Our positioning: Adjustment within equities in Swiss equities

The financial markets began the new year cautiously. In particular, the US Federal Reserve’s stated reluctance towards future interest rate cuts led to rising interest rates and headwinds on financial markets worldwide, though these headwinds proved to be relatively short-lived. Long-term interest rates worldwide again declined sharply last month, despite some ups and downs. While this was likely due in part to the UK and European central banks’ monetary easing last month, renewed hopes that the decline in US inflation will set in more firmly over time also probably played a role. Overall, the markets now appear more confident that inflation rates will fall significantly. We still consider this to be an overly optimistic scenario, and instead expect US inflation rates to remain high for some time to come. Indeed, any looming trade war threatens to exert further upward pressure on inflation.

Adjustment within equities on Swiss equity market

The stock markets remain relatively unconcerned about a trade war that is becoming a reality. On the contrary, they made extremely strong gains last month. The Swiss stock market in particular rose sharply. Index heavyweights Novartis, Roche and Nestlé have made a major contribution to this year’s good performance so far. These three companies published strong annual results last month, pushing their share prices up by over 7 percent month-on-month. Measured by the Swiss Performance Index, the Swiss stock market is up more than 10 percent since the beginning of the year. This means that the Swiss stock market has gained as much in one and a half months as the average of the last 35 years in an entire year. However, there’s a considerable risk that the looming trade war will spread to the Swiss economy. We see the pharmaceutical industry as being particularly exposed. It’s not only high selling prices that could be a thorn in the side of the Trump administration, but also the fact that more medicines are exported to the USA than are imported from there. Given the strength of its two pharmaceutical giants, there is considerable potential for setbacks in the Swiss equity market. Conversely, we believe the European equity market is somewhat less vulnerable, given its broader sector diversification. We are therefore taking profits from our overweight in the Swiss equity market and returning to a neutral position in European equities.

Potential for setbacks on the US equity market

However, we’re maintaining our underweight in tech-heavy US equities in favour of global value stocks. Firstly, value stocks are less expensive than growth stocks, giving them greater upside potential, and secondly, the US equity market is likely to be particularly vulnerable to a trade war. This is because index heavyweights such as Meta or Alphabet could well be targets in any trade dispute. These companies generate a considerable proportion of their revenues outside the USA, making them vulnerable to retaliatory measures.

Performance of asset classes

Our positioning – Swiss focus