Intensive sector rotation

Since the beginning of the year, growth stocks – in particular US technology stocks – have been on a downward flight due to the sharp rise in interest rates. Value stock are, however, in vogue. The intense sector rotation prompted us to reduce our Nasdaq exposure in mid-January. Since then, there has been an unexpectedly broad risk-off mood.

Text: Stefano Zoffoli

Value stocks were also dragged down. Global equities consolidated to 10% in January’s low and the 200-day moving average in the MSCI World Index was breached. The reason: the Fed was unequivocally clear that it was on course to raise base rates and reduce its balance sheet. Its new narrative, the successful balancing act between the labour market and inflation, including firm anchoring of inflation expectations, has not yet quite reached the market.

We see risks that the economy will weaken, and believe the stock market has not yet fully digested the change in monetary regime. The environment for equities has deteriorated. We now prefer a neutral equity allocation and reserve the right to purchase equities in the near future. We continue to be overweight in commodities, as supply shortages tend to rise and commodity investments also act as a hedge against geopolitical tensions.

  • The period after the coronavirus crisis was a tough one for European dividend stocks with a 19% underperformance. This year, the wind turned with an outperformance of 11%.
  • The rotation of highly valued equities towards value, i.e. high-dividend European sectors such as finance, telecommunications and energy will continue to gather pace, as relative valuations are still significantly diverged. The price-to-earnings ratio for value is 14 compared with 33 for growth.
  • We are taking our profits on European commodity stocks and, in return, doubling our investment in European dividend stocks with a focus on sustainable spreads.
  • The spread between government bonds is still huge in the case of China vs US/Europe (2.6% vs 1.1%).
  • However, the Chinese central bank is the only major central bank in the world that is currently lowering interest rates. This could result in a weaker currency.
  • We are taking hefty profits here.
  • Following the underperformance of emerging markets in 2021, we now see opportunities again.
  • The interest rate hike cycle is already well advanced in emerging markets.
  • The valuation difference is as pronounced as it was in 2007. The price-to-earnings ratio of emerging markets is 13 compared with 21 for global equities.

Asset Allocation Special Mandates February 2022

Relative weighting to strategic asset allocation (SAA) in % in January and February 2022 (Source: Zürcher Kantonalbank)


Investment Strategy