In the USA, the yield on ten-year treasury bonds rose to 4.7% at the end of April. The yield on two-year treasury bonds is now as high as 5.0%. Both are significantly more than you get as a dividend if you invest in US equities. It also explains the strength of the dollar in the first four months of this year. At 0.92, the USD/CHF exchange rate is back at the same level as at the end of September 2023. It temporarily fell to 0.84 when a recession was predicted for the US economy with a correspondingly large number of interest rate cuts.

But this did not happen, on the contrary. At present, there is no longer even talk of a soft landing. If anything, the economic signals are pointing to further expansion, i.e. in terms of the economic cycle, there appears to be a “no landing”. The economy is being pushed by fiscal policy in the last two or three quarters before the important presidential and congressional elections in November 2024 to such an extent that the Federal Reserve’s hands are tied in terms of monetary policy. The strong increases in consumer spending (+2.5% in the first quarter) and especially spending on services (+4.0%) have brought the falling inflation path of 2023 to an abrupt halt. Inflation is particularly persistent in the services sector.

As a result, yields on US treasury bonds have risen from 3.9% to 4.7% since the beginning of the year. This has led to considerable price losses for bonds. In Switzerland, on the other hand, inflation appears to have been successfully combated. In any case, investors on the capital market are content with a 0.6% yield on the ten-year Swiss Confederation bond – as at the beginning of the year. The higher yield caused the dollar exchange rate to rise, but the significantly higher inflation rate means that there is even greater potential for price losses in the medium term.

The stock markets in Europe (with the exception of Switzerland) recorded higher price gains in the first four months than in the USA. On the one hand, this is probably due to the surprising economic recovery in Europe. However, another important factor is the observation that dividends alone generate a higher yield than benchmark government bonds in the eurozone.

In the USA, on the other hand, the dividend yield is significantly lower than the yield that can be safely achieved on the money and capital markets. Accordingly, many are also taking a cautious view of the relatively highly valued US equity markets, while the European markets (including in Switzerland!) are characterized by relatively moderate valuations in view of rising corporate profits and higher profit expectations.

Bond markets are constantly moving and offer a wide range of opportunities. However, the market situation is rarely stable, and psychological tipping points are difficult to predict. Nobody is currently interested in the fear of a debt crisis in the USA, but risk premiums are rising. The USA already has to pay 200 basis points more for its debt than Germany. In contrast to the eurozone, the USA is at risk of falling into a vicious circle of rising refinancing costs and a further deterioration in debt sustainability. We highlight two important aspects of this.

On the one hand, the USA is heading straight for an economically unsustainable future. It is spending too much and taking in too little. The result is a gigantic deficit. The mountain of debt is growing and interest payments are accelerating the longer the Federal Reserve keeps its key interest rates high. Around 1,000 billion dollars in interest must be paid annually on the current national debt. As cheap short-term debt from the low-interest phase is replaced by new, more expensive debt instruments, the interest burden will rise to around 1,700 billion dollars within the next 12 months – out of a GDP of 28,500 billion. This is the largest debt burden since 1946.

The second important aspect is inflation. The USA is far more indebted than the entire eurozone. In contrast to Italy, the most important debtor nation in the eurozone, the USA is already running a deficit in its primary budget (income minus expenditure excluding interest payments). In addition, Italy is able to finance its entire government deficit through domestic savings. In contrast, the USA is dependent on foreign borrowing (approx. 30%) and the Federal Reserve holds 20% of its debt securities. Private households hold relatively few Treasuries.

Dependence on foreign creditors weakens the geostrategic role of the USA. The only measure that the US Treasury is probably secretly hoping for is continued inflation. This would allow the debt to be “inflated away”. This would have devastating social consequences. Inflation would further impoverish poorer sections of the population. Those with real assets such as shares, private equity and real estate are protected against this.

We expect the USA’s credit rating to be downgraded further. A structural improvement in the budget situation remains illusory even after the elections, i.e. the pressure for further cuts in government spending on transport, education, defense and healthcare is increasing. The same applies to the huge potential for the dollar to depreciate.

In view of the robust economy, which is accompanied by stubborn inflation and significant wage increases (+4.6% in April compared to the previous year), the US Federal Reserve has maintained its existing key interest rates. The market had anticipated this and pushed down bond prices accordingly in recent weeks. However, the Fed Chairman’s latest assessment is a wake-up call. He practically ruled out increases. Instead, he stated that the Fed expects inflation to fall over the course of the year and that a further rate hike is “unlikely”. May thus opened with noticeably higher bond prices.

GDP in both the eurozone and the European Union as a whole grew by +1.2% annualized in the first quarter of 2024, exceeding forecasts. In contrast to comparable growth in the US (+1.6%), there were no significant inflation drivers in Europe. In the eurozone, inflation was in line with expectations and remained at a low 2.4% in April. In the three largest nations (Germany, France and Italy), it is even lower and therefore within the ECB’s target range. We therefore expect the ECB to decide on lower key interest rates at its next meeting on June 6.

We used this environment to further align our bond portfolios with the promising future. The interest rate-sensitive Zugerberg Income Fund had to cope with the deduction of withholding tax in April. These can be reclaimed with the tax return. This has resulted in a price performance of -2.7% and a total return of -1.8% for the year to date. This puts the ZIF between the Swiss Bond Index (-0.3%) and the World Bond Index (-2.9%; hedged in Swiss francs). Apart from the often macroeconomically induced price fluctuations, the ZIF achieved a monthly return of +0.37% compared to the Swiss Bond Index with only +0.12%.

By contrast, the Credit Opportunities Fund (COF), which is consistently geared towards corporate credit risk premiums, is clearly in positive territory after four months at +3.0%. The average price of the bonds is 95.0% and the modified duration is 3.2, i.e. the COF has a different character to the ZIF. Its duration is typically much lower than in the ZIF, but its main sources of income are not in the yield curve but in the company-specific risk premiums. Typical for the average rating of BB+ in the COF, the four-year bond from Implenia, which has a coupon of 3.0%, was included in the portfolio. Implenia is strongly committed to a more sustainable construction and real estate industry and has a AAA rating in ESG terms. The company is ideally positioned to benefit from all the opportunities in the industry, especially with its competence in infrastructure projects.

Net immigration in Switzerland amounted to around +29,900 people in the fourth quarter of 2023. Calculated over 12 months, the balance is likely to reach just under the 120,000 mark, which is higher than ever before. According to the annual statistics, the permanent foreign resident population is growing primarily due to employment. The second most common reason for immigration was family reunification, followed by those who moved to Switzerland for education and training.

With this in mind, it is also clear that the demand for housing was mainly concentrated in the cities and their agglomerations. Both the vacancy rate (mostly old apartments in rural areas far from dynamic labor markets) and the unemployment rate are low. As the economic outlook continues to brighten, real estate prices are likely to rise as financing costs fall.

In fact, prices for condominiums in Switzerland rose significantly in the first quarter of 2024 compared to the same quarter of the previous year (+3.9%), particularly in the lower segment, as shown by the FPRE real estate price indices. In contrast, the upmarket segment saw the strongest increase in prices for single-family homes. Over the year as a whole, the SWX IAZI Private Real Estate Price Index shows an above-average increase in value of +4.2%.

The supply indicators in building construction are clearly improving. In residential construction, which will generate sales of around CHF 32 billion this year, construction activity is likely to decline slightly, ensuring high occupancy rates even in older existing properties. Conditions have improved for construction investors. In building construction, the Federation of Master Builders reported lower production costs in the final quarter of 2023 (-3.3%); only in stone and concrete construction did prices increase slightly (+0.9%).

The Swiss construction price index published by the Federal Statistical Office changed only minimally in the second half of 2023 compared to the previous six months (+0.5%). The period of high construction price changes (2021 and 2022) is over. Low price changes ensure greater planning certainty and robust construction activity.

In terms of performance on the direct and indirect real estate markets, Fahrländer Partner reports that cash flow yields were around 3.0% last year: slightly higher on the Central Plateau and slightly lower in Zurich. At around -9.0%, the return on changes in value was not only negative, but also exceptionally high, resulting in a negative total return. With lower discount rates in 2024, there should be at least a partial reversal in valuations.

In principle, every investor is faced with a wide range of investment opportunities. Some are liquid and can be traded daily (shares and bonds). Others are considered semi-liquid, such as the private market investment “The Partners Fund”, which is managed by Partners Group and can be subscribed to on a monthly basis. This is more of an investment opportunity in long-term vehicles, e.g. when it comes to pension fund or vested benefits assets. Another investment option is real estate, but the corresponding tradability is limited and the transactions are correspondingly expensive.

There are now listed funds in every illiquid asset class. For example, there are real estate funds whose net assets are hardly subject to any fluctuations because the underlying properties are also traded extremely rarely. This is of little interest to investors. Daily valuations are therefore used to measure whether the market value is higher or lower than the asset value by means of the so-called premium and discount. The average premium for the most important Swiss real estate funds at the end of April was 11%, i.e. investors pay a premium over the asset value. At the same time, they receive an annual distribution of 2.9%.

In the case of equities, there is another indication that can be drawn on. Capital can be invested risk-free in Swiss government bonds. However, this only yields an annual return of 0.6% over the next ten years, which does not even cover inflation. With Swiss equities, on the other hand, I get a return that is around 5% to 7% higher. This has been a principle for many decades, because shareholders want to be rewarded for their higher risk.

Because the yields on bank savings solutions and government bonds are so low as alternatives, it is only a question of scale for long-term investors whether they want to invest 20%, 40% or more in equities. As asset managers, we also take care to make a convincing selection from the large number of shares. As we repeatedly point out in our weekly and monthly reports, there is currently a whole range of attractively valued shares with a rock-solid business model.

Brent crude oil prices have risen to a 5-month high. This is due to disruptions in Russian refineries, the ongoing conflict in the Middle East and the growing global economy – particularly in the populous Asian countries. It is becoming apparent that “black gold” will play a much greater role in the global economy than some might have hoped.

The entire energy sector is currently being supported by both macroeconomic and microeconomic factors. Historical oil consumption, for example, continues to rise. We are currently at around 100 million barrels per day. Road traffic remains a key driver and is likely to continue to increase in the most populous countries for at least another two decades.

In terms of price, it remains important that fundamentally too little money has been invested in exploration (discovery and development of new resources) for at least a decade. Production cuts by Saudi Arabia, disappointing production figures and the sanctions imposed by Iran and Venezuela on trade with Western countries have led to an imbalance between supply and demand.

This means that the outlook for higher oil prices is likely to remain within a broad price range of 70 to 120 dollars per barrel, which is likely to last for years to come. The interesting thing is that the European Union’s (EU) boycotts of Russian oil, gas and coal have lowered their prices. This has made fossil fuels all the more attractive for emerging countries. Turkey, for example, is benefiting massively from cheaper Russian raw materials.

According to the British energy NGO Ember Climate, Turkey is therefore now relying less on renewable energy sources and more on climate-damaging coal to generate electricity. Until the Ukraine war, Turkey imported four million tons of coal from Russia at peak prices of up to 450 dollars per ton. By 2023, this figure had risen to 17.4 million tons, as the price plummeted to 120 dollars per ton – without the additional discount from Russia because Turkey did not support the Western sanctions.

Turkey has already overtaken Poland in terms of coal-fired power generation, and probably Germany, too. While only 12% of electricity is generated from coal in the EU, this figure has climbed to 36% in Turkey, taking the country off the path to the energy transition, even though it has enormous potential for generating solar and wind energy. This is just one example from a large number of similar emerging country developments.