Summer’s over and the financial markets have come back to life. It’s been the central banks above all who’ve taken the lead again. For a long time, they relied on inflationary pressure to ease on its own. Now they’re pushing back more decisively: they want to dampen economic activity and inflation expectations by raising money market interest rates.
The ongoing war in Iran has dashed hopes of a rapid easing of energy prices. With oil prices over 60 percent above the previous year’s level, monetary policy can no longer be guided by hope alone. In most industrial nations, overall inflation has now returned to the 3% range. Higher energy costs, rising inflation expectations and stronger wage increases now threaten to trigger second-round effects and spread price pressure to more and more sectors of the economy.
The situation is extreme in Europe, where gas prices are currently 160 percent higher than the previous year’s figures. Low gas storage levels and a Russian government that remains unwilling to make peace mean there’s unlikely to be any improvement in the coming months. At the same time, the European Central Bank (ECB) set interest rates so low that investors barely generated any income after deducting inflation. A neutral or even restrictive monetary policy is, in turn, still some way off.
Rising interest rates will also have an impact on Switzerland. Although inflationary pressure is much lower in Switzerland, we’re not completely immune from international interest rate developments. The interest rate differential with the euro has become too wide, and the Swiss National Bank (SNB) will probably have to react to this. If the ECB raises interest rates again, interest rates are, in turn, likely to rise here too.
Financial markets have a particular way of describing the predicament facing the major central banks: “They are behind the curve!”. It means central banks are lagging behind inflation with their monetary policy measures. On these grounds, higher interest rates aren’t necessarily bad news for the equity markets. More concerning would be a loss of confidence in central banks’ ability to control inflation. By contrast, if the central banks retain market confidence, positive growth expectations can continue to be reflected in higher prices.
Rising real interest rates tend to weigh on one particular asset class: gold. If investors with interest-bearing investments can achieve a return even after deducting inflation, gold will lose some of its relative appeal. That’s why we’ve decided to liquidate our successful gold overweight and take the profits.
At the same time, the adjustment of our gold position highlights the importance of broad diversification. This applies across different asset classes and within the equity market. Investors in Swiss equities experienced this first-hand last month. Contrary to expectations, two new Novartis drugs proved to be less successful than hoped. The stock exchange punished Novartis quite brutally for this: within a week, the company, which remains successful, saw its share price fall by over 15 percent.
This underlines our financial market strategy: if you want to generate long-term returns on the financial markets, you have to take risks. But, it’s crucial to spread these risks broadly – not just within individual asset classes, but across different ones. This philosophy has paid off in recent years. And this year, it’s clear that a broadly diversified investment strategy can play to its strengths, especially during turbulent market phases. Our e-asset management is once again well ahead of its peers in terms of performance this year.
