Monthly Report 06/2025

The rapid recovery of share prices from their lows at the beginning of April is surprising, particularly in the US, given that the growth outlook for the US economy has deteriorated recently. Responding to this will be challenging for the highly indebted US in terms of monetary and fiscal policy. The bond market clearly signaled its skepticism about further tax cuts. In addition, uncertainty surrounding radical US tariffs and unpredictable U-turns is weighing heavily.

There is a lack of predictability not only in the short term but also in the long term, with Donald Trump likely to usher in a period of greater economic nationalism and protectionism after decades of free trade. However, as this is only a theory, investment projects in the US are being postponed indefinitely.

US President Donald Trump, who is accustomed to victory, has suffered massive setbacks in recent weeks, whether in negotiations with Russia (Ukraine), Iran (nuclear program), China (tariffs, trade), Canada (trade), or on the capital market (US Treasuries, rating agency Moody’s).

Nervousness is growing in his camp because he faces heavy losses in next year’s midterm elections if he continues to pursue his current policies and ultimately provokes higher inflation and an economic downturn as a result of tariffs. It would be the first recession in US history that could be attributed to the actions of a single person.

We have long been prepared for more protectionism and slower economic growth in our portfolio strategies with a strong focus on defensive stocks. The vast majority of US equities are facing lower margins, declining profits and falling prices. We therefore remain underweight in this sector and are investing exclusively in global market leaders with positive earnings growth rates, such as Microsoft, Mastercard and Nvidia, whose core products continue to be manufactured primarily in Taiwan.

In Europe, we are seeing talent, capital, and innovation flowing in from North America. Basic research is world-class in many areas, and now massive investments in the real economy are following: EUR 1 trillion in Germany’s future fund for defense, security, and infrastructure.

The European space program is being accelerated, and the EU is investing EUR 200 billion in AI development alone. Private sector investment is likely to more than double this amount. All of this is leading to MEGA: Make Europe Great Again. Investors believe in it, which is why European markets are performing better than their American counterparts.

In fact, the US federal budget is already out of balance, and the path it is on points to a sustained damaging trend. Tax revenues are nowhere near enough to cover spending. This is leading to new borrowing, which, at 7% of gross domestic product, has reached a level never before seen in the US during a period of economic expansion.

This is all the more remarkable given the current increased risk of recession. Recessions are typically accompanied by falling tax revenues, which would increase the deficit. In addition, fiscal stimulus would be expected in a “normal” economy entering a recession.

However, when the budget deficit in a growing economy is already around USD 2 trillion per year, it cannot be expected that additional fiscal measures can be financed – even in a stagflationary period. This is particularly worth mentioning at a time when the US economy is struggling with the effects of the sharpest tariff increases in almost a century.

With interest rates at around 5%, the current new borrowing alone will result in additional interest payments by the government of USD 50 billion in the coming year. Added to this is the fact that within 12 months, around USD 9 trillion in government bonds will have to be “rolled over” into new debt instruments at significantly higher interest rates. This does not seem to bother members of parliament at all. It is precisely this that is unsettling not only investors, who held back at the latest bond auctions.

Consumers (consumer loans and leasing rates), businesses (credit terms), and homeowners (mortgage rates) are also feeling the impact of higher interest rates and are puzzled by the discussions surrounding the draft legislation, which is intended to generate significant growth through tax cuts.

The bill also provides for a further USD 4 trillion increase in the US debt ceiling, so that there will be no need to discuss a government shutdown for as long as possible during Donald Trump’s term of office.

Even before the budget debate in Congress in Washington, which is likely to continue into next month, Moody’s was the last of the three major rating agencies to downgrade the United States’ credit rating.

The rating is now “AA+,” the same as Apple, for example, and thus lower than the “AAA” rating of Zuger Kantonalbank, Microsoft, and Johnson+Johnson.

When positioning the two bond solutions, we also ensure diversification across debtors and sectors. The ZIF holds 280 bonds from 200 different issuers, while the COF holds around 208 bonds from 182 different companies. The ZIF includes conservative bonds such as covered bonds, which are secured by first-class Swiss mortgage loans and therefore have a AAA rating. However, the yields on these covered bonds have declined in line with the fall in inflation and lower Swiss government bond yields.

While bank accounts have to settle for virtually zero interest, bonds can still generate positive returns in some cases. They can also generate price gains if interest rates fall, for example in the wake of an economic downturn, whereas bank-related demand deposits offer no price potential.

In recent weeks, we have added several new bonds to the ZIF, including Zurich Airport (approx. 1.2% coupon), Georg Fischer (1.6%), Dorma Kaba (1.4%), Liechtensteinische Landesbank (1.7%), Kühne + Nagel (1.0%), SIX Group (1.0%), Coop Group (1.3%), Zurich Insurance (6.3% USD) and Google (3.4% EUR).

If the bonds are denominated in dollars or euros, the currency risks are fully hedged. The inspiration for this selective approach comes from the client perspective of achieving a positive overall return in Swiss francs with this fund while at the same time managing it as a robust component of an overall portfolio.

New bonds were also added to the COF. These were typically rated lower and the aim is to achieve a return of around 2.0% to 2.5% more than the Swiss Bond Index, accepting some volatility. Among the better-known issuers that have recently been added are the Swiss-headquartered construction group Implenia (2.5% coupon), the Swiss telecommunications company Sunrise (4.6% EUR), Germany’s sugar supplier Südzucker (6.0% EUR), the Iberian energy supplier EDP Portugal (4.5% EUR), the global generic drug manufacturer Teva (4.1% EUR), the Canadian business jet manufacturer Bombardier (6.8% USD) and the French water infrastructure operator Veolia (4.4% EUR).

The Implenia bond is a good example of the COF. The bond matures at the end of April 2029. The yield to maturity is around 220 basis points above that of the comparable Swiss bond. Specifically, its yield at the end of May was -0.2%, meaning that investors must accept a negative return over the next five years.

The Implenia bond is currently trading at around 101.8% and is very likely to be redeemed at 100.0%. This results in a yield that is 2.2% higher than that of a comparable government bond, thereby contributing to our long-term target.

The results of FINMA’s supervisory activities revealed that various banks’ affordability assessments and valuation practices in particular deviate from the ideal. Where financing is granted outside the affordability criteria, this leads to so-called ETP transactions (“exception to policy”).

In view of the current risk situation, FINMA recommends setting lower lending limits for investment properties and higher amortization requirements. This issue has been known for more than two decades, shaped by the real estate financing wave of the 1980s, when up to 100% of the purchase price was financed.

At the end of the 1980s, inflation rose in Switzerland and the Swiss National Bank had to tighten its monetary policy considerably. As a result, mortgage interest rates rose in the early 1990s and there were massive write-downs, particularly for commercial investment properties, which, however, were almost entirely reversed in the following years. Since then, lending practices have tightened considerably.

As a result, the default risk on owner-occupied residential property loans is very low in Switzerland. Although 10- or 20-year fixed-rate mortgages can be taken out at less than 2%, banks must check affordability using a calculated interest rate of 5%.

However, household income cannot be adjusted, even though it is clear from an economic perspective that the scenario of nominally stable gross income coupled with high inflation (approx. 4% p.a.), which would go hand in hand with higher mortgage interest rates, is not realistic. Nor may it be taken into account that inflation pushes up the market price of the property, while the debt ratio tends to fall due to the nominally stable mortgage debt. In addition, gross income is flexible and can be increased – depending on household needs – by a higher level of employment in the case of dual earners.

Nevertheless, banks are forced to set unrealistic scenarios in their internal guidelines and carry out stress tests in accordance with FINMA requirements, regardless of whether they appear economically plausible or not. However, it remains clear that the governing body (the board of directors of a bank or insurance company) regulates risk policy and determines risk appetite on an annual basis.

Accordingly, the board of directors also specifies the risk tolerance and risk appetite in the mortgage sector. We therefore welcome the fact that former members of supervisory authorities (such as Thomas Jordan, who was elected to the board of directors of Zurich Insurance) are experiencing in practice how appropriately and adequately risks are actually measured and managed.

At Zugerberg Finanz, we use AI prospectively to question common forecasts and trend analyses and identify risks at an early stage. This year has once again shown how much actual market developments can deviate from forecasts published just six months ago.

This means that one should not cling to outdated information for too long, but rather change and adapt the portfolio when the facts change. The difference between the US markets and the European and Asian markets became apparent several weeks ago when growth forecasts for the US were lowered and those for Europe and Asia were raised.

To minimize risks and maximize performance, rapid optimization of asset allocation is necessary.

European and US equities performed well in May after a difficult April, with US indices proving more volatile. Numerous companies remain under pressure, both in terms of their business performance and, as a result, their valuations.

We are sticking with Apple (-27% in CHF since the beginning of the year). Apple remains under severe pressure simply because the US president has repeatedly called for production to be relocated to the US, but CEO Tim Cook has pointed out to him on several occasions that the necessary manufacturing capabilities are simply not available in the US. China has long since ceased to be a low-wage country. The main reason for the production facilities there is the immense availability of (highly) skilled personnel.

Apple has announced that it will invest USD 500 billion in the US over the next four years, including a new server manufacturing facility in Houston and a supplier academy in Michigan. However, Trump is demanding a complete relocation of iPhone production.

The scale of this is often overlooked. Apple’s largest FATP (final assembly, test, and pack-out) facilities are located in Asia and are cities unimaginable to non-Asians, with hundreds of thousands of people, schools, sports halls, dormitories, and factories. The largest complex is located in the Chinese city of Zhengzhou, which has a population of 13 million and has even been given the name “iPhone City.”

The cement company Holcim has announced details of the spin-off of its North American business Amrize. Monday, June 23, 2025, will be Amrize’s first day of trading.

Amrize will be included in the SMI and is also seeking inclusion in the US S&P 500 Index. Formally, a special distribution in the form of a non-cash dividend of one Amrize share will be made for each Holcim share. AI will continue to play a key role.

FINMA and the SNB have certainly given this matter some thought. However, well-managed shadow banks have no cause for concern. Their liquidity risks differ fundamentally from those of banks. This is one of the main reasons why they are gaining market share. In Europe, non-banks now account for around a quarter of total lending.

Banks have long focused on default risk in their lending business. Reputational and, ultimately, liquidity risk have been neglected. If a major debtor defaulted, stopped paying interest and was no longer able to make repayments, this became public knowledge and caused uncertainty among bank customers (one example was the collapse of the Signa real estate group owned by Austrian businessman René Benko).

Just how quickly customers can withdraw their demand deposits and transfer them to another institution was demonstrated in spring 2023 by the example of Silicon Valley Bank. Rumors spread on social media that the Californian bank could become insolvent. This prompted customers to withdraw a quarter of their deposits within a few hours, effectively rendering the bank insolvent overnight. This was the first “bank run” fueled by social media.

A banker is a man who lends you his umbrella when the sun is shining and wants it back as soon as it starts to rain. Mark Twain hit a sore spot in the history of bank lending. As a result, more and more companies are relying on a resilient, well-capitalized shadow banking system. And shadow banks such as Partners Group, KKR, and Apollo are increasingly stepping out of the shadows thanks to their positive contribution to economic development.

Ultimately, increasing regulation of banks (including higher capital requirements and higher liquidity) led most of them to shift their business model to the relatively risk-free mortgage lending business. If a bank-financed company such as SAir Group gets into trouble, the successor companies no longer receive bank loans.

Parts of companies such as SR Technics, Swissport, and Gategroup, which became independent at the time, owed their new lease of life exclusively to shadow banks. The 2008/09 crisis and the spring of 2020 also showed that numerous companies were able to count on the support of their private market funds.

A growing company has financing needs that are typically not met by banks with a low risk appetite. Pension funds, foundations, family offices, wealthy individuals, and others are investing more and more in private market vehicles, partly to participate in non-bank lending in a prosperous economy. These often prove to be more reliable lenders. Because they know that institutional investors who invest in private credit funds will not demand their money back tomorrow, this reduces the risk of sudden financing stops for companies.

Highly regulated banks, on the other hand, are “optimizing” their capital by focusing on senior secured loan books. No wonder private lending has been growing faster than commercial banking for several years. It provides financial market stability where banks fail.

Part of the success model is that the responsible credit managers only earn money and bonuses once the loans have been repaid with interest. They are committed with their own assets and, unlike employed bank managers, do not act with the same leverage. Incidentally, Swiss Life announced a few days ago that it would be launching a CHF 1.2 billion credit fund together with the insurer Vaudoise.