities is the risk of another global economic downturn, which is itself influenced by two factors. The first of these is the uncertainty over the future direction of US economic policy in the run-up to the US elections. Whether or not the plans unveiled by the two presidential candidates in advance of polling day will actually be implemented will not be known for many weeks – or even months. As an additional factor, the proliferation of coronavirus continues to be a negative for consumer spending and hence also for economic growth in the affected countries. This should not be underestimated with the Christmas shopping season almost upon us. In addition, the fragile market concentration of the US equity market, which typically sets the tone for developments on global stock exchanges and is currently close to its historic high, represents a further volatility factor. Taking all the above into account, we remain focused on defensive equities with a lower beta (i.e. lower market sensitivity) than the overall global market (MSCI World Index). The same considerations also lie behind our current overweight stance in equities with minimal volatility (“MinVol”) and in Swiss equities.

Our focus lies on equities with defensive character that are less sensitive to the overall market and less dependent on economic developments.

Gérard Piasko, Chief Investment Officer

The bond purchase programmes of the world’s leading central banks (“quantitative easing”) continue to be implemented at full steam. This explains why bond markets have been much less volatile in recent months than in similar economic phases in the past. Where duration is concerned, the market average can probably be tracked, as long as no interest rate rises or major changes in inflation appear on the horizon. Fresh economic data should become more significant for corporate bonds over the next few weeks. Admittedly, an economic slowdown would hardly be a motivation to build up positions, but the bond market can also be expected to keep its eye on the development of company results. The asset purchase programmes of central banks this year have so far been particularly supportive of investment grade bonds, and little change should be expected here in the near future. We are therefore just as keen on quality in the fixed-income market as we are in the world of equities, and are therefore overweight in the investment grade segment.

The development of the euro has provided plenty of fuel for debate over the last few weeks and months. The nadir of March 2020, right in the middle of the coronavirus crisis, was then followed by a strong recovery, with the euro rising to around 1.20 against the US dollar. Part of this recovery was due to the fact that proliferation of the virus became more acute in the US than in Europe at times during the summer. The euro also appreciated against the Swiss franc, albeit less strongly than against the greenback. With the onset of autumn, and in view of the latest economic data no longer exceeding lofty expectations, the recovery of the euro has now given away to a period of correction. Going forward, all the major currencies – euro, US dollar, Japanese yen, British pound – could be susceptible to pronounced swings in both directions. The prevailing economic risks are likely to make the traditional stability of the Swiss franc an appealing play for investors.

For cyclical commodities such as industrial metals and crude oil, the quality of the emerging economic data should prove crucial. After all, following the sharp upturn that established itself in the late spring, the commodity market has attuned itself to the prospect of economic recovery. Accordingly, we should not be surprised to see bouts of profit-taking in the event of key data disappointing. Due to the above-mentioned economic risks, we are currently not overweight in commodities. Gold is clearly less sensitive to economic developments, including when compared to other precious metals. However, it should not be forgotten that gold has often reacted strongly to changes in real interest expectations, particularly in the US. Dollar sensitivity has also traditionally played an important role in the direction of the price of gold. As we are expecting greater volatility in both directions for the US dollar over the next few weeks, with the repercussions for gold that this implies, we are maintaining a neutral weighting in this precious metal.

Conclusion: The challenges facing the financial markets are growing – not least because cooler weather is conducive to proliferation of coronavirus, with the slowdown in economic growth that this probably entails. Our focus therefore lies on equities with defensive character that are less sensitive to the overall market and less dependent on economic developments. In addition to the renewed spread of the coronavirus and US political developments, the markets will be heavily influenced by any additional economic stimuli announced by governments and central banks.

Gérard Piasko

Gérard Piasko

Gérard Piasko is CIO and head of the investment committee of private bank Maerki Baumann & Co. AG. Before he was for many years CIO of Julius Baer, Sal. Oppenheim and Deutsche Bank.

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This publication is intended for information and marketing purposes only, and is not geared to the conclusion of a contract. It only contains the market and investment commentaries of Maerki Baumann & Co. AG and an assessment of selected financial instruments. Consequently, this publication does not constitute investment advice or a specific individual investment recommendation, and is not an offer for the purchase or sale of investment instruments. Maerki Baumann & Co. AG does not provide legal or tax advice. In addition, Maerki Baumann & Co. AG accepts no liability whatsoever for the content of this document; in particular, it does not accept any liability for losses of any kind, whether direct, indirect or incidental, which may be incurred as a result of using the information contained in this document and/or arising from the risks inherent in the financial markets.

Editorial deadline: 21 October 2020

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