perspectives 03/2024

The central banks once again proved to be the key market drivers in the second quarter. The Swiss National Bank set the tone and surprised the world by cutting interest rates in March, and then again in June. The European Central Bank is keen to demonstrate its independence from the Fed and also risked a cut in June.

In the USA, Jerome Powell is in no hurry; despite initial high hopes, the Fed has yet to lower rates this year. The ECB is under pressure to stimulate the European economy with further rate cuts in the autumn. The varying approaches taken by the central banks show the different economic challenges they are facing. The SNB is focused on boosting exports, whereas the Fed is taking a wait-and-see position due to the robust state of the economy. The ECB in turn is facing the tricky task of getting a grip on a stuttering economy and high levels of debt.

 

Equity markets, on the other hand, are not paying much attention to what the central banks are getting up to. The main indices in Switzerland, Europe and the USA have gained roughly 10% since the start of the year, even though hopes of rate cuts have fallen sharply. Good corporate earnings, better economic data and high levels of liquidity have pushed equities up even so.

 

Can the positive trend be sustained? Should you buy bonds if rates are being cut, and which sectors will do best over the medium to long term? Read all this and more in our CIC Perspectives.

 

Luca Carrozzo

CIO

Eco­nomic pro­spects

Adjusting for sporting events, Swiss gross domestic product rose 0.3% in the first three months of this year, sustaining the moderate pace seen in the final quarter of 2023. The services sector and consumption were particularly supportive; the situation in the manufacturing industry remains mixed. This meant that at the start of the year Swiss economic growth was in line with that of the eurozone, which did better than expected in the first quarter and shook off fears of a recession, at least for the time being. The fact that many of our European neighbours are now growing again and the recent weakness of the Swiss franc may help Swiss exports over the next few months. For 2024 as a whole we currently see Swiss economic growth of 1.2%.

 

Euro 2024 and Olympic games

If you look at gross domestic product on an unadjusted basis in the first quarter (i.e. including sporting events) it was as much as 0.5%. This is due to the fact that several major sporting associations are based in Switzerland. Growth is significantly distorted in years such as this one when major sporting events like the European football championships and the Olympic games take place. The income from these associations alone, from selling broadcasting and brand rights for example, is expected to add 0.4% to Swiss GDP in 2024. (muc)

Markets

Oversold short-term, consolidation likely

Equity markets enjoyed a mighty rally in the first half of the year, driven by soaring tech stocks. Consolidation is likely over the summer, as the next rate cuts are not on the agenda until the end of September at the earliest and expectations for corporate half-year earnings are high, especially in the technology sector. Setbacks should be used consistently to top up positions in quality stocks; in the current environment, equities are by far the best asset class. (bae)

Swiss equities

The Swiss equity market put in a good performance in the second quarter thanks to a bounce-back in index heavyweight Roche. Reasons for this include the solid corporate earnings figures for the first quarter and another rate cut from the Swiss National Bank in June. As we anticipate consolidation in the third quarter, the defensive Swiss market remains one of our favourites. Among blue chips, we like Roche, Nestlé and Sika; our preferred second-liners are SIG Group, Tecan and Swatch. (bae)

 

European equities

The ECB decided to change direction and cut interest rates in the second quarter. European equity markets lagged the USA and Switzerland nevertheless. The announcement of early elections in France was another setback. With all this uncertainty, volatility in the euro area is set to remain high. We assume it will be more the case that cyclicals benefit from the recovery in the global economy in the second quarter. Our recommendations in Europe are Schneider, Heineken and L'Oreal. (wan)

 

US equities

This year the US equity market is being underpinned by tech stocks. Persistently good economic data have deferred the anticipated rate cuts. From having expected six cuts in 2024 earlier the market now thinks there will be just one or two. We therefore see something of a quiet summer on Wall Street, but the market will heat up again in the final quarter as the presidential election campaign gets under way. We recommend Salesforce, Caterpillar and Alphabet. (amm)

 

Bonds

Bond markets moved sideways over the whole of the second quarter, with credit spreads stable. The Fed left its monetary policy unchanged, but the ECB cut rates for the first time and the SNB went further towards neutral by cutting for the second time this year. The global decline in short-term interest rates may last longer than expected, so we feel the most attractive risk/return profile is offered by sound borrowers in the 1-5 year range. (muc)

 

Authors:

Marc Ammann (amm), Roger Baumann (bae), Luca Carrozzo (cal), Carl Münzer (muc)