Monthly Report 05/2025

When it comes to liquid assets that could be invested, we are not talking about a “nest egg” or emergency fund comprising perhaps three to six months’ salary that is set aside for unforeseen circumstances. These are liquid assets that should remain untouched. Planned consumer spending, such as an upcoming safari or the purchase of a new car, falls into a similar category.

We are primarily concerned with liquid assets that contribute to strategic wealth accumulation or preservation. This is capital that investors can use to invest countercyclically when attractive opportunities arise.

April was such a month, and in addition to our weekly reports, we contacted our clients twice to consider additional investments at low prices. It is not too late to buy quality stocks at significant discounts.

It is also interesting to note that even where long-term investments are the norm (tax-privileged pension savings under the third pillar), a large proportion of Swiss households’ assets are still not invested in securities.

According to the Swiss National Bank’s (SNB) asset statistics, assets in 3a pension funds totaled CHF 143 billion at the end of 2023. Of this, 40.4% was not invested.

Liquidity yields little or no return, while long-term returns on the stock market are significantly higher. Investing is always a personal matter. Depending on their risk capacity and risk appetite, investors opt for a low, medium, or high equity allocation. Only one thing is certain: not investing in real assets in the long term is associated with high opportunity costs.

There are many reasons to invest, and at least part of your assets should be invested in equities. Here are the three most important reasons:

1) A high equity allocation is worthwhile because of the compound interest effect on dividends and the historically positive performance of stock market returns. The SMI has gained 3.0% annually over the past 20 years. If you add dividend income and reinvest it, the total return is 6.8% per year.

2) Because you benefit from the highest-yielding investment with stocks: you benefit in the short term from dividends and in the longer term from expected price gains resulting from retained earnings of listed companies.

3) Because we pursue an investment strategy that primarily prioritizes Swiss stocks, the (exchange rate) risks are massively reduced: By focusing on convincing business models with high, positive cash flows and a long-term growth path, we significantly reduce the risks of volatility.

We believe it is important to aim for stable returns with part of the portfolio. And in the context of portfolio stability, it is worth adding bonds. During the volatile month of April, portfolios with a high bond allocation experienced significantly less volatility than those with a high equity allocation.

Bonds were also affected by the uncertainty caused by US President Donald Trump’s announcement of “Liberation Day” tariffs and the increasing likelihood of a recession.

There was a significant increase in corporate bond spreads, but even government bonds experienced volatility in April. After a prolonged period of relative calm, increased volatility returned to all credit markets. The Move Index, for example, which is the fever barometer for US Treasuries, had a turbulent month. Risk premiums also fluctuated.

However, spreads currently offer significantly better return prospects than in the recent past, meaning that yields on corporate bonds have increased. We could see spreads widen further, though, especially given the increased likelihood of a recession in the US. But many companies are financially sound and not at risk of default. Nevertheless, increasing dispersion across all industries, sectors, countries, and capital structures is likely to continue for the time being.

Fundamentals in Europe remain in decent shape. However, as credit markets could deteriorate somewhat from their moderate premium levels, disciplined, careful selection will remain crucial. Surprisingly, bond markets in Europe remained much calmer than equity markets overall in April.

This is often the opposite, as bond markets tend to be driven by risk-averse investors. The discrepancy between Europe and the US is also striking. The European market has outperformed the US market so far and still has the potential for continued outperformance.

Like equity markets, credit markets tend to overreact in both directions. After several quarters of emphasis on how low credit risk premiums are, the recent re-pricing could provide opportunities to strengthen the future earnings power of bonds.

From a total return perspective, high-yield bonds delivered solid results in the first quarter as government bond yields rose. These gains were quickly wiped out in April when Trump’s announcement spooked investors and high-yield bonds suffered as markets began to price in a recession, particularly in the US.

At the end of April, the picture for bond indices looks negative, unless they are hedged against currency risks. Of course, one could argue that bond vehicles can always be hedged against currency risks. However, it must be borne in mind that hedging costs currently amount to 4.4% p.a. for Swiss franc investors with dollar exposure. By contrast, the annual hedging costs against the more stable euro are less than half that (2.1%).

Another relevant factor for private investors is that coupon income is subject to income tax, whereby hedging costs cannot be offset. If a client earns an annual coupon income of 4.4% on a dollar bond, this is taxable. If they earn it in a currency-hedged vehicle, the coupon must be significantly higher in order to achieve a net zero after income tax.

Another aspect, however, is the recession. If private households hold excess liquidity in a non-interest-bearing account, customers risk that this will soon be subject to negative interest rates again. In Swiss interbank trading, banks are already lending money at negative interest rates for terms of 4 to 48 months: this is a sure sign that bank savings are likely to become interest-free again across the country soon. In a recession, however, this does not lead to capital gains.

The situation is typically different for bonds. When interest rates fall, prices rise. This effect is all the more effective the longer the remaining term of a bond. For this reason, the remaining term in a bond fund with a corresponding focus should not be kept too short, so that the desired effect can actually be felt in the event of an economic downturn and triggers a countervailing effect in a “balanced” mandate of equities and bonds. This is the main reason why we consider bond solutions such as the Zugerberg Income Fund to be a risk buffer.

The average rating of the Zugerberg Income Fund remains high at “A.” Credit risk premiums are on average 91 basis points above the duration-adjusted government bond. For example, we recently added two bonds from Alphabet (91 and 107 basis points, respectively) and one from logistics group Kühne+Nagel (89 basis points) to the portfolio. Credit risk premiums are traditionally significantly higher for COF.

An asset manager can essentially generate additional returns on four levels. The first is to convince potential clients to invest in real assets. This is challenging, as Swiss households clearly prefer to leave excess liquidity in bank accounts.

While the share of equities in household assets rose from CHF 264 billion (at the end of 2014) to CHF 388 billion (in 2023) over the last ten years, the share of cash and sight deposits grew significantly more strongly, from CHF 744 billion to CHF 936 billion, according to the SNB. This corresponds to around CHF 100,000 per person: capital that does not generate any return.

Real assets can be used to generate substantial additional returns, but this does not only refer to equities, of course, but also to often neglected asset classes such as real estate and infrastructure. This brings us to another level of portfolio management, namely portfolio construction. This is where most asset managers differ. For us, for example, it has always been clear that real estate and infrastructure assets belong in a portfolio.

This is not the case in traditional portfolio theory, where real estate is considered an “alternative” asset class. Additional returns can be generated by taking risk and return into account. Many institutional investors simply implement the bond asset class with government bonds.

However, a higher return can be achieved with the same level of risk by including corporate bonds. And further additional returns can also be achieved through efficient implementation. This shows whether a portfolio manager can bridge the gap between theory and practice.

Back to real estate and infrastructure investments. They demonstrated their defensive character in an exemplary manner in April 2025. Swiss real estate stocks Mobimo and PSP Swiss Property, which we hold in our dividend portfolios, for example, achieved positive total returns of just under +5.4% and +9.5% respectively in April, while the SMI fell by more than 2.4%.

The situation was similar for domestic infrastructure stocks Zurich Airport (+1.9%) and energy group BKW (+7%). Such companies are not involved in customs disputes. Their operating cash flows are structurally positive and their market position can be considered solidly anchored.

In other words, the defensive portion of a portfolio should consist largely of real estate and infrastructure stocks. This has also proven its worth this year.

During April, we saw the most volatile stock markets since the outbreak of the COVID-19 pandemic in spring 2020. In the case of US equities, this impression was exacerbated by the weakness of the dollar.

However, toward the end of the month and in early May, financial markets regained confidence as it became clear that Donald Trump’s trade policy could not be implemented in its entirety.

In addition, the results posted by SAP and Microsoft demonstrated why technology stocks belong in a broadly diversified equity portfolio. The opportunities arising in transformative areas of innovation such as artificial intelligence (AI), digitalization, and decarbonization over the next decade will remain intact well beyond the term of office of the current US president.

European equities also offer attractive opportunities, but remain significantly cheaper than typical US stocks. European quality leaders are also less dependent on a single country market and are therefore often more integrated into the global economy than most US companies, which are heavily focused on their domestic markets. In addition, there are numerous sectors in which European companies are global market leaders. These are particularly areas at the interface between technology and industrial manufacturing, such as mechatronics and industrial software engineering.

They include large companies such as Siemens, an industrial powerhouse with AI capabilities. But they can also be smaller companies such as Mettler-Toledo and Belimo, which have carved out a market-leading position in their niche from their base in the Zurich Oberland.

The cement group Holcim, following its merger with Lafarge, is also one of these undisputed global leaders with roots in Europe. Details of the spin-off of the North American business are now available. Amrize’s shares will remain in the portfolio when the billion-dollar transaction is completed in June.

The Board of Directors is proposing a special distribution in the form of a non-cash dividend of one Amrize share for each Holcim share. This undisputedly attractive deal is subject to shareholder approval. Amrize shares will be listed under the symbol “AMRZ” on the New York Stock Exchange and on the Swiss stock exchange SIX Swiss Exchange.

Swiss Re, the globally significant reinsurer, remains a gem. Its capital position deteriorated slightly in 2024 but remains at a very high level. According to the Swiss Solvency Test, the ratio fell by twelve percentage points to 257%. Swiss Re considers itself well equipped for the future.

Several delegates from the OPEC+ oil-producing countries are pushing for a further acceleration in production, even though the International Energy Agency (EIA) inventory report showed high stock levels. This should have curbed the sell-off, but many countries are so heavily dependent on oil revenues that they are pushing ahead with production.

This is the main reason why forecasts for various energy prices for 2025 are being lowered further, as demand is expected to be weaker in the coming months due to the tariff-induced slowdown in manufacturing. It must even be expected that increasing political uncertainty will delay corporate investment, thereby exacerbating the economic downturn.

The behavior of OPEC+ and the political processes involving Russia and Iran remain important unknowns that could lead to further volatility. Under pressure to import more goods from the US, exports of liquefied natural gas from the US in particular could rise.

Recently, US LNG export capacity has grown surprisingly quickly, driven by the commissioning of two LNG export projects (Plaquemines Phase 1 and Corpus Christi Stage 3), which correspond to a nominal capacity of around 450 TWh per year. As a result, the EIA has significantly revised its forecast for US LNG exports in 2025.

Chinese gas demand has been sluggish this year, already recording a year-on-year decline of ~15% in March. This is likely to have continued in April. On the other hand, demand for gas imports into the European Union (EU) is strong due to low inventories (currently 39.0%) and low prices after the winter, regardless of possible changes in storage policy in the EU. Demand for LNG supplies is also strong in the EU because pipeline gas supplies from Russia are limited to the Black Sea corridor.

The rapidly growing LNG supply from the US, strong demand in the EU, and its efforts to balance trade in goods somewhat more strongly are creating more momentum in the Atlantic LNG market. The TTF price for liquefied natural gas has fallen by 36% since the beginning of the year.

Europe has become a buyer’s market for the time being, which could remain in place for a long time if none of the key drivers, such as the recovery in demand in Asia or the slowdown in supply growth in the US, change.