A crisp, cold winter, plenty of snow, well-groomed pistes, panoramic views and sunshine in the mountains – what more could a skier’s heart desire? Sometimes there are days that simply couldn’t be better.
Things feel similar on the financial markets at the moment. Following the excellent performance of the last two years, our portfolios are in very good shape. In the early days of this new year, we can look forward to it with confidence. However, it’s unsurprising that the markets are currently finding it difficult to move seamlessly on from last year’s strong performance. Doing so would require already favourable expectations for the economy, corporate earnings, inflation and interest rates to actually be exceeded.
This isn’t a complete surprise. We’ve been pointing out for months that there are clearly identifiable risks for the financial markets. For example, inflation in most industrial nations has barely declined in recent months. In the eurozone, core inflation – i.e. excluding the volatile components of food and energy – has been stagnant since last April. In the USA, too, inflation has been trending only sideways since the summer.
The stock markets’ expectations of repeated further interest rate cuts by central banks, which were almost euphoric at times, have gone up in smoke. In turn, inflation expectations have risen around the world and capital market interest rates are also significantly higher than last autumn. It means any further major price rises on the equity markets look to be limited for the time being.
The political situation has also added to a growing sense of caution. Germany’s election campaign is now under way and it’s becoming increasingly clear that there’s little chance of any major change in policy after the new elections at the end of February. And looming over everything is Donald Trump’s inauguration on 20 January.
In short, the proverbial new year rally on the stock markets has failed to materialize up to now and a repeat of last year’s strong returns seems quite unlikely at the moment. So where can we still find investment opportunities?
Given the extremely low returns on bonds, real estate investments have started to look more interesting again to us. With a distribution yield of 2 to 3 percent, their “interest” is significantly higher than the level of Swiss bonds. As the population grows and construction activity fails to keep pace, demand for living space appears almost impossible to satisfy, which is likely to limit any fall in prices as a result of interest rates rising again at some point. And ultimately, Swiss investments should actually benefit from the increased international risks. A stronger franc would lead to continued low interest rates, and, in turn, to high real estate valuations.
