Monthly Report 10/2025

The US Federal Reserve (Fed) continues to pursue a restrictive monetary policy, but in September, after a lengthy pause, it resumed its path toward a neutral key interest rate level. One reason for this is that the labor market is showing signs of weakness. The Fed has a mandate to ensure full employment through its monetary policy.

This endeavor has received more attention again at recent meetings. In addition, the inflation rate of 9.0% (June 2022) has fallen rapidly. In August 2025, it was still at 2.9%, with core goods inflation oscillating around 0% over the last twelve months. The main driver of inflation remains housing, and this is precisely what the Fed has control over: when key interest rates fall, housing costs also fall and the inflation rate continues to decline. The pressure from the White House on the long-inactive Fed is therefore entirely justified.

The capital market currently expects four further interest rate cuts in the coming twelve months. This would effectively bring the key interest rate down to 3.1% and would ease a number of conditions, not only in corporate financing (debt capital through bank loans and bonds).

With the Fed’s key interest rates, mortgage rates would also fall, for example, and rental apartments would become cheaper. In addition, leasing rates (currently averaging around 7.5% p.a.) and credit card overdrafts (currently around 22% p.a.) would incur lower interest rates, as would high student loan debts.

More than 50 million young and older people have incurred debt during their college and university years to pay for their expensive education. Many graduates start their professional lives heavily in debt and then struggle to service the interest on their loans and repay the debt.

Currently, outstanding debt amounts to more than $1.8 trillion. Education may be a gateway to social advancement, but for too many people, this promise collapses under the weight of debt.

In other words, the Fed holds the monetary policy key to making life much easier for American households. This is urgently needed, as the middle class is still reeling from the wave of inflation in recent years, which has forced it to dip into its savings to pay all its bills.

In the US, 50% of consumer spending now comes not from the middle class, but from the top 10% of households in terms of income. Specifically, these are households with an annual income of $250,000 or more. The dependence of economic growth in the US on the purchasing power of the rich has never been so high.

We caution against tempting statements. At the beginning of the month, we read in an email from a US bank to its customers: “Government bond yields are at levels not seen since 2008 and offer investors an attractive entry point. With central banks heading for interest rate cuts, falling yields could enable capital gains.” But is such an investment really “attractive” from a Swiss franc perspective?

Firstly, not all central banks are heading for interest rate cuts, as we explained on the previous page. But it is true that we also see further potential for cuts in the US. Secondly, it is very important to note that coupon income is taxable as income.

At a tax rate of 30%, a coupon yield of 5.0% results in a net yield of 3.5%. Thirdly, if you want to hedge the exchange rate risk, this currently costs around 4.2% per annum. However, these costs are not deductible when calculating taxable income. It is therefore clear that, after taking into account the costs of currency hedging and income tax, the 5% dollar bond already yields a return of -0.7% in Swiss francs. Finally, there are also the costs of the custodian bank, etc., which means that we are already deep in negative interest territory.

The hedging costs of approximately 4% p.a. have already amounted to a cumulative 16% since 2022. If the Fed were to actually implement sharp cuts in key interest rates, hedging costs could fall to around 3% p.a. by the end of 2026. But even then, short- and medium-term government bonds should be avoided. The prospects for positive overall returns remain low.

On the other hand, for reasons of (risk and return) diversification, a number of longer-term bonds can and must be included in a portfolio balanced between bonds and equities. These would stabilize the portfolio in the event of a sharp decline in interest rates due to economic conditions through essential price increases. In addition, the price gains then achieved on the bonds are exempt from income tax.

The focus on key interest rates often obscures an important change in the yield curve. This has become much steeper since the beginning of the year. The SNB’s monetary policy has lowered interest rates at the short end of the yield curve by around 40 to 50 basis points.

At the long end, however, various market forces are at work. Interest rates in Switzerland have risen by 20 to 30 basis points since the beginning of the year – an obvious steepening of the yield curve.

Corporate bonds are attractive in the current market environment, while government bonds are hardly profitable anymore. Ten-year Swiss government bonds currently yield 0.1% per annum. These are meager prospects, whereas a disciplined selection of corporate bonds can generate significantly higher returns.

History illustrates this. The Swiss Bond Index (AAA-BBB Total Return) represents the best segment of the Swiss franc capital market – a combination of government and cantonal bonds, mortgage bonds, and high-quality corporate bonds. Over the past 13 years, the index has generated a cumulative return of just +11.5%. If you deduct the costs of an index product, you would end up with a return of around +0.6% per year.

In contrast, we have been focusing on corporate bonds for 13 years, often on the threshold between a BBB and a BB rating. With this approach, our clients have benefited from a rise in the price of fund units from CHF 100.0 to CHF 138.9. The increase of +38.9% corresponds to an annual return of +2.6%. The longer you remain invested, the stronger the compound interest effect becomes.

In the current year, the return to date is +3.4%. In the conservatively oriented Zugerberg Income Fund (ZIF), with which we aim to outperform the Swiss Bond Index (SBI) over a longer period, the return after all costs and fees is +1.8%. This is significantly higher than the SBI, which has achieved a return of +0.5% so far this year, excluding costs.

The ZIF has recently added corporate bonds that will secure a solid return for many years to come. These include bonds from Swiss Life, Implenia, Groupe E, and Danaher (12-year CHF bond with a yield of around 1.6%, 20-year CHF bond with a yield of 1.9%).

The first bond issue by the newly formed Cham Swiss Properties was also included, which will yield interest of 1.4% per annum over the next five years. The debtor is a real estate company with attractive growth potential in prime locations and a relatively high residential component (60%) as well as a conservative financing structure with a high equity ratio (61%). The shareholder structure is characterized by entrepreneurial, long-term anchor shareholders such as the families of Philipp Buhofer and Annelies Häcki Buhofer from Zug.

Higher valuations do not necessarily mean attractive investment opportunities. We currently have little faith in Swiss real estate funds. They offer hardly any returns. Rental income is stagnating for many funds. Due to the reference interest rate, a decline in income is even to be expected for funds with a high residential component.

The focus would therefore have to be on attractive locations with value-creating development prospects. But even then, numerous (large) real estate funds are trading at a high valuation premium to market value. This leads to price-earnings ratios (P/E) of between 40 and 50, measured against expected earnings for the coming year. We consider this too high and it only promises a modest dividend payout of around 2%.

With selected individual real estate stocks, it is possible to achieve a more favorable risk/return profile. With our selection (including Mobimo +13%, PSP Swiss Property +8%), the total return so far this year is noticeably higher than that of the Swiss real estate fund index CHREF (+7.2%). Mobimo’s P/E ratio is 23, while PSP’s is lower. Mobimo is a dividend stock with a high residential component and interesting development potential. Its economic dividend capacity is therefore structurally higher than that of a typical real estate fund. This is also due to the fact that these companies operate with a leverage effect by incorporating debt capital.

Debt capital is currently cheap again. Some companies take out bank loans (mortgage loans). However, it should be noted that bank margins have risen by around 20% in the past twelve months, and even more for commercial real estate.

As a result, real estate companies are increasingly turning to the capital market with regular staggered maturities, thereby stabilizing their debt profile and reducing the corresponding interest rate risks that could affect their annual results.

However, the vast majority do not exceed a loan-to-value ratio of 50%. Long-term real estate loans and bonds currently cost between 1.5% and 2.0%. This makes more sense for investments in a development portfolio than a money market-based solution. In addition, rolling financing also stabilizes the dividend stream, because the path of rental income on the expense side is not thwarted by highly fluctuating interest costs.

Compared to bonds, real estate companies remain attractive, provided they are carefully selected. On the one hand, you participate in economic growth through real value. Low interest rates also favor construction financing and increase the attractiveness of real estate purchases, which in turn stimulates demand.

September is considered the notorious villain of Wall Street, shaking up the stock market and causing panic among investors – but this year, it did not play that role. Only the Swiss market remained in negative territory (-0.6%). The US S&P 500 (+2.9%) and Nasdaq Composite (+5.0%) significantly outperformed the traditional Dow Jones (+1.3%). European indices also performed largely positively in September.

US stocks experienced their best September in 15 years. This is a surprising turn of events that is now leading investors to wonder whether the rally could continue until the end of the year, even if the warning lights are flashing. We remain confident about the disciplined selection of stocks we hold in our portfolio for the final quarter.

The rally in the US came as investors welcomed the Fed’s decision earlier this month to cut its key interest rate by 25 basis points to a range of 4.00% to 4.25% and to announce two further rate cuts at its remaining meetings this year.

This was accompanied by renewed enthusiasm for artificial intelligence (AI), which gave the stock market – especially megacap technology stocks – a new boost. However, the actual group of companies that will emerge as the next generation of AI winners remains open.

In the US, earnings growth, a sufficiently strong economy, the resumption of the interest rate cut cycle, and continued signs of long-term growth in AI were the key catalysts supporting stocks this month. However, the latest labor market data is disappointing. Strong earnings growth of around +8% year-on-year is already priced into stock prices following the recent rise in the third quarter.

Swiss stocks can also expect seasonal tailwinds in the final quarter. The market is also more broadly based than in the past. On October 1, the market capitalization of the three largest Swiss stocks in the broad Swiss Performance Index was around 12% each for Novartis, Roche, and Nestlé.

Zurich Insurance, ABB, Richemont, and UBS each have a weighting of around 5% to 6%, followed by Swiss Re (3%) and Holcim and Sika (each with around 2%). However, we deliberately deviate significantly from this weighting in our portfolios. As a result, we have outperformed the SMI and SPI seven times in the past ten years.

This puts Open AI at the top of the list of the most valuable unlisted companies. Number two is SpaceX, the space company founded and run by Elon Musk, with a valuation of $350 billion. A listed AI-related company such as Palantir Technologies is already valued at $440 billion. The US company is expected to generate an estimated $4.2 billion in revenue this year (!).

The share price of US software and database specialist Oracle skyrocketed in September when it announced plans to invest over $100 billion in data centers. At the same time, it was announced that no positive cash flow was expected over the next four years and that a significant portion of the gigantic investment cycle would be financed with debt.

Anyone who fears an AI-related bubble should take another look at the chapter on stocks. In Switzerland, the inflation rate is practically 0%. Government bonds traded in Swiss francs also yield around 0%. Stocks, on the other hand, are generating a return on earnings of around 6%, and this does not even factor in future earnings growth. That is a real return of 6% for stock investors.

In the US, on the other hand, the inflation rate is 3% and the earnings yield for a broad basket of stocks is 4%, meaning that the current real return is only 1%. It has been a long time since investors who are not blinded by hopes for the future but focus primarily on real value appreciation have been able to find comparatively genuine bargains outside the US.

Over the past ten years, the US stock market has been the driving force behind global capital markets, pushing portfolios upward with seemingly endless liquidity and seemingly unstoppable profit growth. Despite already high profit margins, annual profit growth of 11% to 12% will now be required over the next five to six years to justify the current price level economically.

In contrast, the Swiss portion of our stocks in the Zugerberg Finanz portfolios is selected so conservatively that the price levels are justified by the dividend yield of 3% to 4% per annum alone. Expectations for future earnings growth are much more modest than for US stocks and are always sustainably underpinned by substantial free cash flow surpluses from operating activities.