You can only be successful by trading with the trend. On the markets, as the saying goes, “the trend is your friend”. To put it another way: it’s the momentum that counts. Or simply, go with the flow.
The US stock market is a good example here. We’ve seen an almost continuous upward trend for three years. By contrast, the dollar has been heading south for about the same amount of time. Whereas the media has regularly been reporting new record highs for US stock markets, the picture for Swiss investors is less impressive: in Swiss francs, the USA is lagging behind both Europe and the emerging markets.
And there’s plenty to suggest that the weak dollar is more than just a passing fad. US inflation is well above that in Switzerland. At the same time, US fiscal policy lacks discipline. Despite a strong economy, the budget deficit is running close to 8 percent of national income, , which is exceptionally high in peacetime. The US debt-to-GDP ratio has now even exceeded that of France. Added to that, the White House itself has outlined a weaker dollar as one of its policy goals.
Whereas US stocks have achieved only a modest single-digit return in Swiss francs this year, emerging markets have been far stronger. These markets are up by over 17 percent on average in Swiss francs. We’re benefiting from this as we’ve deliberately been underweighted in the USA and are more heavily invested in emerging markets. China’s stock market performed particularly strongly, which is why we took profits there last month.
It’s no surprise that emerging markets tend to benefit from a weaker dollar. As a result, we expanded our position in emerging market bonds in November. The dollar’s downturn could even accelerate if stock markets become more turbulent. However, we’ve yet to see the inflows into the Swiss franc as a safe haven typically resulting from such turbulence , despite our currency rising by more than 10 percent. Such inflows could still set in and boost the Swiss franc even more.
Gold, where we’ve also increased our weighting, is likely to have recorded its biggest rise for the time being: it has gained over 40 percent this year in Swiss francs. Bitcoin, on the other hand, is undergoing a correction and is around 25 percent below its peak.
Given the dollar’s intact downward trend, the sharp rise in US government debt and the Swiss franc’s growing structural appeal, it makes sense to reduce currency risks in US dollar positions. With this in mind, we recommend at least partially hedging US dollar investments. We’ve unwound our overweight position in US government bonds and simultaneously increased our positions in emerging market bonds. And we still consider our current underweight in US stocks to be correct.
