perspectives 02/2023

Contrary to expectations, Swiss economic growth was stagnant in the last quarter of 2022. October and November saw declining exports and a negative contribution from construction. However, the exceptionally warm winter meant the impact of the energy crisis on the economy was not as bad as had been feared. Worries of a recession receded accordingly over the winter months. Gross domestic product in Switzerland enjoyed strong growth of 2.1% last year.

An era draws to a close

At the end of November 2008, the US Federal Reserve under its then-Chair Ben Bernanke started buying mortgage-backed securities to the value of USD 600 billion. Since that day when central banks’ ultra-loose policy (known as quantitative easing or QE) got under way, several thousand billion US dollars have been poured into financial markets. Quantitative easing was supposed to supply the markets with liquidity. The resultant low interest rates were meant to promote lending and encourage consumers and companies to invest.

 

Since 2008, the Swiss National Bank, European Central Bank and Federal Reserve alone have pumped roughly USD 15,500 billion of liquidity into financial markets. Investors have now grown accustomed to this liquidity. But the Covid-19 pandemic, the war in Ukraine and the subsequent rise in consumer prices have broken the trend. Central banks are attempting to bring inflation back down to a reasonable level by hiking interest rates and tightening monetary policy. With interest rates having been low for years, investors are now having to get used to the new environment. 2022 was an annus horribilis for investors that saw negative returns on both bonds and equities, and now in 2023 some financial institutions are struggling with rising interest rates.

 

The financial world seems to be all topsy-turvy. The era of cheap money and very low interest rates is definitively over. A new era of higher interest rates, tighter monetary policy and higher volatility has started, but equities and bonds of quality companies continue to offer very good investment opportunities. 

 

Luca Carrozzo

CIO

Economic prospects

Contrary to expectations, Swiss economic growth was stagnant in the last quarter of 2022. October and November saw declining exports and a negative contribution from construction. However, the exceptionally warm winter meant the impact of the energy crisis on the economy was not as bad as had been feared. Worries of a recession receded accordingly over the winter months. Gross domestic product in Switzerland enjoyed strong growth of 2.1% last year.

 

Building confidence!

Forecasts for 2023 in an uncertain environment suggest the economy will grow less than average (around 1.0% in Switzerland). Central banks still have to deal with the challenge of resisting stubbornly high core inflation without causing too much economic damage.

 

Just to make things more awkward, the many rate hikes seen over recent months have caused yield curves to invert all over the world, unleashing fears of instability on financial markets. Rising risk aversion, especially in the banking sector, may be rooted in a range of things. However, most of the traces now emerging are related to the monetary policy that has been in operation over recent months. In a situation like this, the focus has to be on what the most important thing is that a bank or central bank has to offer – and if at all possible, strengthen it. (muc)

Markets

 

Keeping a cool head in an uncertain environment

Just to add to the uncertainties we all knew about like geopolitics, war in Ukraine, high inflation, an economic slowdown and so on, the first quarter of 2023 brought a crisis of confidence in the banking sector. Against this backdrop, how central bank policies and corporate earnings will move from here is anybody’s guess. Our assumption is that the situation will calm down again in the medium term, so we recommend consistently buying blue-chip equities on weakness and taking care to maintain a balanced allocation between sectors. (bae)

Swiss equities

The Swiss equity market is likely to be one of the winners this quarter. The large cap pharma stocks Roche and Novartis fell in the first quarter, but share prices are likely to stabilise and offer welcome support to the market as a whole. The takeover of Credit Suisse by UBS will calm things down in financials, where we have a clear preference for insurers like Zurich Insurance and Swiss Life. Among blue chips, we also like ABB, Lonza and Sika; in the second-liners Bachem, SIG and VAT Group. (bae)

 

Europe

Falling energy prices courtesy of the mild winter have not only caused production prices to melt away – they have also taken the pressure off consumer prices. At the same time, the re-opening of the Chinese economy could reverse the trade deficit again and help European companies grow their earnings further. The market is cheap on a price/earnings ratio of 12 and has recently been attracting investors; the dividend season will also be a draw. We favour Sanofi, Volkswagen and Adidas. (goste)

 

USA

The US equity market got off to a cracking start in 2023. Despite inflation and higher input prices, many companies managed to beat analysts’ expectations for 2022. March put a dampener on things, with several US banks collapsing. Sentiment remains tense and people are wondering if further rate hikes are needed. The giant tech companies also laid people off for the first time. Rate cuts are anticipated as early as the second half of the year, which would support tech stocks. We recommend Alphabet, Amazon and Salesforce. (amm)

Bonds

Fixed income markets have been showing their volatile side this year. In March, expectations for central bank policy and the entire yield curve shifted down sharply as a consequence of the stress in the financial system. Credit spreads have widened again recently, but are still trading at high levels. We therefore favour high-quality securities rated A or AA. We think bonds are attractive when yields on ten-year Swiss issues exceed 1.8%. (muc)

 

Authors:
Marc Ammann (amm), Roger Baumann (bae), Luca Carrozzo, Sten Götte (goste), Carl Münzer (muc)