Swiss equities are interesting

Investment Policy, June 2020

Swiss equities are interesting

The financial markets have clawed back some of their lost ground, and the huge monetary and fiscal support packages have been rolled out more rapidly than in 2008/09 – for good reason, as the corrections to both financial markets and economic activity were more sudden on this occasion. Swiss equities are currently interesting for three reasons: 1. a stable currency thanks to Switzerland’s comparative political stability by global standards; 2. a price/earnings valuation that is once again attractive compared to the MSCI World; and 3. the defensive nature of many leading Swiss companies, i.e. the below-average beta of the Swiss stock market due to its relative income stability. 

As far as can be established on the basis of the available information – which could of course change at any time – we are on the verge of a deep recession that will likely prove similar to that of 2008, but without turning into a 1930s-style depression. Why not? Because then – unlike now – the authorities chose to pursue restrictive fiscal and interest rate policies. The coronavirus crisis is now entering the next phase – a cautious one. It gives priority to the development of the corporate sector. This could prove beneficial for equities, as long as the number of active infections doesn’t shoot up. For that reason, an important role will be played by the huge (and still growing) economic stimulus packages put together by governments and central banks of the world’s leading economic nations – amounting to some 5-10% of GDP – as they seek to combat the recession and prop up financial markets. The increase in financial support for the unemployed announced by the US government and the new EUR 500 bn initiative spearheaded by Germany and France – the so-called “Recovery Fund” – show that the authorities are taking the issue of economic stimulus very seriously.

Equities
Ultimately it is the fundamental data that will prove decisive, i.e. the development of the economy and corporate earnings. While it is true that one should not put complete faith in the economic data released by China, this could nonetheless prove a decent indicator of how things will unfold for the rest of the world going forward. Chinese production (admittedly dictated by state instruction) may not have reached pre-crisis levels, but it does appear to be back to around 85-90% of those levels. Consumer spending, which clearly cannot be decreed from on high, is now at around 70% of pre-crisis levels. This should be viewed as progress following the slump in economic activity of some 50-60% that resulted in Chinese gross domestic product (GDP) recording a year-on-year decline of 6.8% in the first quarter. In view of the now inflated volumes of money market funds and the high cash holdings of institutional investors, equity market gains are quite clearly possible as economic data start to improve. In this hazy phase we are drawn to US equities, which have a good track record in such situations. Among other things, these benefit from the low weighting of the financial sector in the US stock market: Banks and other financial institutions are suffering against a backdrop of even lower interest rates, which are dragging down the profitability of the sector and thus represent a clear disadvantage for the equities of the Eurozone, where the financial industry is the most highly-weighted sector. But Swiss equities are also interesting right now. For one thing, they benefit from the fact that Switzerland has a stable political situation in a global comparison. History shows that the Swiss franc is more likely to hold its value than other currencies. The Swiss stock market contains an above-average number of companies with stable income streams from defensive sectors that have a good track record when it comes to growth. In addition, Swiss equities are now attractively valued compared to the MSCI World Index in terms of price/earnings ratios.

The Swiss stock market contains a proportion of companies with stable income streams from defensive sectors that have a good track record when it comes to growth.

Gérard Piasko, Chief Investment Officer

Bonds
In the fixed-income markets, two developments are now significant. Firstly, the decline of the truly wild market volatility that we witnessed in March should be viewed as a positive. Back then, the volatility of trend-pointing US bonds increased by a multiple of around four; it has now fallen back to the point where another bout of selling in the US government bond segment does not appear likely. Secondly, both the Federal Reserve and the ECB have gone further than just announcing a massive increase in their quantitative monetary easing operations, i.e. the purchase of bonds. They have also announced that they are extending their QE programs to include the corporate bond segment as well. Furthermore, the Fed will be buying not only the bonds of investment-grade quality, but also so-called “high-yield” bonds. Overall this will translate into additional demand for corporate bonds, which – together with their still above-average yields – increases their appeal compared to both cash and government bonds. 

Currencies
The funding of rising budget deficits and government debt mountains, which are the logical consequence of the fiscal stimulus pumped into virus-weakened economies, will be effected through bond purchases of a magnitude never seen before. This amounts to nothing less than a monetization of government debt, which in the long term will lead either to higher inflation or to a stealthy devaluation of paper currencies – whereby we view the latter as more likely. The currencies of countries that go down the road of extreme quantitative easing are likely to come under more pressure than those that take a more cautious approach. After a certain phase of consolidation, the Swiss franc could therefore experience a general phase of strength against other currencies over the next few months – especially the euro.

Commodities
Volatility remains above-average in the oil market, as the gulf between supply and demand remains significant. On the one hand, a reduction in global oversupply is clearly needed. The onus is very much on the three leading producers – Russia, Saudi Arabia, and above all the US – to risk (i.e. cut) their market share in order to stabilize prices. On the other hand, global demand is also being influenced by the fact that the economic situation is extremely difficult to evaluate right now. For that reason we continue to view gold as an interesting form of portfolio diversification: this commodity is supported by the central banks’ monetization of government debt, which is likely to lead to a devaluation of paper currencies. That said, investors should also factor in the likelihood of volatile movements in the price of gold, which – just like other commodities – is much more volatile generally than bonds.

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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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: 26 May 2020

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