political and economic volatility

Political and economic volatility

Investment Policy, November 2024

Political and economic volatility

Signs pointing to an economic downturn are on the rise in Europe, particularly in Germany. The US and Swiss economies, however, appear to be doing better than that of the eurozone. It will be important to see whether the more extensive stimulation of the Chinese economic we see today will have a sufficiently positive impact for the emerging markets. Rates of inflation around the world are on the decline, but achieving the goal of 2% quickly is not likely to become any easier due to the stimulation of the Chinese economy, as commodity prices could potentially rise. It therefore makes sense for us to retain our preference for US and Swiss equities as well as for quality global equities.

Global economic trends are diverging from one region to the next. Europe – especially the eurozone – is showing signs of an economic downturn, most noticeably in Germany. The industrial output here in particular is trending downwards, whereas an increase in real household income is keeping consumption stable. In the US, the economy is undergoing a period of normalisation following a third quarter that exceeded expectations economically. The initiated interest rate cuts could have a positive impact on the global economy if they are carried out to a sufficient degree in the next few months. With this in mind, we must also make mention of China’s now more extensive economic stimulus package, which includes interest rate cuts and minimum reserve ratios for banks as well as the provision of state financing and liquidity for the housing and equity markets. In Switzerland, two trends are coming to the fore. First, the national economy hitherto appears to be extremely robust thanks to declining inflation, which has given real income a boost. Second, the strong Swiss franc is weakening exports, which are becoming more vulnerable due to the slowdown of the EU economy. As a result, there is increasing pressure being placed on the SNB to make further interest cuts and currency interventions in order to support exports.
 

Equities

The equity markets could soon bear witness to more fluctuations than has been the case in recent times, as contrasting factors exert a greater influence. On the one hand, the rise in gold prices illustrates that the level of geopolitical uncertainty remains very high. On the other hand, key interest rate cuts are likely to help the markets, whereas slowdowns of economic activity could have a negative impact. This means that a cautious positioning which supports our preference for quality global equities as well as for Swiss and US equities over eurozone equities makes sense on the whole – also because eurozone equities appear more vulnerable to economic developments. Nevertheless, the higher-than-average levels of political uncertainty around the world mean that now is not the time for euphoria. For example, an increase in US tariffs under a potential Trump government could place strain on companies in the eurozone or China versus those in the US. On the other hand, tax cuts under a Republican congressional majority would likely favour US companies, while US tax hikes under a Democratic leadership of the US Congress could, if anything, negatively impact American and global equities.

The higher-than-average levels of uncertainty around the world mean that now is not the time for euphoria.

Gérard Piasko, Chief Investment Officer

Bonds

The decline in inflation in the western nations is beneficial for bonds, as the likelihood of interest rate cuts increases. Furthermore, the absolute level of the starting bond yields continues to remain relatively attractive in comparison to the long-term average and in some cases also versus the dividend yield on various equity markets. However, high-yield bonds historically have very low additional carry (credit spreads) compared to investment grade bonds, which is why we remain clearly overweight in investment grade bonds. In the event of a more pronounced economic slowdown in particular, bonds of a higher credit quality, i.e. investment grade bonds, should perform better in terms of the total return than those with a lower credit quality or high-yield bonds. Swiss-franc investments, including bonds, are currently being helped by the level of inflation in Switzerland, which is particularly low by international standards. On the strength of the significance of a company’s performance, i.e. company-specific fundamentals, we would recommend taking a particularly selective approach in the bond market at present.

Currencies

The slowly narrowing interest rate differential advantage of US over European interest rates will not be beneficial for the US dollar. Nevertheless, economic growth in the US continues to clearly outstrip that of the eurozone. All in all, this contrast could result in rising volatility for the US dollar versus the euro. However, the euro could become more volatile versus the Swiss franc due to greater economic uncertainty within the eurozone, particularly in France and Germany. This is due to the fact that the financial situation and economic policy of these two key nations within the European Union are currently considerably less stable than in recent years. This trend benefits the Swiss franc, especially as Switzerland has significantly lower government debt than other countries.

Commodities

The now more pronounced stimulation of the Chinese economy by the government and central bank has resulted in commodities rallying significantly, particularly industrial metals. It is not yet possible to determine whether this will be long-lasting, as the interest rate cuts and China’s fiscal policy programmes will only have an effect further down the road. For the price of oil, the next, completely unpredictable developments in the Middle East will be significant. If the markets see Iran becoming more involved in the conflict, possible reductions in Iranian oil exports or disruptions to the transport route through the Strait of Hormuz, which is extremely important for the global oil market, could result in the oil price rising temporarily. This could also keep the price of gold at a historically high level or even increase it further due to greater demand for gold from retail investors.

Gérard Piasko

Gérard Piasko

Gérard Piasko is Chief Investment Officer and head of the investment communication 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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Editorial deadline: 29 October 2024

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