The Fed pursues a policy of “average inflation targeting” (AIT) and its restrictive stance has resulted in the latest inflation figures coming within the Fed’s AIT target range. As a result, the Fed’s policy makers expect a potential rate cut of around 300 basis points in the medium term. The current level of 5.5% is significantly higher than the Fed’s forecast for the end of 2025 (3.875%) and the end of 2026 (2.875%). Should the respective forecasts materialize, this would result in a strong recovery of bonds. However, a side effect for the franc investor would also be a severe depreciation of the dollar against the Swiss Franc.

In Europe, too, a moderation of inflation is being observed across the board. However, we are still well short of the target. In the euro zone as a whole, inflation fell from 5.2% in August to 4.3% in September. There was a sharp decline in the momentum of service prices. Industrial goods excluding construction and energy in the euro area only achieved an annual increase of 1.6%. In May 2022, year-on-year growth was still at 16.0%.

Without new price shocks, overall inflation in the euro area will move toward the 2% target. In some euro area countries, the inflation rate is already negative (e.g. the Netherlands at -0.3%). In Belgium (+0.7%), it is not particularly high either. In the Netherlands, the sharp decline has to do with the fact that contracts for natural gas are often concluded at short notice.

Due to the Fed’s monetary policy signals to keep key interest rates high for longer, the dollar has recovered further. Most recently, it stood at 0.92 against the franc (+3.3% in one month, only -1.2% since the beginning of the year). At 0.97 against the franc, the euro also gained in September, but not as strongly (+1.1% in one month; -2.2% since the beginning of the year).

Both currency developments are providing tailwinds for Swiss companies whose sales or earnings are primarily generated in these currency areas. As most analysts have not yet priced in the dollar’s strong currency movement, many Swiss equities are likely to see a more positive assessment in the fourth quarter ahead of the 2023 financial statements.

For the last 20 months, central banks came up with rapid and significant interest rate hikes. At the beginning of 2022, inflationary pressure was still underestimated. In the meantime, it could be overestimated, because strong deflationary developments worldwide are already working in the opposite direction. Inflationary pressure is weakening significantly. Increasingly, deflationary price developments can now be observed in producer prices. In the U.S., the PCE inflation rate in August was +0.1%: This is price stability. Nevertheless, there is a risk of monetary policy mistakes if the central banks were to tighten their previous sharp market interventions again out of impatience.

The Swiss National Bank left the SNB key interest rate unchanged at 1.75%. The significantly tightened monetary policy over the last few quarters is counteracting the inflationary pressure that still exists. In addition, the economic slowdown and the lower inflationary pressure from abroad are providing support. In its monetary policy assessment of September 21, 2023, the SNB assumes inflation of +2.2% for 2024 and +1.9% for 2025, which puts it just within the price stability range at the end of the forecast period.

In the U.S., the cycle peak has been reached. The focus from the Fed’s statements was on the dot plot. On the one hand, there was a moderate update to the end of 2024 (5.125% as median) as well as to the end of 2025 (3.875%) and on the other hand, a new perspective for 2026 (2.875%). Market expectations at the longer end of the yield curve are not at the Fed’s realistic estimate. Those who now trust the Fed can achieve rich returns with long-term bonds and high credit ratings in the coming 24 to 30 months.

Implicit market expectations no longer assume further interest rate hikes. Rather, a total of around six interest rate cuts of 0.25% each are pending until the end of 2025. After all, the Fed itself has set the key interest rate at 2.5% for the longer term. This means that there is room for a total of twelve interest rate cuts, or nominally 3.0%, in the coming years. Such a starting position should by no means be missed.

But of course we also understand the hesitants on the capital market. They remain convinced that the Fed will overshoot with its key interest rate policy and drive the key rate even higher until the economy slides into recession. But even if a mild recession were to result, no economy would be as well prepared for it as the U.S. Moreover, such a recession would be accompanied by faster interest rate cuts, which would make the recovery potential of bonds even more attractive.

The ZIF and the COF differ in that the ZIF mainly includes interest rate risks. However, the typical maturity is nowhere near as high as in a government bond index, but significantly higher than in the COF. There, the focus is not on interest rate risks, but on credit risks. The maturities are rather low. In a month with foreseeable moderate economic momentum, it can be assumed that exposure to credit risks is worthwhile.

As long as there is no deep recession, defaults are not to be expected. Companies with a leading market position are able to raise their prices in an inflationary environment and thus increase their sales. Accordingly, it is not difficult for them to service their nominally stable debt capital with the income generated from this. As the economic trend continues, September resulted in a typical month in which corporate bonds fared better than government bonds. At present, there are also still more “rising stars”, i.e., companies with a rating upgrade, than “fallen angels”, i.e., companies that disappear from the investment grade zone.

Among the new corporate bonds we have included in the COF is Katjes. The bond yields 6.75% interest in euros over the next five years. The German family-owned company has a history of clever smaller acquisitions. Sometimes the seller is called Nestlé (e.g., for the sensitive children’s sun lotion Bübchen), sometimes Henkel (e.g., for toothpaste TheraMed). The corresponding brands are often far too small and region-specific for a global corporation. At the same time, they are ideal for a lean, flexible and well-managed SME to further cultivate and expand the potential organically. In any case, the profitability is impressive. The two entrepreneurs at the helm do not pay themselves a dividend, but reinvest the net income entirely in M&A’s in order to further develop a resilient growth portfolio.

The COF portfolio also includes a bond issued by Europe’s leading security company, whose name (Securitas Direct) and foundation go back to Swiss roots. Temporarily, Partners Group also held a part of the current company Verisure in its portfolio.  The allocation is focused on Switzerland (14%) and the rest of Western Europe (79%).

In the ZIF portfolio, solid borrowers such as Fresenius (healthcare group), John Deere (agricultural vehicles), Zürcher Kantonalbank, Citibank and Energias de Portugal (a leading company in the renewable energy sector) were added. Switzerland (14%) is the most important source region of debtors after Western Europe (52%) and North America (25%).

A data center refers to the entire building complex in which the operator houses data centers and servers as well as the necessary security technology. When it comes to leasing, there are inherent competitive advantages for locations on the west coast of Europe as the shortest links to North America. Greater cloud adoption and the geographic protection requirements to store European data in Europe will increase demand for many years to come. Investments in data centers are considered recession-resistant. There is still a long way to go before there is oversupply.

Climate control is easier in cooler northern Europe than in southern Europe. Drought, heat and power cuts are rare there. In addition to the lower environmental risks, there are also sufficient renewable energy sources. Competing for this infrastructure segment are private market players such as Partners Group, as well as private companies such as the Norwegian family-owned Bulk Infrastructure, whose balance sheet always consists of around 50% equity.

We recently acquired a “green” five-year bond from Bulk Infrastructure, which yields 7.0% interest in Swiss francs. The data centers are powered by low-cost hydroelectricity, are highly CO₂ efficient, and are located in an environment where the average annual temperature is below 8 degrees Celsius, which significantly reduces cooling requirements. Their fiber network runs across the UK to North America and is particularly valued by tech giants who are generating growing demand for data centers in Europe due to data protection regulation.

On the equity side, we are benefiting from Partners Group’s exposure (+32% year-to-date) to data centers. Among private market investments, infrastructure is playing an increasingly important role at Partners Group. In many cases, infrastructure investments are priced for inflation, meaning they offer inherent inflation protection. Partners Group is fundraising for an investor-friendly evergreen fund structure with its Private Infrastructure theme, which could raise up to $10 billion in new money.

The most recent Nobel Prize in Medicine was awarded for basic mRNA research, thanks to which covid vaccines were developed within a short time and saved the world economy from disaster. While pharmaceutical companies are expected to make major breakthroughs against diseases such as Alzheimer’s and cancer, Apple is apparently content with minimal innovations. At any rate, the presentation of the iPhone 15 didn’t knock anyone off their chairs. A smartphone may be part of our life almost everywhere in the world today, but the health effect cannot be compared with the diagnostic and therapeutic successes of the last few years. In the capital market’s estimation, however, companies like Apple and Microsoft are clearly on top.

Not only the tech giants, but all companies will probably have to deal with the topics of Big Data, cyber and augmented artificial intelligence (AI) for a long time to come. After all, the competitiveness of companies is ultimately at stake. It is also unavoidable for pharmaceutical companies if they do not want to lose their competitiveness. AI can be used at every stage of the development of a new drug. In addition, anonymized data sets from previous studies can be efficiently searched through again. Novartis CEO Vas Narasimhan aims to transform Novartis (+17% year-to-date) – following the successful spinoff of Sandoz – into a leading pharmaceutical company operating on advanced therapy and data science platforms – making AI a core part of Novartis’ future. Accordingly, it is looking to hire the best talent and leverage the best technologies available.

SAP (+30% year-to-date) has high hopes for its “Joule” AI program, which aims to provide customers with “intelligent answers” to a variety of questions in the future. Joule has “the potential to profoundly change the business processes of companies and the way their employees work” CEO Christian Klein is quoted as saying. After all, around 87% of all commercial transactions in the world pass through an SAP program at some point. This volume should ensure the quality and reliability of SAP AI.

AI is also expected to profoundly and comprehensively change the labor market. Companies will have to see labor as an asset rather than a cost factor – not least because demographic change is exacerbating the labor shortage. In the short to medium term, AI will help boost productivity and make predictions. This can improve store performance by analyzing buying patterns, customer targeting, stock levels, discounts and delivery recommendations. At the same time, however, the technology is also associated with risks, such as misuse and cybercrime, which requires investment in appropriate protective measures (cyber security).

Brent crude oil prices have climbed over the past three months, reaching a good level of around $92 a barrel at the beginning of October. But compared to the $86 at the beginning of the year, this is not an earth-shattering change. Prices rose in September after the International Energy Agency (IEA) warned in its monthly report of a “significant supply deficit” in the second half of 2023. Demand will exceed supply by an average of 1.2 million barrels per day in the second half of the year, the IEA predicted.

The optimistic forecasts added momentum to the rally that began in mid-June, as Saudi Arabia and Russia cut supply while demand in the U.S. and Asia proved relatively stable. Global auto sales rose slightly more than many had recently anticipated, driven by higher sales in China (sales are up 27% over 2019, not a buyer’s strike like housing) and India. China and India are the largest global oil consumers behind the United States. The European Union also reported an impressive increase in auto sales, as well as rising air travel.

Most other energy prices fell wholesale – including European gas prices. The flow of gas from the Norwegian continental shelf to Europe recovered significantly following maintenance work. This means there is a good chance that gas prices in Europe will collapse, i.e. towards coal parity (Asia) to around 22 EUR/MWh or below. Gas levels in Europe are high, for example in Germany at 96%, about 8 percentage points above the 2017-2021 average (as of October 1, 2023).

The IEA, a Paris-based organization of leading industrialized nations, sees “the beginning of the end of the oil age” coming. Experts now believe that the world will have passed the peak of oil and gas production in 2030 and will then enter the promised land of majority renewable energy. In this regard, there is still a dependence on China for solar cells.

China produced a record high of solar cell capacity last quarter at nearly 600 GW. By comparison, the total photovoltaic (PV) capacity in operation in the EU is about 200 GW. While Chinese PV production is growing at an impressive pace, global PV panel prices are collapsing. Panel inventories in Europe are increasing and electricity prices are falling. Meanwhile, there is a massive increase in interest in batteries, energy storage and technologies to meet the challenges of the “green” energy transition resulting from the rapid adoption of PV.