If you’ve got big plans, you need money – that goes for home-building families, but equally for governments and companies. And there’s certainly no shortage of big plans at the moment. Governments are modernizing their infrastructure, increasing defence spending and driving forward the energy transition. Meanwhile, companies are investing billions in artificial intelligence and new data centers.
But who’s funding it all? Where in-house resources are insufficient, external capital is needed, whether from household savings, retained earnings or capital from abroad.
The strength of competition for such capital has become particularly apparent in the USA, where, despite the positive economic situation, the government budget deficit stands at around 8 percent of annual economic output. What’s more, even the tech companies with the highest profits are increasingly unable to fund their own billion-strong AI investments and are taking on more debt. Conversely, households have less and less scope to save as wages are only rising modestly while living costs remain high. This means fewer resources are available from this side as well. And foreign investors are likely to be less willing to entrust money to America under the previous terms, because the country has lost standing as a reliable investment destination.
The consequences have long been apparent on the capital markets. In September alone, long-term interest rates rose sharply again, with 10-year US government bonds now yielding more than 5 percent. In Europe and Japan, too, financing has become much more expensive, with the recent central bank policy rate hikes likely a contributory factor. Given that they mainly affect short-term interest rates, they provide only a limited explanation for the increase on the capital market.
Higher interest rates made it difficult for many asset classes last month. They’re weighing on existing bond prices and reducing the present value of future returns. In equities, meanwhile, these headwinds are being countered by a robust global economy and encouraging corporate earnings. Moreover, the big plans are ultimately a bet on the future. Companies are investing so heavily because they expect to get even higher profits. If this bet pays off, equity markets will do well enough, even with higher interest rates.
Rising interest rates are having a positive impact on bonds, too. Newly acquired bonds are now yielding sizeable returns again, which can be secured for years to come. If the economic situation weakens and interest rates fall again, price gains would also be possible. With this in mind, we’re maintaining the neutral weighting of our long-term investment strategy for both equities and fixed income.
However, in Swiss real estate funds, we’re using this opportunity to take profits. Although Swiss long-term interest rates have remained comparatively low so far, Switzerland is unlikely to escape any further increase abroad unscathed. In such cases, real estate fund valuations could come under pressure, especially as they are trading at significant premiums to the value of their properties after the price gains of recent years. With this in mind, we’ve decided to reduce our previous overweight position and revert to a neutral weighting.
