Monthly Report 03/2025

Falling energy prices should eventually lead inflation back on a downward path. This is another reason why US President Donald Trump is seeking a peace agreement with Russia while simultaneously ending the oil and gas embargoes. He is also seeking an agreement with the oil-producing nation Iran. His tariff policy is driving up inflation, which he hopes to counteract by putting pressure on energy prices.

Meanwhile, the US central bank, the Federal Reserve (Fed), continues to pursue a restrictive course, although PCE inflation, its preferred measure of inflation of actual household consumption, has been virtually in the target region of “2% on average” on an annualized basis for several months. However, the Fed sees that uncertainty about the inflation path is increasing, not least due to Trump’s inflationary economic and trade policies. In its minutes, the Fed states that it would like to see further improvements on the inflation front and is in no hurry to cut interest rates again.

It is also interesting to note that Donald Trump wants to completely abolish the debt ceiling, which was established more than a hundred years ago (1917) as a means of preventing politicians from spending freely. Of course, this has to be done “now and immediately”, before he has to renegotiate its increase. After all, the deficit recently amounted to 1.8 trillion dollars or 6.4% of the gross domestic product. Budget discipline is not likely to become part of the government program under Donald Trump either.

In the end, negotiating the cap has always been an important political tool for the opposition to push through certain negotiating positions, since the consequences of not raising the cap would be devastating. However, what Trump fears most is having to compromise with the Democrats. Furthermore, the cap could jeopardize negotiations for congressional approval of his permanent tax cut package.

It is in this context that the idea of defending the US dollar against external attacks must have arisen. The USA has threatened countries with the harshest measures if they even consider replacing the dollar as the leading trading and reserve currency. American government bonds, known as “Treasury Bonds”, are considered the most highly valued safe investment in the world.

According to Washington’s calculations, the net foreign debt now amounts to more than 24 trillion dollars. Even if the USA’s rating is “only” AA+, government bonds remain more popular than those of the European Union with its AAA rating. In view of the low potential growth in Europe due to demographic factors, US bonds, with their higher growth potential, remain the benchmark.

At the beginning of the coronavirus pandemic, credit markets feared that interest would no longer be paid on some bonds and that they would not be repaid. Risk premiums shot up in spring 2020, to levels last seen during the major economic and financial crisis of 2008/09. However, it was not only the economy that proved resilient, but also individual companies.

There were only a few bankruptcies among debtors. Occasionally, debt was restructured, sometimes with a postponement of the repayment date. Interestingly, risk premiums rose again three years ago. No turnaround in interest rates has ever been as dramatic and rapid as that of 2022, when central banks worldwide reacted practically in sync to galloping inflation in the post-corona phase.

But the resilience of companies was underestimated. In contrast to 2008/09, the vast majority had sufficient liquid funds to service the bonds in time and repay them on schedule. The cumulative five-year default rate of European issuers remained relatively low. Recently, the average rating in the high-yield segment has improved to such an extent that it can be said that the underlying borrower quality has never been better.

Spreads remain interesting, but managing them requires a great deal of attention and discipline. We use funds because they enable us to achieve diversification benefits.

Many bonds can only be purchased in nominal volumes of at least CHF or EUR 100’000 and 200’000. However, it is also important that the corresponding fund matches the individual risk appetite.

For example, subordinated and high-yield bonds are mainly found in the Credit Opportunities Fund. Senior bonds, on the other hand, whose issuers are considered to be of higher credit quality, are mainly found in the Zugerberg Income Fund. This is the efficient shock absorber in phases of potential stock market setbacks. In our view, it makes sense to hold bonds in a portfolio and to hedge somewhat against turbulence.

The maturities are also characteristic, and we pay attention to whether they tend to be short (COF) or long (ZIF). If foreign currency bonds are used, the portfolio is largely hedged against exchange rate fluctuations. The fund manager’s freedom remains limited. This makes it impossible to suddenly change the strategy.

No one wants Swiss government bonds at the moment. Interest rate risks are significant and the prospects of a positive cash flow from net interest income (after income taxes) are low. Despite the very best credit rating (AAA), the index of Swiss government bonds has drifted well into negative territory since the beginning of the year (-1.5%).  This means that almost half of the annual performance of 2024 (+4.1%) in the first two months of 2025 has already been erased. In the last five years, the cumulative total performance was in the double-digit negative range (-11.0%), which is why some investors are turning away from Swiss government bonds.

The situation looks better for corporate bonds, even if it can happen at some point in the entire economic cycle that a company loses its high-grade rating and is downgraded (e.g. the generics manufacturer Teva). Generally speaking, corporate bonds offer a higher return than risk-free investments (government bonds) over the long term. This higher return is the compensation for the higher default risk and the typically lower liquidity and, in financial theory, corresponds to a combination of credit risk and illiquidity premiums.

In Europe, the subdued growth outlook means that interest rates are more likely to be cut than raised in the near future. Companies will benefit from this asymmetry, which generally differs from the US, where monetary policy will initially remain restrictive, while in Europe the transition to a neutral or even loose monetary policy is not expected until spring 2025.

In the low-risk strategy (e.g. Revo1), we have added an ETF from the Swiss franc capital market that consists of bonds from Roche, Novartis, Nestlé, etc. The duration is moderate (4.5). The average coupon is 1.4% and the yield to maturity is 1.1%.

Overall, however, we are convinced of active bond solutions. At the moment, ratings in the BBB and BB range remain of pronounced interest if you have a corresponding risk budget. The segment is called “crossover” because it crosses the typical boundary between “high grade” and “high yield”. It is now a market-ready asset class that offers attractive yields and sufficient liquidity.

Unlike in the US, European bond terms are relatively investor-friendly. Nevertheless, a disciplined selection process is crucial to further reduce the specific risks and minimize negative surprises.

In recent weeks, the results of various Swiss real estate companies have been published and commented on by the management. One common component was the reference to increased demand from private investors. These are confronted with the fact that the phase of high coupons for bonds is already history again. They are turning away from bonds and increasingly investing in listed real estate companies. These not only have a high degree of value stability (“concrete gold”), but also reliable sources (monthly rental income) for dividend distributions.

The entire range of Swiss real estate stocks is broad, but the corresponding index (SXI Real Estate All Shares Index) is dominated by a few companies. In terms of market capitalization, Swiss Prime Site is in first place with a market value of CHF 8.4 billion. PSP Swiss Property is in second place with 6.3 billion francs. It is followed by Allreal (2.9 billion), Mobimo (2.2 billion), Investis (1.4 billion), Intershop (1.3 billion) and Zug Estates (1.1 billion). They all have different characteristics, differentiating business and geographical focuses.

Taking a broad view, Zurich Airport (6.8 billion) could also be included, given that the main source of income comes from the 150 or so buildings (including “The Circle”) and the parking garages.

As an investor, you initially earn money from the dividend. From a tax perspective, it is interesting to note that the distribution is exempt from income tax. This is partly because formally it is a capital repayment, and partly because the companies pay the taxes. For example, Mobimo’s distribution will be CHF 10.25 (+2.5% compared to the distribution in April 2024). Earnings per share from “day-to-day” operations (mainly rental income) were CHF 12.59; however, if revaluation is included, they amount to CHF 17.26.

This means that Mobimo shareholders receive an attractive distribution yield of 3.3% while also participating in the upward trend in profits from significant developments and successful sales. In Oberägeri/ZG, 67 notarizations were recorded in 2024 alone, reflecting the unwavering demand for condominiums.

Measured by net assets, the shares of real estate companies such as Mobimo and PSP are trading at a premium of around 20%. This certainly does not reflect the full potential of these two companies. That is why we use them in a number of our strategies (including the dividend strategy).

European equities have been in the spotlight so far this year, outperforming the US benchmark S&P 500 index by more than 10%. Signs of a bottoming out in Europe, supported by a further normalization of key interest rates by the ECB and sharply reduced valuations compared to the US, provided a tailwind. Global investor interest also recovered significantly, with inflows into European equities much higher than in previous quarters.

Significantly lower key interest rates than in the US and falling inflation (just above 2% in the spring) continue to support domestic demand and a recovery in economic activity. Current valuations for European equities are pricing in a very weak economic scenario. Although uncertainty remains, there is plenty of scope for valuations to catch up, including due to a potential peace agreement in Ukraine. There are numerous companies such as Siemens, Schneider Electric, Holcim and Sika that could benefit disproportionately from potential reconstruction.

For the time being, numerous companies are cautiously signaling hopeful messages. Here is a brief selection:

· Apple (-4% in USD since the beginning of the year) wants to create 20’000 jobs in the US. CEO Tim Cook announced the company’s largest US investment package ever. The background to this is likely to be fear of tariffs. Apple has already successfully used this tactic once.
· Microsoft (-6%) remains our favorite in terms of the application-oriented development potential of software, AI assistance combined with data centers and cloud platforms.
· Nvidia (-9%) was unable to fully convince long-term investors with its optimistic outlook and inherent upside potential as a tech leader in the AI movement.
· Mastercard (+9%): With a market share of 25.8%, MC is the clear number two in the US credit card business, behind market leader Visa with 61.1%. However, MC is catching up, particularly in global business.
· Nestlé (+16%) rose to a five-month high, although patience is required for the turnaround. Under the new CEO Laurent Freixe, the focus is on strong cash generation, which would already enable a further share buyback program and a dividend increase in 2026.
· Roche (+17%) is deliberately sticking with the attractive diagnostics business because many synergies arise from it in purely technological terms. In addition, AI and the Chief Digital Technology are being used to drive research and development forward with better data.
· Novartis (+10%) is currently in an enviable position with its blockbuster heart drug Entresto and the cancer drug Pluvicto. Under CEO Vas Narasimhan, the core operating profit margin is expected to rise to 40% by 2027.

There are plenty of examples of such behavior, because ultimately the Federal Council often relies on countless internal administrative experts. A recent example of this is the expansion of the 3a payment options: the Ettlin motion adopted by parliament did not provide for any restrictions on subsequent payments. The Federal Council saw it differently, or rather the administration, which had to reformulate the amended ordinance articles.

Parliament cannot intervene at the ordinance level, only at the law level. The Neue Zürcher Zeitung accused the Bundesrat of “insubordination”. But because it is an ordinance, there is little that can be done about it, as the Pension Forum also states in its latest newsletter on the 2nd pillar.

There is also a certain amount of uncertainty regarding vested benefits. In 2022, numerous pension funds fell massively into underfunding. But who is interested in transferring their vested benefits to a fund that is underfunded and thus risks losing assets when they leave, after possibly having to pay additional contributions to restore its financial position?

Even the pension forum says: “It’s better to park your money externally and wait for better times. … Although the BVG prescribes the transfer, it does not take place in an unknown number of cases. The receiving fund cannot enforce it and at some point it will give up its efforts if the insured person does not respond to its requests.”

Ultimately, the responsibility lies with the insured, and that is where it should remain. There are more than a million changes in Swiss pension funds every year. Therefore, one has to be careful about adding new costly administrative hurdles here. There is another reason for this, and now we have come full circle back to alternative investments: many pension funds do not invest in alternative investments and have therefore fallen into a funding shortfall. They lack the corresponding return contributions.

In the recently published and highly recommended study “Private Markets in Switzerland: Scaling Innovation & Growth” by the Asset Management Association Switzerland, the industry association SECA and BCG, the potential of the booming private markets as an asset class with good long-term returns is illustrated.

The public pension fund Publica does not invest in this asset class and has a meager performance record. SUVA, for example, is different as the largest private market investor in Switzerland, as explained in the study. Its pension fund has a highly profitable allocation to private equity, private debt and private infrastructure totaling 15.5%.