On the bond markets, long-term inflation expectations are once again heading upwards. This seems to have been triggered by the recent rise in energy prices. It has put added pressure on the leaders of the world’s major central banks as they consider normalising monetary policy in the near future.
The Swiss National Bank (SNB) again needs to rein in the Swiss franc against the euro. The single currency fell back below the CHF 1.07 mark for the first time in a year. We therefore expect the SNB to intervene in the forex market.
The S&P 500 ended the week at an all-time high, bringing an end to the market’s only real correction of the year. The current earnings season has been good enough to drive up US stocks. The stage appears to be set for the traditional year-end rally.
Switzerland – an attractive market de-spite the slowdown
Even though economic indicators seem to be losing steam in Switzerland, the growth outlook for the Swiss economy is still bright, with GDP growth expected to remain solid for the next two years. Domestic growth is mostly back at cruising speed, primarily because of the relatively limited rise in Swiss unemployment. And exports will continue to be buoyed by the economic recovery in the rest of Europe. And for once, they shouldn’t be held back by a strong Swiss franc – the franc has been relatively stable against both the euro and the dollar in recent quarters. This positive outlook is now reflected in corporate earnings forecasts, which are regularly being revised upwards by analysts.
Yet Swiss equities have posted a disappointing performance in 2021: although they gained ground over the summer, the SPI and SMI are still lagging behind global indexes. Investors have cooled on blue chips, which are now broadly undervalued despite their solid fundamentals. The smallest caps, which are more cyclical, have fared much better. This gap between the market’s heavyweights and its more discreet players should start to narrow. Volatility has risen recently and will likely remain in the coming months, so we expect investors to turn back to high-quality stocks, which will be a boon for the Swiss market. The finance sector, a cornerstone of the Swiss economy, should do well as interest rates gradually start to rise.
Another factor in favour of Swiss stocks is their valuations – they are currently trading at a major discount relative to indexes in other regions. This anomaly should correct in the coming months as investors seek protection against the economic slowdown that is now setting in. We therefore remain overweight on Swiss equities, with a preference for the most defensive stocks. The current climate warrants equal exposure to small and large caps.
Europe has some good cards
Europe’s economic growth is now starting to normalise – lagging a few months behind the US. However, it still looks set to remain above its long-term average for several more years. Consumer spending will be driven up by high savings rates and pent-up demand, and the NextGenerationEU programme is now up and running. The EU is embarking on a major investment programme, and this will underpin long-term economic growth.
Recent developments indicate that European equities may be coming out of the erratic pattern they had been following since the 2008 financial crisis; this is largely thanks to the recovery plan and the European Green Deal. However, the main investment case for European equities is that dividend yields are much more attractive than bond yields. These dividend yields are flirting with all-time highs, despite the many companies that were forced to cut or even cancel their dividends during the pandemic.
But what about the recent underperformance of Germany’s DAX index? We believe it primarily reflects election-related uncertainty, along with the large weighting of cyclical stocks in the index. We think that improved business sentiment towards China – a major trading partner for Germany – could lift prices. Finally, it’s worth pointing out that valuations are at a 30-year low, which seems exaggerated in light of companies’ fundamentals.
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.
