Category: Market Updates

Reading Time: 2 minutes

In this Market Update, we look back at the global financial markets in September, provide an outlook for the months ahead and explain how we adjusted our portfolios in the last rebalancing.

Political events

In mid-September, the G20 summit took place in Delhi under India’s leadership. With the inclusion of the African Union as a member of the G20, emerging economies are now better represented on the international stage—a fundamentally positive development. This is expected to pave the way for enhanced cooperation and investment opportunities in the medium term, though it also introduces a certain degree of complexity.

The situation on the markets

In the third quarter, most asset classes experienced sideways movement, largely due to inflation data and interest rate decisions. The hike in interest rates subdued further economic expectations. For instance, the European Central Bank, as anticipated, raised its interest rates by 0.25 percentage points. This was followed by the U.S. Federal Reserve, which opted to keep its rates steady but hinted at possible hikes by year-end. Generally speaking, central banks have exhibited caution in their widely-observed commentaries regarding interest rate decisions. This suggests that future trends might be more unpredictable than usual, and subsequent interest rate decisions could trigger significant market reactions. Overall, the U.S. economy has shown more positive growth than Europe’s. However, this economic surge in the U.S. has been largely propelled by government expenditure. Concurrently, China experienced an economic downturn.

The impact on the asset classes equities and bonds

Equities

In the USA, stocks performed well despite rising interest rates. This was attributed to easing inflation and encouraging economic growth that was in line with the current situation. This environment led to more stable forecasts for future earnings, positively affecting stock prices. Another contributing factor is the relative weakness of the Chinese economy. Among developed economies, the U.S. has the least exposure to sales in China. In contrast, European stocks have been lagging. This can be attributed to the current weaknesses in major European economies, such as Germany, which are evident in less favorable labor market trends and declining sectors like industrial goods.

Bonds

Higher real interest rates (defined as the interest rate minus inflation) have fundamentally increased the attractiveness of bonds. For instance, yields on U.S. government bonds have reached levels not seen since before the financial crisis.

Since the U.S. has been ahead of Europe in its interest rate decisions, the current U.S. situation might offer insights into the future of the euro zone, which began adjusting its interest rates later.

What are the implications for the Everon portfolios?

In principle, the Everon strategies are designed with a long-term approach and robust diversification. Diversifying across asset classes, regions, and sectors becomes even more critical during uncertain times. In our August rebalancing, we increased the number of individual stocks in both the Multifactor and Income strategy lines, a change that we continued into September. We believe that we are well-positioned for the final quarter, given our diversified allocation across various asset classes such as equities, bonds, real estate, and commodities.

Reading Time: 3 minutes

In this Market Update, we look back at the global financial markets in August, provide an outlook for the months ahead and explain how we adjusted our portfolios in the last rebalancing.

The most important facts in brief

• The environment of falling inflation rates and rising interest rates led to an economic slowdown.
• In recent weeks, however, the previously rather negative sentiment has brightened.
• Economic data on future US monetary policy suggest that the fight against rising prices is succeeding.
• Fears of recession have subsided and the outlook for autumn is more positive.
• Both equity and bond markets have rallied after interest rate hikes led to a correction over the past 18 months. Key interest rates peaked.

Economic situation

The latest economic data point to a possible end to key interest rate hikes, which in principle makes for optimism among investors. In addition, several IPOs are in the pipeline, both in the US and in Europe, after the financial markets were still in great turmoil six months ago due to the demise of the Silicon Valley Bank. The much-watched volatility index “VIX” has fallen to its lowest level in three years, indicating a more optimistic mood among equity investors.

The US labour market continues to grow and more people are employed than ever before, supporting household incomes and boosting consumer spending. Similarly, the European labour market is very robust and unemployment is at an all-time low.

Falling inflation poses short-term challenges, but is unlikely to trigger an “earnings recession”. This is the term used when corporate profits are below the previous year’s level for two consecutive quarters. Furthermore, US companies will benefit from a weak US dollar in the second half of the year, especially multinationals with high foreign currency sales, as the US dollar has depreciated by 7% since the end of 2022.

What does this mean for the asset classes equities and bonds?

Equities

Price-earnings ratios are slightly above the long-term average worldwide and significantly above the long-term average in the US. In the current reporting season for the second quarter of 2023, the focus is particularly on big tech companies such as Apple and Microsoft. It will become clear how companies cope in a challenging market environment and how they adapt their value chains. Special attention is paid to the company outlook not only for the second half of the year, but also for 2024.

The outlook for the third and fourth quarters is promising, especially for US companies with international business. The dollar’s year-on-year weakness will boost their revenues, as around 30% of sales (of S&P 500 companies) are generated abroad. The US dollar index is currently almost 7% lower than last year. US companies will continue to form an integral part of Everon’s portfolios.

Bonds

In recent weeks, the bond markets have reacted strongly to economic data, especially labour market and inflation figures. Among other things, these figures will determine how many interest rate hikes are expected in the coming months. Bonds with maturities of 2 to 5 years in particular experienced large fluctuations. For example, yields on 2-year US government bonds rose to 5.1% in early July on the back of strong labour market data, but fell to 4.6% shortly afterwards when US inflation data came in weaker than expected. Key interest rates peaked, which could make long-term bond yields attractive.

Where do we go from here?

In the coming weeks, the focus will be on two crucial factors.

First, how far will central banks push their monetary tightening cycle? Secondly, how have companies reacted to the macroeconomic environment, which is characterized by weak growth and increased price pressure?

Further, the euphoria around the topic of artificial intelligence led to “FOMO” (Fear Of Missing Out) among investors who are eager to participate. In this environment, regular rebalancing and active risk management are particularly important, not only in the AI and technology sector, but in general.

Global growth weakness is expected to continue into the autumn, although the US economy has been resilient so far. However, growth is slowing due to weak consumption and lower investment. The outlook for the second half of 2023 is subdued, but the likelihood of a “soft landing” (decreasing but not negative growth rates) is increasing, with a managed slowdown and a gradual easing of pressure on demand and inflation expected.

What does this mean for your Everon portfolio?

In addition to our multifactor investment approach, we offer other strategy lines that have different characteristics. The Everon Income strategy focuses on high dividend paying stocks, such as equities with high dividend yields. A more passive approach that follows global financial markets is offered in the Everon Smart Global Markets strategy. This is how we adjusted our portfolios in August:

Multi Factor

The Everon Multi Factor strategy is characterized by direct investments in equities. In the August rebalancing, we increased the number of stocks to around 70 in order to further diversify the risk. In terms of sectors, we focus on solid stocks in the industrials, technology, pharma and non-cyclical consumer goods sectors.

Income

The Everon Income strategy is characterized by increased distributions. In the equity sector, the focus is on high-dividend stocks. Here, too, we increased the number of shares in August rebalancing (to around 20-25 in Switzerland and 15-20 each in the US and Europe). In terms of sectors, we are focusing on stocks from the industrial goods, financial, non-cyclical consumer goods and real estate sectors.

Reading Time: 3 minutes

In this market update, we are looking back on the global financial markets for the month of July, highlight significant trends and share our outlook on the months ahead.

Economic situation in the USA

Inflation data for June were again positive, with an annual inflation rate of 3%, compared to 4.1% in the previous month. This trend was also mirrored in core inflation, albeit at an elevated level. Core inflation fell from 5.3% to 4.8% in June. This development indicates that the high interest rate level appears to be impacting inflation. However, it remains uncertain how long it will take to reach the 2% target.

The labor market presents a contrasting picture: it continues to be surprisingly robust, a trend the Fed is not keen on, as it prevents consumer demand from cooling down. This was confirmed by a further slight increase in consumer spending for the second quarter of 2023.

As expected, in response, the Fed raised interest rates by another 0.25 percentage points after the interest rate pause in June. Yet, it remains unclear whether there will be another interest rate increase at the September meeting, as the U.S. economy has been consistently robust and even reported growth in Q2 2023.

Thus, the future remains uncertain in the United States. Balancing the fight against inflation without stalling the economy now seems like an achievable goal.

Economic situation in Europe and Switzerland

In the Euro zone, the situation looks similar to that of the US, with falling inflation coupled with a stagnating core rate and a central bank that has continued to raise interest rates by 0.25 percentage points. Unlike the USA, however, the effects of the interest rate hikes are becoming more apparent in Europe. For example, the business climate is increasingly gloomy and industrial production continues to decline steadily. As inflation also remains at a higher level than in the USA, it is assumed that the European Central Bank will need to continue combating inflation with interest rate hikes for some time. Economic growth continues to decline year-on-year in the second quarter of 2023.

In Switzerland, inflation fell to 1.7 percent in June and is therefore no longer a problem domestically. The Swiss economy also experienced a decline in economic growth this year and last, but it never contracted and seems to have bottomed out in Q1 2023. Analysts even project that growth of 0.6% can be reported for 2023. This strength and stability of the Swiss economy is reflected in the unchanged strength of the Swiss Franc, leading to currency losses in USD and EUR.

Nasdaq rebalancing

In July, a rarely implemented measure was taken in the Nasdaq 100, an occurrence which has only happened twice before in this index. Due to the AI hype at the beginning of the year, some technology stocks, such as Apple, Microsoft, Alphabet, Amazon, and Nvidia, experienced significant increases in value. As a result, these stocks collectively accounted for over 48% of the market capitalization in the Nasdaq 100. The weight of these stocks was reduced on July 24, since the rules governing the construction of the Nasdaq 100 state that issuers with individual weighting exceeding 4.5% cannot surpass a combined 48% of the entire index. Prior to this measure, it was unclear what the exact impact on the financial markets would be, as passive-indexed products based on the Nasdaq 100 also needed to be reweighted. However, the resulting impact turned out to be relatively minor.

Our comment

While the U.S. has proven to be a robust economy in many respects, Europe seems to be struggling more with increased interest rates. Germany, the former powerhouse of the European economy, has recently experienced a significant downturn and recorded two quarters of negative economic growth. Therefore, the U.S. and Switzerland currently offer a more attractive environment for capital investments. However, it’s important to bear in mind that the valuation of the U.S. stock market is once again quite high. If investors now expect that the high interest rates will still negatively impact the U.S. economy over the course of the year, then a significant market correction can certainly be anticipated. It is therefore essential to continue monitoring developments and adjust the orientation of investment portfolios accordingly. Including more defensive sectors such as healthcare, energy, or utilities in the portfolio can help mitigate the potential negative impact of a market correction.