In the eurozone, investors have been accumulating “cash” in the form of short-term fixed-term deposits over the last 18 months, attracted by the combination of higher interest income and very low risk.

There is currently almost a trillion euros in European retail deposits that will mature by the end of the year. This huge amount of money needs to be reinvested – but with what return prospects and in which asset class?

The inflation trend in the eurozone remains clearly downward, and interest rates are likely to move in the same direction. It is becoming increasingly unattractive to remain fixed in time deposits. This is because overall inflation is approaching that of Finland (+0.5%) and Italy (+0.8%). The time was ripe for a first interest rate cut on June 6. This sent a strong signal to the trade unions, which have been able to push through higher collectively agreed wages in times of high inflation.

At present, the European Central Bank’s (ECB) experimental wage indicator known as the “wage tracker” suggests that wage pressure in the eurozone is decreasing. With a less restrictive course, the ECB can also confirm the expectation of declining inflation.

Given this mix of macroeconomic data and monetary policy considerations, it is time to shift fixed-term deposits into investments with longer maturities and higher cash flows, which can offer relatively attractive (nominal and real) yields as interest rates fall.

These are, for example, longer-term corporate bonds, which are currently less volatile. In addition, this bond segment in Europe has impressively low default rates, even in a weak economy. If the outlook improves, it should become even more attractive to hold corporate bonds with a historically attractive risk premium in the portfolio.

As interest rates fall, real investments with stable cash flows will also experience higher valuations in the medium term. So far, valuations are still under pressure from high interest rates (and correspondingly high discount rates). The higher potential at lower interest rates typically relates to dividend-bearing shares of high-yielding companies, which is inherently associated with a favorable risk/return ratio.

We also include infrastructure stocks in this category. If a company such as Zurich Airport achieves disproportionately high earnings growth in the coming years, this is even particularly advantageous – especially in comparison with the commercial real estate segment.

The complexity and diversity of the global bond markets continue to offer interesting opportunities for experienced investors. A balanced bond portfolio diversified across different sectors and regions can currently optimize returns in different economic conditions.

Above all, it is now important to keep an eye on how far inflation data falls on both sides of the Atlantic and what this means for the extremely restrictive monetary policy that has been pursued for more than two years.

We believe that we are currently in a clearly disinflationary and rather underestimated deflationary price phase. In times of rising inflation, inflation-protected securities offer protection at times, but in times of falling inflation, one must take a differentiated view of the securities alternatives.

If GDP growth stabilizes at a moderate level, short-term, high-yield bonds, for example, deliver robust returns. In this market segment, we achieved +4.0% with the “Credit Opportunities Fund” in the current year with corresponding bonds – hedged in Swiss francs, nota bene.

In recessions, on the other hand, medium to longer-term bonds perform particularly well, as central banks cut key interest rates quickly. The “Zugerberg Income Fund” is committed to this scenario, which has a buffer function in the portfolio during a recessionary phase, but tends to move sideways in economically strong times. The Swiss franc-hedged World Bond Index (-2.4%) and the Swiss Bond Index (-0.6%) have been down noticeably since the beginning of the year.

As economic cycles vary from region to region, global diversification of bond holdings increases the overall return potential. This strategic approach ensures resilience and profitability in a dynamic market environment.

This is particularly evident in the first five months of the current year. In the growing US economy, ten-year government bonds led to a strongly negative yield (-4.1% since the beginning of the year). In contrast, two of our three core bond investments are clearly in positive territory.

However, we not only look at the bond markets, but also at their mutual relationships with the equity markets. The correlation between bond yields and equities is complex and unstable. In the first two decades of this century, it was generally positive, reversing the “typical” negative pattern.

At present, it remains difficult to estimate whether the correlation would tend to be negative again in the future.

We could not escape these “laws”. Anyone looking for a low-risk portfolio (risk class 1) based on their risk profile will come across a portfolio with a strong bond bias everywhere. Bonds with a high credit rating – regardless of the currency – have proven to be a poor hedge against inflation in the long term. In the short term, however, such portfolios are stable in value. This was demonstrated by the outbreak of the pandemic in March 2020, when pure equity portfolios (risk class 5) recorded significantly higher losses in value. An inflationary environment leads to higher input costs for a company, which may be passed on to higher sales prices in order to maintain margins. Some companies manage this better. These are often innovative market leaders with pricing power.

A large number of companies are not able to fully pass on the additional costs. They have to accept a lower margin. In our portfolio, we focused strongly on market leaders, which led to an attractive return for equity-heavy portfolios despite inflation. In the case of bond-heavy portfolios with their nominal values, neither the World Bond Index nor the Swiss Bond Index were able to compensate for inflation.

We have been looking at three “regularities” in the relationship between bond yields and equities for some time:

– The drivers of the rise in yields: the difference between real and nominal yields has a major impact in the longer term. However, inflation-driven increases are often easier for equities to cope with, because in reality inflation leads to higher prices, higher sales and ultimately higher profits.

– The timing of the economic cycle: Equities are generally more immune at the beginning of the upswing, when growth is recovering from a low point, even if yields are rising. However, we are not currently in a typical cycle, but in the midst of a post-pandemic exceptional economic cycle, which is being met with proud US equity valuations.

– The valuation of equities: High risk premiums for equities make them less susceptible to a certain rise in yields. The current high valuation of equities, on the other hand, makes them more vulnerable if US key interest rates are not lowered soon. From this perspective, valuations in Europe look much more attractive. In the US, we focus on dominant growth companies with strong balance sheets and high net liquidity, which makes them immune to high bond yields.

The good news initially remains the confirmation that real estate ownership has retained its value beyond the wave of inflation. This at least applies to the Swiss real estate market, where prices are showing a moderate upward trend.

The momentum of price increases on the home ownership market slowed temporarily, as the real estate experts at UBS noted for the first quarter of the past year. Accordingly, the so-called “real estate bubble index” continued its decline. We are not in a bubble, but certainly in the middle range.

This cannot be transferred across borders. In Germany, for example, real estate prices are continuing to fall. According to official statistics, property prices have fallen by around 13% since peaking in the second quarter of 2022.

According to residential real estate experts, prices are set to fall further this year – even more sharply (-2%) than previously assumed, even though rising real wages and falling interest rates on loans are improving the financial leeway of private households.

The latter is also evident in Switzerland. Added to this is the significant net immigration, which is likely to reach just under the 120’000 mark in Switzerland over a 12-month period. This should ensure stable and rising transaction prices, as the semi-annual survey conducted by Fahrländer Partner Raumentwicklung (FPRE) with a total of 872 real estate market experts shows. Higher residential rents are also expected to continue.

According to FPRE, 56% of survey participants expect rents to rise over the next 12 months, 42% expect rents to stagnate and only 2% anticipate lower rents. The performance of apartment buildings has therefore probably also brightened considerably. In autumn 2023, the corresponding index fell to its lowest level since 1996 at -33.7 points. It has since risen again to 22.7 points. The tight supply and the interest rate cut by the SNB are the two decisive factors.

Looking at the eight major regions of Switzerland, the index for apartment buildings is highest in the Lake Geneva, Zurich and Eastern Switzerland regions. The low value in the Basel region is striking. Here, the Housing Protection Act in Basel-Stadt is likely to have led participants in this region to expect hardly any price increases.

The continued high demand for cloud services brought Alphabet (+6% last month) and Microsoft (+7%) strong quarterly results. Microsoft reported an increase in revenue (+17%) and operating profit (+23%). Alphabet’s growth in revenue (+15%) and operating profit (+46%) was also impressive.

SAP was able to accelerate the growth momentum in its cloud business in the first quarter of 2024 with a 24% increase in revenue. Quarter-on-quarter, the important cloud gross margin improved by 2% to 72%.

However, the prospects of rival Salesforce ultimately caused the share price to slide again towards the end of May, even though SAP is delivering new use cases on a weekly basis with AI collaborations and has a positive outlook for the future.

In the technology world, the dominant report ultimately remained that of industry leader Nvidia (+27%), which once again exceeded expectations. The supply of Nvidia chips (currently the Hopper model “H200”) far exceeds demand, especially since data centers need more computing power for their AI applications. Jensen Huang, CEO of Nvidia, wants to remedy this with the “Blackwell Ultra” chip in 2025 and the “Rubin” chip in 2026.

Nvidia’s position is taking on historic dimensions. In 2024, Nvidia accounted for 40% of the year-to-date return of the S&P 500, i.e. all other 499 stocks together contributed the remaining 60%. In addition to the boom in data centers, there are a number of companies that are likely to benefit in the slipstream, so to speak. These include Alphabet, Microsoft and Amazon, which will invest over 100 billion dollars in the cloud this year – in the race for the most powerful AI infrastructure. The major cloud computing operators currently account for 45% of Nvidia’s sales.

Chip shares are early cyclicals. If they do well, an upswing in the economy as a whole follows downstream. This should soon include the gaming industry, whose graphics cards are based on Nvidia solutions. Personal computers, laptops and smartphones will also be equipped with AI chip systems in the future, which will bring super-fast computing power into everyday life.

Partners Group is also making an above-average commitment to the expansion of this type of digital infrastructure.

Holcim and Sika are needed in the construction phase. Sika closed the first quarter with sales growth of 14%. In local currency, growth amounted to 20%. For 2024, Sika expects further sales growth and an above-average improvement in profitability due to the ongoing innovations that are driving the industry’s transformation towards automation, digitalization and sustainability.

Crude oil is losing its decisive role in the 21st century. In terms of competitive strategy, data and the ability to process it at any time are much more important, but they are also likely to change the demand for energy. This is because every search for a data center location will also involve securing a connection to renewable energy sources through stable power grids. Cooling systems powered by renewable energy are also likely to be required.

The current electricity requirements for modern cloud computing are around 10 to 30 times higher than with previous cloud servers. The ecosystem is therefore likely to become a problem for other electricity consumers. This is because the electricity requirements for electromobility, should this become established one day, and for the relocation of industrial production from China back to Europe and the USA will be added to this.

This will undoubtedly make the energy transition more expensive on the consumer side. The switch from abundant but polluting fossil fuels to renewable energy sources in the form of wind and solar power may be one important factor. Another is that the generation of renewable energy involves huge costs for electricity transmission infrastructure, as the best locations for electricity production are often far away from areas with high electricity demand.

The big players are therefore bypassing the general electricity grid and turning directly to electricity traders and producers to source power through long-term contracts – often at a significant premium to prevailing electricity prices. Amazon recently concluded a 1-gigawatt electricity contract with a 50% mark-up.

The electricity grid operator E.on will drive forward the green transformation by investing heavily in the expansion of the European energy grids. No wind or solar farm makes economic sense if there is no investment in the grid infrastructure at the same time.

Microsoft and Brookfield Renewables have also understood this. In the first global framework agreement of its kind, the Canadian infrastructure operator is aiming to provide more than 10 gigawatts of renewable energy for the software company. This is eight times the size of the largest electricity contract ever signed and is intended to help Microsoft cover 100% of its own global needs with carbon-free energy by 2030.

At the same time, the agreement incentivizes Brookfield, the world’s largest infrastructure company, to build a large portfolio of new renewable energy projects, including effective carbon-free power generation technologies, over the coming years.