Tareno View July 2024

In the new issue of Tareno View, Simon Lutz provides insights into the changing interest rate and market environment. Find out how Tareno is positioning the company in this environment.

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 share index MSCI World 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 the MSCI World ETF.

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.

Legal notice

Tareno AG, Gartenstrasse 56, CH-4052 Basel, +41 61 282 28 00

Tareno AG, Claridenstrasse 34, CH-8002 Zürich, +41 44 283 28 00

info@tareno.ch
www.tareno.ch

Verantwortlich

Simon Lutz
Chief Investment Officer
s.lutz@tareno.ch

 

Disclaimer

The statements and data in this publication were compiled by Tareno AG to the best of its knowledge, in part from external (publicly accessible) sources that Tareno AG considers reliable, solely for information purposes. This publication is not the result of a financial analysis. Tareno AG and its employees are not liable for incorrect or incomplete information or for losses or lost profits resulting from the use of information and the consideration of opinions expressed. The statements and information do not constitute a solicitation or invitation, offer or recommendation to buy or sell any investment instruments or to engage in any other transactions. Nor do they constitute a specific investment proposal or other advice on legal, tax or other issues. A positive return on  an  investment  in the past is no guarantee of a positive return in the future. The statements, information and opinions expressed here are only current at the time of writing and may change at any time. Duplication or reproduction of this publication, even in part, is not permitted without the written consent of Tareno AG. The „Directives on the Independence of Financial Research“ of the Swiss Bankers Association do not apply.

Pictures: Marijke Vosmeer, Jürg Kaufmann, Unsplash

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