The SNB’s new conditional inflation forecast is well below the level projected at the monetary policy assessment in June. The stronger Swiss franc, lower oil price and the cuts in electricity prices announced for next January contributed to the downward revision. With the sharper fall in inflation, the SNB also expects lower second-round effects in the medium term. The new forecast is 0.6% for 2025 and 0.7% for 2026 on an annual average. If interest rates had not been cut, the inflation forecasts would be even lower.

A similar picture can be seen for inflation in the eurozone, which fell to 1.8% in September. The last time inflation was below the 2% mark was in May 2021. The data increased the probability on the financial markets that the ECB would lower key interest rates further at its next interest rate meeting on October 17, rather than waiting until December.

Shortly thereafter, on November 5, Americans will be able to choose between Democrat Kamala Harris and Republican Donald Trump in the presidential election. According to today’s media reports, the outcome will probably also influence the Fed’s monetary policy. Observers assume that an election victory for Trump could end the Fed’s cycle of interest rate cuts as early as the second quarter of 2025, as the Republicans’ economic program would favor higher inflation.

If Harris wins the election, economists believe we could see regular rate cuts to around 3% by mid-2025. Harris had also insisted that she would not interfere with the Fed’s work as president, while Trump had indicated that he would try to influence the Fed’s monetary policy if re-elected. This is unconstitutional, but it does not bother him at all.

Meanwhile, US Fed Chairman Jerome Powell reaffirmed his confidence that inflation will continue to move towards the target of two percent. According to the harmonized method of measuring inflation, as primarily used by European countries, inflation in the US is 1.9%. “If the economy develops as expected, interest rate policy will move towards a more neutral stance over time,” Powell said recently at a financial conference in Nashville, Tennessee. However, the Fed is not pursuing a fixed course. With a target range of 4.75% to 5.0%, the Fed is still pursuing a highly restrictive monetary policy. According to the latest assessment by Fed members, the neutral level is around 175 basis points lower at around 3.0%.

The yield curve is a fascinating construct that is influenced by a wide range of forces. At the short end, it is particularly influenced by monetary policy. The SNB’s interest rate cuts have significantly reduced interest rates for twelve-month time deposits since the beginning of the year (-0.7%). It is expected that this interest rate will fall further.

At the longer end of the yield curve, various aspects come into play. The leverage of a currency area plays a role, but so do currency aspects, potential GDP growth, longer-term inflation expectations, which in turn are linked to labor supply and thus to demographics. The cyclical resilience of an economy and its structural characteristics play an important role. Determining the longer-term resilience of a borrower also depends on productivity and innovative strength, and sometimes also on belonging to a sound fiscal equalization system.

We do not recommend large bets at the long end. To get an impression of the price volatility of a “long-dated” bond, we use the CHF 100 million bond issued by the City of Bern in the fall of 2020 in a denomination of CHF 5,000 with a coupon of 0.04% and a term of 50 years. Due to the negative interest rate environment at the time, some investors chose this investment in order to at least achieve a tiny positive interest income. However, there may be some doubt as to whether all buyers will actually live to see the bond repaid in October 2070.

Nevertheless, investors were naturally pleased with the initial price performance. The bond rose from 100.00 to 111.60 (December 7, 2021): a remarkable return of 11.6% in the first 14 months. As a result of the interest rate hikes, the price fell to 40.8 (September 20, 2022). With a price loss of 65%, it was one of the worst bonds in the Swiss Bond Index. However, the prospects of a recovery allowed the price to gradually rise again. With the latest SNB assessments, the price even rose again to 78.00 (September 30, 2024).

These bonds are held in an ETF, a product that claims to cover the entire market. We are convinced that active selection can achieve fewer fluctuations and at the same time a better return. The selection of bonds not only involves choosing between government and corporate bonds, but also the rating of the respective issuer, the term, the currency and its financing structure. We provide an impression of this in the next section “Zugerberg Finanz bond solutions”.

In risk class 2, the conservative part of the bonds is weighted more heavily. That is why the cumulative return on all bonds in the first nine months is +3.3%. In risk class 3, the weighting shifts increasingly from bonds subject to interest rate risk to bonds subject to credit risk. This has worked extremely well this year and has so far resulted in a return of +4.2%.

Of course, it should be noted that the end of the year has not yet been reached. Bonds have the nice feature of yielding interest every day, including Saturdays and Sundays. This makes it possible to estimate the interest income for the next 90 days with a high degree of probability.

What can also be predicted well is the development of monetary policy over a shorter period. Since the central banks are only at the beginning of a cycle of interest rate cuts, significant interest rate moves can be expected in the coming months and quarters, particularly at the major central banks (Fed, ECB). This increases the likelihood that bond prices will at least move slightly higher.

Estimates of credit risk premiums are typically the most volatile. These play hardly any role at all for high-quality bonds, which make up a large part of our ZIF. These fluctuations are small as long as there is no recession. In the ZIF, credit risk premiums are on average around 107 basis points above the level of the respective government bond with the same maturity. This is significantly more than for Swiss high-grade bonds (73 basis points) and slightly more than for US high-grade bonds (89 basis points), but less than for European bonds (117 basis points).

This is important because, for example, a government bond in Switzerland now yields practically nothing. The redemption yield is 0.3%, i.e. for a bond that will be repaid in the summer of 2034 and bears interest at 0%, I have to pay 97 francs today to get 100 francs in ten years. That is a meager return. We are convinced that our bond solutions will achieve a noticeably better result – both with the ZIF, which achieves particularly robust results when US inflation rates are below 3% (as is now the case).

The COF also impresses in the long term according to the Morningstar fund rating agency. It awards the COF the highest rating (5 stars) for its ten-year performance, taking into account not only the returns but also the fluctuations, i.e. the risk. Anyone who paid in CHF 100 when it was launched in the fall of 2011 now has CHF 133.50.

It was only in the course of 2024 that the index rose again above the original value at the end of 2019. It should be emphasized that the present index is a so-called “total return” index, i.e. all dividends and distributions of any nature are included.

It is also important to remember that these are real values that can be touched, that people live in them and that rents are paid for them. And there were no rent losses.

Around 90% of the valuation fluctuations are due to the interest rate environment. Real estate funds, like corporate bonds, are held as a higher-yielding alternative to government bonds.

There are minimal technical differences to the second Swiss real estate fund structure, the SXI Real Estate Fund Broad (SWIIT), whose performance, however, shows no significant deviation. The material focus is on residential investment properties.

Those seeking a stronger focus on commercial real estate will find it in the SXI Real Estate Shares Total Return Index. However, because a certain vacancy rate persists there, commercial real estate is less popular among investors. Although the corresponding index shows a similar curve, investors had to settle for a 5% lower total return over the five-year observation period.

In recent weeks, investors’ interest in real estate funds has been rekindled by falling inflation rates and key interest rates, as well as shrinking returns on fixed-term deposits.

The inflation forecast published by the SNB reinforced investors’ conviction that the SNB will cut interest rates by a further 25 basis points at its meeting on December 12, 2024. Therefore, interest in real estate investments is likely to increase further.

Excess cash will hardly yield any more returns, and it is therefore important to protect it from the loss of purchasing power and to invest it. The interest rate fluctuations on fixed-term deposits or savings accounts are immense.

Much more consistent returns can be achieved on the real estate and infrastructure investments in our portfolios. With our values such as BKW, Zurich Airport, Vinci and Veolia, etc., we feel well positioned for the coming investment periods.

September was a good month for cyclical industrial stocks. The Zug-based fastening technology specialist Bossard (+9% in September) was able to use its monthly performance to close the gap again on the globally active companies Siemens (+7%), Schindler (+5%) and Schneider Electric (+3%). These have already achieved a double-digit total return since the beginning of the year, which in some cases has been significant.

Our funds from India (+4%), which is proving to be an increasingly attractive business location, also benefited from the cyclical upturn.

The same can be said of Sika (+3%). Sika has a great deal of expertise, for example in making high-rise buildings earthquake-proof, in developing waterproof concrete, and in making the floor in a data center free of static electricity. In a circular economy, there is also growing demand for ways to reuse construction waste on site with additives for new buildings.

Sika’s business model is aligned with the macroeconomic trends on which we are betting across the entire portfolio: Sika is not in a stagnating market, but in a structural growth market that is currently worth CHF 110 billion. As a global leader, Sika has a market share of 11% and thus benefits from trends such as increasing urbanization, growing demand for infrastructure, and the more recent requirements for digitalization and decarbonization.

The emerging markets are growing faster than the established industrialized nations and already generate 41% of Sika’s sales. As the No. 1 with the broadest product range, Sika is growing faster than its competitors (market penetration), although the best thing about the business model is that gross profit is growing faster than sales, meaning that the business is scalable. This works like compound interest if you hold the share for ten years instead of just one. In this way, macroeconomic trends ultimately flow into our investment decisions via industry analyses and individual business models.

That is just one example. In this process, we are also increasingly using large computing capacities to support selection with the help of artificial intelligence.

Industry assessments remain important, and for years, for example, we have given the insurance industry a much higher weighting than banks. For various reasons, the latter were in the spotlight in September. Reinsurance company Swiss Re (+2%) reported good premium income in Monte Carlo. Zurich Insurance Group (+4%) is reporting a return on equity of almost 20%, which is above the industry average, thanks to the successful commission business of its US subsidiary Farmers. The shareholders will benefit from this with an above-average dividend.

Axa (+1%), a global leader in property insurance, is receiving support from the increasing demand among companies to insure themselves against business interruptions. Swiss Life (+3%) benefited in particular from lower interest rates. These will lead to a higher valuation of real estate holdings in the coming 18 months due to the application of lower discount rates. Europe’s largest real estate investor is therefore likely to generate record fee income in the near future, because a significant portion of the real estate and infrastructure assets are held for third parties.

Partners Group’s success is unparalleled in Switzerland. Founded 25 years ago in Zug, the company now employs more than 1,800 people worldwide on every continent and in a wide range of roles. One of its core tasks is to carefully identify interesting investment opportunities for the 149 billion dollars (13% growth rate over ten years!) that Partners Group has been entrusted with in long-term vehicles.

Investments can arise for a variety of reasons. For example, it may be an entrepreneur who cannot find a suitable succession solution within the family. But it may also be due to an industry trend, such as the need for more data centers that are to be operated with renewable energy.

Partners Group and EQT are among the leading private equity companies in Europe, with EQT increasingly focusing on very large deals and Partners Group tending to see its strength as being in the medium-sized buyout business.

This is a segment that barely features in the listed markets and thus also in the investment portfolios. That is why private equity is always a diversification to an existing public equity portfolio in the real economy, in which primarily large companies are found.

For example, Partners Group acquired the Swiss luxury watchmaker Breitling for its clients and successfully developed it further under the co-investing CEO Georges Kern. Partners Group also acquired a majority stake in the Rosen Group as part of a succession plan for the founder Hermann Rosen.

The company, headquartered in Stans in central Switzerland, is now further strengthened as a market leader – with innovative solutions and outstanding services based on our expertise in various technology areas and further developed with advanced digital and AI-based capabilities.

At some point, a company also has to be transferred into new hands again. This could be an IPO. Partners Group is pursuing this with KinderCare Learning Companies. The 55-year-old institution, which operates under various brands in over 2,000 locations, providing premium daycare and educational services for children up to the age of 12, is to be listed in the US. Partners Group bought the group nine years ago and has continued to develop it. The first attempt at an IPO in 2021 had to be abandoned in the middle of the pandemic.

A two-pronged approach that could also have led to an IPO was the sales process at Techem, where Partners Group was the majority shareholder with two Canadian pension funds as co-investors. The buyer was the well-known TPG from America, together with the minority investor GIC, the Singapore sovereign wealth fund.

This is one of the largest sovereign wealth funds in the world and likes to hold equities, hoping to achieve better returns than holding government bonds. The valuation of €6.7 billion represents around 12.1 times gross profit (EBITDA), and is significantly higher than the enterprise value of €4.6 billion at which Techem was acquired in 2018. The transaction had no impact on the Techem bond, which we hold in COF.