Tug of war between equity and bond markets

We consider the decline in bond yields justified and are more surprised by the robust equity markets. The tightening of monetary policy and the associated uncertainties in the banking sector will be reflected in weaker economic activity because of stricter lending terms.

A recession towards the end of the year seems likely, in our view.

Against this background, we are increasing our weighting in US government bonds and maintaining the underweight in equities. Valuations remain excessive, and we believe that the low equity risk premium does not fully compensate for the elevated risk. Within equities, we remain cautious, particularly concerning overpriced US securities, but we are also slightly reducing our overweight in Europe. We are adding to our positions in defensive Swiss large caps and emerging markets. We continue to rate alternative investments as attractive, in particular CAT bonds and listed Swiss real estate funds.

• Swiss small caps have had a solid start to the year (+8%), but headwinds will now increase on the back of economic risks, not least in credit financing.
• We currently favour the defensive and stable large caps and anticipate a rebound.
• For example, after a long dry spell (down 35% since the peak a year ago), Roche is likely to hit the bottom with a historically low price-earnings ratio for 2024 estimated earnings of 12.

• While lending terms in the West are tightening, the requirement for minimum reserves has been eased in China. Emerging markets have an advantage over developed markets in terms of monetary policy.
• The re-opening of China is now also reflected in the data with the Purchasing Managers’ Index rising from 42 to 56; the valuation remains favourable (P/E 11 compared to 16 in MSCI World). The break-up of the Alibaba Group was positively received.
• The Fed will soon reach the end of its interest rate hike cycle, and the USD is weakening. The headwind for emerging markets is easing off. We are overweight in the emerging markets in both equities and bonds.

• As a result of the turbulence surrounding Credit Suisse, the listed real estate funds of the two large banks have corrected significantly, but this is fundamentally not justified.
• The premiums for the overall market have fallen again and are now averaging below 5%, almost a record low. The risk of re-evaluations on the back of rising discount rates exists but is limited, as we only anticipate a marginal final interest rate hike by the SNB.
• The real estate market in Switzerland remains stable and rental income will continue to rise in June thanks to a higher benchmark interest rate. We remain overweight in listed Swiss real estate funds.

Tactical Asset Allocation April 2023