Tareno View July 2024

Interest rate cut cycle gains momentum

The global decline in infla­tio­nary pressure clears the way for a global cycle of interest rate cuts towards a more neutral level. Switz­er­land led the way in the club of the most important central banks in March, followed by Sweden, Canada and the Eurozone. The UK and the US are likely to follow in the second half of the year. Investors should adjust their portfo­lios to a lower interest rate environ­ment at an early stage. There is no shortage of attrac­tive invest­ment oppor­tu­ni­ties: current yields can be secured for several years by buying bonds with medium maturi­ties. The growing range of private market invest­ments offers intere­sting oppor­tu­ni­ties for higher yet stable returns. In the equity universe, despite the recent record highs of some indices, we see a large number of quality compa­nies at reasonable prices, parti­cu­larly in Switz­er­land.

Macroe­co­nomic environ­ment

Infla­tio­nary pressure is easing

Since the dramatic return of infla­tion three years ago, infla­tion has dominated the macroe­co­nomic picture, as it deter­mines the direc­tion of monetary policy and hence of the economy and the capital markets. Follo­wing the sharp decline last year, infla­tion rates moved sideways for the most part in the first half of the year and remained above the central banks’ target values in most count­ries. However, a closer look at the factors which influence infla­tio­nary trends shows that infla­tio­nary pressure is conti­nuously decre­a­sing. In many economic sectors, supply and demand have regained a better balance in recent months. Infla­tion in goods prices has already been comple­tely reversed.

However, the norma­li­sa­tion of services has been somewhat slower. Especi­ally in the US, the savings surpluses accumu­lated during the pandemic had kept spending on holidays, leisure time, restau­rant visits, etc. high for a long time. These surpluses have now largely been depleted, which is leading to a decline in consumer spending in the US and ultim­ately to an easing on the US labour market, as wage growth suggests.

Despite the emerging slowdown in US consump­tion, we expect the global economy to remain stable in the coming quarters. On the one hand, consu­mers and compa­nies are in good finan­cial shape. On the other hand, invest­ment spending will remain high due to govern­ment support and struc­tural trends such as decar­bo­ni­sa­tion, reorga­ni­sa­tion of supply chains and techno­lo­gical progress. In Europe and China, a slow recovery is underway, driven by a gradual revival in industry and an impro­ve­ment in consumer confi­dence.

Overall, the combi­na­tion of stable growth, falling infla­tion and an easing of monetary policy conti­nues to offer a favourable outlook for the capital markets.

Market commen­tary

The boom of Big Tech

The global stock index rose by a solid 10% in the first half of the year. This rise was once again driven by big tech, fuelled by rising profit expec­ta­tions from artifi­cial intel­li­gence. Capital expen­diture by tech giants is expected to amount to USD 205 bn this year, an increase of 40% compared to 2023. These signi­fi­cant invest­ments empha­sise our view that artifi­cial intel­li­gence is not just a short-term hype, but one of the most important megatrends of our time.

In view of the enormous poten­tial, we consider a strategic invest­ment in the techno­logy sector impera­tive. However, the explo­sive share price perfor­mance of recent years has led to a signi­fi­cant expan­sion in valua­tions, which is diffi­cult to justify using funda­mental valua­tion approa­ches.

The five most valuable compa­nies in the world (Micro­soft, Apple, Alphabet, Amazon and Nvidia) account for a fifth of the entire global stock market today. This is more than Europe as a whole, which is both alarming and worrying.

Rather than chasing after Big Tech, we currently recom­mend investing in quality Swiss equities and Japanese equities with signi­fi­cantly more reasonable valua­tions and corre­spon­dingly better return prospects. Export-orien­tated, medium-sized compa­nies in parti­cular are likely to benefit from the expected interest rate cuts and the recovery in industry. Buying oppor­tu­ni­ties could arise mainly if the current uncer­tain geopo­li­tical situa­tion and the upcoming elections in the US, France and the UK lead to tempo­rary price setbacks.

The Swiss franc is once again proving to be a good hedge against fluctua­tions due to political risks. In the first few months of this year, it depre­ciated by around 7% due to the increased interest rate diffe­ren­tial against the euro. However, with incre­a­sing political uncer­tainty, the franc returned to its long-term appre­cia­tion path. We expect the strength of the Swiss franc to continue, parti­cu­larly as the interest rate advan­tage of other curren­cies will gradu­ally diminish.

Invest­ment policy

Specific portfolio adjust­ments

The adjust­ments we have made and are planning show that our assess­ment of the market and the macroe­co­nomic environ­ment is not just empty words, but is also reflected in the orien­ta­tion of our portfo­lios.

In May, our convic­tion in favour of the Swiss franc led us to take advan­tage of the weakness since the begin­ning of the year to align our portfo­lios even more strongly to the Swiss franc. In our portfo­lios with the euro as the reference currency, we cancelled the currency hedge against the Swiss franc at an exchange rate of EUR/CHF 0.99.

The attrac­tive yield prospects of quality Swiss compa­nies and Japanese equities led us to make acqui­si­tions in these areas. We chose Barry Calle­baut, the world’s largest choco­late manufac­turer, and Georg Fischer, an industrial group specia­li­sing in piping systems. In Japan, we expanded our existing ETF position. In order to fund larger positions, we took profits and reduced our global stock ETF position.

Against the backdrop of falling interest rates, our strategic focus is currently on investing surplus liqui­dity and money market invest­ments. In addition to the purchase of corpo­rate bonds with medium maturi­ties, we are exami­ning the expan­sion of selected private market invest­ments, speci­fi­cally in the areas of private equity and infras­truc­ture.

Positive milestone

All asset classes repre­sented in our positio­ning delivered positive returns in the first half of the year, which led to a very pleasing perfor­mance of our mandates in the middle of the year. This was not only in absolute terms, but also in compa­rison to our compe­ti­tors. This is a smooth conti­nua­tion of our long-standing successful track record.

By making specific adjust­ments to our long-term positio­ning in line with the changing interest rate and market environ­ment, we are setting the course for continued successful perfor­mance develo­p­ment.