The US has narrowly averted another government shutdown after tense budget negotiations. A shutdown would have dire effects on the lives of millions of Americans, who either wouldn’t get their government salary or receive vital support payments. However, the negotiations aren’t over, as Congress only passed a stopgap measure to keep the government running for another 45 days.
Oil prices continue to rise. Although investors are overly optimistic on oil, readings show that the market is tight, with supply struggling to keep up with demand. We remain bullish on oil but are aware that the uptrend is coming to an end.
The latest inflation data from the eurozone suggest that the European Central Bank should be able to bring the current round of monetary policy tightening to an end. Consumer prices were up by only 4.3% year on year in September, versus 5.2% in August. This figure is much lower than expected, and inflation should continue to ebb over the coming months.
Q4 – investors should be reassured by the end of rate hikes
The global economy has proved to be remarkably resilient over the past year despite numerous headwinds, such as the war in Ukraine, high inflation and sharp monetary policy tightening by the major central banks. This is largely because consumers’ financial position has remained solid despite the prevailing anxiety – unemployment is very low, wages have risen and people were able to build up their savings during the pandemic.
Inflation is returning to more normal levels almost everywhere. Prices of manufactured goods have fallen sharply following the decline in commodity prices, and this disinflation is now spreading to services. This trend should provide some reassurance to central bankers in developed countries, who probably implemented their last rate hike for some time this summer, the exception being the Bank of Japan, which has not yet begun normalising its monetary policy. The rise in mortgage interest rates has weighed on new builds, but it hasn’t had the same effect on capital expenditure, which actually seems to be picking up again in the US, as debt levels remained contained and profit margins held up well – and sometimes even rose – when inflation was at its peak. For once in Europe, the peripheral countries have withstood the global slowdown fairly well, while Germany is being dragged down by its manufacturing sector’s dependence on cheap Russian natural gas. That has also had a knock-on effect on the Swiss economy, which is paying the price of its privileged trading relationship with Germany.
The Chinese authorities are now stepping up their stimulus measures, and it seems that the global economy has bottomed out.
Growth is likely to recover in 2024 and then pick up pace in 2025. The start of a new economic cycle should push up stock markets after their summer slump. We’re therefore maintaining our constructive stance on equities, especially since the upcoming monetary policy turnaround will rein in rising bond yields, which are currently at a more-than-15-year high in the US. The Swiss National Bank seems to be reconsidering its recent policy of keeping the Swiss franc strong, so we’re reducing our exposure to the Swiss franc in CHF-denominated portfolios. Lastly, we’re increasing our exposure to Swiss real estate funds, whose premiums are at a 15-year low.
Real estate funds show renewed appeal
Higher interest rates have unsettled the Swiss property market by threatening to put an end to the two-decade-long trend of rising prices. Yet, for the time being the underlying market is holding up well – rents and prices haven’t fallen thanks to limited supply and a steady inflow of foreign workers.
Unsurprisingly, the change in sentiment has affected listed property funds: after trading at an average premium of more than 40% of the value of their assets in 2021, they’re now down sharply on the all-time highs, dropping more than the underlying market. Valuations are currently near historical lows – the only time they were lower was during the 2008 financial crisis. And thanks to the fact that Swiss investors are generally exempt from taxes on fund income and capital gains, the nearly 3% return is attractive, equivalent to a bond yield of more than 4.5%. A small drop in property prices shouldn’t have much impact on these funds’ share prices, which we think have already factored in much of the bad news. We’re therefore increasing our exposure to this market. We still prefer tax-advantaged investment vehicles, which offer higher-quality portfolios with investments primarily in residential property.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
