Uncertain summer stabilisation

Investment Policy, September 2022

Uncertain summer stabilisation

The temporary market recovery seen in bonds and equities shows that many market participants assume that the phase of interest rate hikes will soon be over. However, this is by no means certain. While fears of a recession have led to a correction in commodity prices, they also entail downside risks for the development of corporate earnings and thus for the equity markets. By the same token, global inflation is not developing in such a way that the central banks can already give the all-clear. Further interest rate hikes are to be expected, jeopardising the valuation of both equities and bonds. We are therefore maintaining a cautiously defensive investment policy in keeping with our philosophy of “security over return”.

Due to commodity trading and inventory volatilities, economic growth in the US during the first quarter was down just 1.6% when viewed on an annualised basis relative to the prior quarter, with the corresponding decline in the second quarter being just 0.6%. Annualised changes in private consumption – an important factor for the US economy – relative to the prior quarter during the first three months of 2022 stood at +1.8%, while this figure still totalled +1.5% in the second quarter. These developments show that neither are we in the midst of a recession nor is one imminent, as the changes in real gross domestic product (GDP) relative to the prior year stood at +3.5% and +1.7%. Nevertheless, the slowdown in US and European economic growth is a reality that should not be ignored by the financial markets. The Fed is using the historically high inflation rates to push up interest rates more quickly. This means that next year interest rates will be at a higher level from which interest rate cuts could also be made should a recession strike. For the time being, both US and Western central banks thus remain an obstacle to higher asset valuations. The energy bottlenecks that are being experienced in Europe, in particular, due to the reduction in Russian gas supplies are further complicating the tasks of the central banks. Over the coming months, they are likely to lead once more to higher fluctuations in both bond and equity valuations by historical standards.

Equities

Generally speaking, the second quarter results of global public limited companies were by no means unsatisfactory. However, top managers were less positive and thus more cautious in their outlook for the quarters ahead. The reason for this can be found in the combination of a weakening global economy and a rise in various cost factors. In addition, there are still existing bottlenecks for supply components required for the production of goods. It can be assumed that profit margins, which are now at a historically high level thanks to the good margins of energy companies, will decline in the coming months due to increased financing and wage costs. The earnings estimates of the majority of analysts for 2022 as a whole and for 2023 thus appear to be overly optimistic. At the same time, the risks of recession for the global economy, and in the Eurozone in particular, are gradually increasing. We remain overweight Swiss equities, which are less cyclical thanks to the high share of defensive sectors. We are likewise maintaining our tactical underweight position in Eurozone equities.

In light of a likely economic slowdown, we remain overweight investment-grade bonds versus high-yield bonds.

Gérard Piasko, Chief Investment Officer


Bonds

Over the summer holidays, the bond markets underwent what is likely to only be a temporary stabilisation. The background to this development appears to be the fact that the inflation in US consumer prices has not accelerated any further as of the end of July. It must be noted, however, that inflation in both the US and Eurozone remains at historically high levels. It is thus possible that the central banks are feeling a certain sense of hope. However, headline inflation of 8.5% and core inflation of 5.9% (excluding energy and food prices) still suggest that, given the current US key interest rate of 2.5%, further significant interest rate hikes in the US lie ahead, with this also being the case elsewhere. Investment-grade corporate bonds saw a narrowing of spreads in both the US and Europe following twelve months of widening against government bonds. However, as an economic slowdown is more likely over the coming months, we remain overweight investment-grade bonds versus high-yield bonds, which are known to be exposed to higher risks in the face of the threat of recession.

Currencies

The US Dollar Index, a gauge of the greenback’s valuation versus the currencies of America’s major trading partners, rose to a 20-year high at the beginning of the summer holiday period. It thus can come as no surprise that there has been some profit-taking in the meantime. The exchange rate for the US dollar to the Swiss franc, for example, has fallen from 1.00 to below 0.95, while a recovery has been observed in the euro to US dollar exchange rate from parity back towards 1.04. The decisive factor will now be the further communication of the Fed – in other words, how aggressively it intends to raise interest rates from September. We remain neutral on currencies. In the case of rising recession risks in the Eurozone, the Swiss franc could strengthen further against the euro.

Commodities

Gold benefited from the summer correction in the US dollar and thus gained in value. The price of crude oil, which dominates all commodity indices, has fluctuated again in recent times. From its peak, the price of oil has fallen primarily because the US has increased the global supply by releasing some of its stockpiled strategic reserves. The decision of the Organisation of the Petroleum Producing Countries (OPEC) to only slightly increase oil production could, however, put the brakes on the decline in oil prices once more. Commodities as a whole are set to respond sensitively to upcoming economic data; if there are signs of economic weakness, further corrections are quite conceivable.

Gérard Piasko

Gérard Piasko

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

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Important legal information:

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: 25 August 2022

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