Equities: Headwind expected again after recovery rally

Yields on government bonds have continued to rise sharply; even in CHF, yields on two-year Swiss Confederation bonds are no longer negative for the first time since 2014. The US interest rate curve is already almost inverted. Lower yields on long versus short maturities have historically been a reliable leading indicator of a recession. Although the business climate indices were surprisingly robust in March, other economic survey figures (ZEW, Sentix and IFO) have fallen sharply. Concerns about recession or even stagflation will hardly disappear in the coming weeks. In addition, the US Federal Reserve has introduced even more aggressive interest rate hikes; 10 interest rate hikes have already been priced in by the market for the next 12 months. Financing conditions have deteriorated due to extended credit premiums and rising mortgage costs.

In view of these considerable headwinds for equities, the current price gains seem too strong for us. Equity valuations are again above the historical average; the premium for equities versus bonds has decreased significantly. We are therefore using the current recovery rally to sell equities. We are now slightly underweight in equities. Regionally, we continue to favour Switzerland, Canada and emerging markets. After the sharp rise in yields, we are reducing our duration underweight. We remain overweight in commodities.

• Investment grade bonds have fallen sharply since summer 2021 (-12%) and spreads are now at an average level again following this rise (125 basis points versus 80 compared to mid-2021 lows)
• We are reducing our strong underweight in investment grade bonds. After the adjustment, our duration is close to the benchmark.
• We do not expect a further rise in yields for the time being.

• China is the only major nation that will provide fiscal and monetary stimulus in 2022.
• A lot of pessimism regarding the regulations of Internet companies has been priced in.
• Further advantages: the valuation of Chinese technology stocks has halved and is favourable with a price/earnings ratio of 10.7x. The equities are massively underrepresented among foreign investors, and there is an increase in share buybacks, for example at Alibaba and Tencent.

• Emerging market central banks have already aggressively raised interest rates due to high inflation, for example to 11.75% in Brazil.
• Now the yield premium is very attractive compared to US Treasuries, with 380 basis points for USD bonds and around 600 for local currency bonds.
• Since the currencies are also valued favourably, we are building up bonds from economically healthy emerging markets.

Asset Allocation Special Mandates April 2022

Our tactical asset allocation for February und March 2022 can be found here.