In spring, liquidity in the Swiss financial system was scarce and there was great mistrust among the banks. The stress in the banking sector was palpable. The refinancing situation among the banks has eased considerably since then. Swap rates have fallen since the takeover of Credit Suisse by UBS. Everyone who pays Saron-based interest on loans is now benefiting from this calming of the market. Taking futures prices into account, things could get even better over the next two years. What is needed now is confidence and patience.

In quiet times, swap rates have a low constant premium over the Swiss Confederation bond with the same maturity, for example in the years 2015 to 2021. However, they can also be subject to considerable fluctuations. On the one hand by the Swiss National Bank (SNB), which tightens the refinancing supply among banks through significant interest rate increases (2022/23). This will cause risk premiums – the difference between swap rates and Confederation bonds – to rise in general.

On the other hand, a crisis could change the demand for Confederation bonds to such an extent that yields fall and become decoupled from swap rates. Since the beginning of the year, yields on ten-year Confederation bonds have fallen from 1.5% to 1.0%. This could only be observed in Switzerland as a «safe haven». In all other countries, yields on ten-year government bonds rose, in some cases very significantly.

In the meantime, however, the majority view is that bond yields will fall. The high inflation rates have been successfully combated. In the eurozone, they have fallen from 10.6% to 2.9% within a year, the first time they have fallen below 3% since mid-2021. This is more than everyone expected and not far off the ECB’s target of 2%. A similar trend can be observed in the USA. Central banks on both sides of the Atlantic are emphasizing that it would be “absolutely premature” to consider cutting key interest rates. The restrictive monetary policy is gradually taking full effect and it is indeed important not to ease up too soon.

However, the sharp fall in inflation naturally increases expectations of interest rate cuts, which are usually already anticipated on the capital market. The markets like this discussion. After all, falling inflation rates, lower interest rates and capital market yields are ultimately the key to higher economic growth in the future. They are also the drivers in the M&A business and stimulate the private markets, especially venture capital and private equity markets. All investors in real assets benefit from this, as do investors in long-term nominal investments.

In the USA, the yield on ten-year treasury bonds is 4.9% at the end of October, with a strong tendency to fall. Anyone investing in corporate bonds with a good “A” rating also receives a risk premium of around 1.2%. This makes long-term government bonds and solid corporate bonds attractive investments.

The last few months have been an enormous challenge for bond investors. Central banks such as the Federal Reserve have insisted in their restrictive monetary policy that there will be no interest rate cuts in the near future. This led to a revaluation of bonds with longer maturities, partly because the risk of recession was «priced out». Within just three months, the yield on a 10-year treasury bond rose temporarily from 4.2% to over 5.0% and that on a 20-year treasury bond from 4.4% to 5.3%. A steepening of the yield curve to this extent is also unusual in view of the economic outlook in the near future.

The yield trend and the potential for bond price increases led to a strong outflow from US equities and an inflow into US treasury bonds in October. However, these yields are also becoming a benchmark for other asset classes. US yielding real estate lost value because the higher «risk-free» yield resulted in higher discount rates. The economy initially remained strong and resilient. The growing labor force, excess savings and moderate wage increases ensured continued consumption and strong economic growth in the US. In particular, there are clear signs that the US labor market is returning to equilibrium. This favors the decline in inflation and eliminates the risk of a wage-price spiral.

Despite this economic resilience, we remain wary of a recession, especially as we invest not only in government bonds, but primarily in corporate bonds in a disciplined manner. The vast majority of companies that have financed themselves with bonds on the capital market in recent years are also able to cope with higher interest rates. We therefore do not fear a wave of insolvencies, especially as the main exposure beyond the Swiss franc area is in the eurozone, where the key interest rate has peaked at around 4% – around 1.5% lower than in the USA. It should not be overlooked that the issue of a bond is a nominal debt. If a company is able to increase sales and gross profit in an inflationary environment simply due to price adjustments, which is to be expected, the bottom line is that more nominal financial strength remains to service the interest and repay the debt.

In the eurozone, inflation fell to its lowest level for more than two years at +2.9%. This reinforces our view that the ECB is likely to cut key interest rates up to three times in the next twelve months. The main job is done, now it’s a matter of fine-tuning. In addition, the economy in the eurozone is cooling without the need for such a restrictive monetary policy. Inflationary pressure is also easing in Switzerland. The same is true in the USA, where the danger of a wage-price spiral has been averted. A lot has happened on the labor market recently. This is practically in equilibrium. Commodity prices (-7.3% since the beginning of the year) also contributed to the rapid decline in high inflation rates. However, the consumer confidence index fell less sharply than expected in October, but still fell to its lowest level since May 2023.

Bonds traded in dollars and euros in particular are promising for those investors who assume that the economic future is rather bleak. Typically, central banks react with interest rate cuts in a phase of moderate inflation (which is increasingly the case at present) and economic dips. These are particularly interesting when the remaining term of the bonds is relatively high. However, this requires solid credit ratings and business models with a strong cash flow.

Specifically, there are redemption yields on long-term bonds from Holcim, for example (e.g. 2033: 4.5% p.a. yield in euros; 2046: 6.9% p.a. yield in dollars), which are particularly interesting in view of the fact that redemption yields in these currencies are likely to fall significantly over the next two years as key interest rates are cut. This will result not only in coupon income, but also in a (income tax-exempt) capital gain on the bond.

The ZIF portfolio was actively improved further with a total of 25 transactions in order to benefit from falling interest rates. The portfolio included long-term bonds from Johnson & Johnson, Roche and Sandoz (healthcare group), the Deutsche Telekom subsidiary T-Mobile (communications), AMAG Leasing (AAA-rated covered bond), the European Stability Fund, the Republic of Austria and the City of Zurich, as well as mortgage bonds from two Swiss banks.

The credit rating and duration of the COF portfolio were also increased through 12 transactions. A bond from T-Mobile and one from the southern German family-owned company Adler Pelzer (automotive supplier in the field of acoustic solutions and thermal efficiency to increase driving comfort) were also included.

People generally invest in real estate funds in order to achieve a diversification effect and to have a supporting pillar in a crisis. However, the supposed crisis stabilizer has recently failed. Real estate investments, which were once regarded as crisis-resistant, were unable to withstand higher interest rates and correspondingly higher discount rates. Nevertheless, it is worth noting that the Swiss share index of medium-sized and smaller companies (SPIEX Index) lost significantly more than the SWIIT Index in the corresponding comparison period at -25.4%.

Most of the fall in value occurred in 2022. In the current year, the real estate index was “only” an additional -4.3%, i.e. after the sharp correction, there appear to be signs of stabilization at a level around 20% lower than at the end of 2021. For a sustained recovery, interest rates would have to fall and thus substantially reduce the discount factor again.

At present, the chances of appreciation remain low. This is particularly true in the institutional real estate business. The ETF, which has fully tracked the Swiss Real Estate Index with a replication strategy for 14 years, has an annual expense ratio of 0.98%. At 2.6%, the return remains rather modest and has stagnated over the past five years. Taking into account the fall in prices, Swiss real estate funds have at best preserved capital over the past four years: with a net return of -0.4% on the index, excluding the costs of the ETF.

In the private real estate sector for residential purposes, borrowers are benefiting from the fact that mortgage interest rates fell to a new annual low in October. The benchmark rate for a two-year period is 2.4%, although more favorable offers than a margin of 0.9% can also be found. The swap curve for 2- and 3-year interest rates is around 0.5% lower than at the end of March 2023 (1.5% instead of 2.0%) and fell by 28 basis points in October alone.

Fixed-rate mortgages have therefore become attractive again – and not just because of the planning security they offer. It is by no means the case that Saron-based mortgage loans will have to become cheaper again in the future. Anyone taking out a fixed-rate mortgage at 2.4% has a tax-adjusted interest burden of around 1.6% – without quarterly fluctuations. This corresponds to financing conditions that are at the level of the expected inflation rate. This is therefore a very attractive level in the longer term, especially for those who expect their property to increase in value in real terms over the long term.

Equity indices around the world suffered massive losses in October. The Swiss SMI, which is better known for being defensive, was particularly negative at -5.2%. European stock markets suffered price losses of around -4.2% (Stoxx Europe 600). The decline was somewhat less in the USA with the broad-based S&P 500 Index (-2.7%).

However, it should be noted that the markets react particularly strongly to external factors in the short and medium term. We therefore focus less on individual quarterly results and more on medium-term sales, margin and profit trends.

We also see that overall inflation has fallen faster than the markets expected. Admittedly, there is still quite a way to go due to some stubborn components of inflation. And certainly geopolitical tensions such as in the Middle East could make the oil price more volatile in the short term, but such periods of “investor” uncertainty have always been part of the investment environment in the past.

In terms of growth, company results show us that growth has been much better than expected, particularly in the US. Meanwhile, tighter financial conditions, the high cost of capital, declining pandemic savings and cooling labor markets are slowing growth. However, the market leaders on which we place particular emphasis in our portfolios are growing at an above-average rate – also in the coming years and for a variety of reasons.

As interest rates are gradually returning to lower levels, this will also be factored into the discounting model used to value shares in the medium term. This will increase the present value of future company earnings. In view of such prospects, it is currently a very interesting starting position to invest selectively in real assets with above-average characteristics (market position, balance sheet strength, pricing power).

Swiss dividend yields remain attractive: while the yields on ten-year government bonds abroad often far exceed the dividend yields on equities, the opposite is true in Switzerland. The yield on Swiss government bonds is currently 1.0%, even below the inflation rate. The distribution yield alone (dividends and tax-exempt par value repayments) should reach 4.6% in our Revo Dividend Portfolio. It is important to bear in mind that a considerable proportion of the companies’ profits is retained rather than distributed. The earnings yield in Revo Dividends is 8.3%: 3.7% or roughly 45% of company profits are retained and used to finance growth internally, which should lead to higher profits in the medium term and higher dividends in the long term.

This is the crux of the matter. Chicken or egg? If you are not interested in the weight of the chickens, but in the number of eggs that are laid each year, you can sit back and relax: since we set up the dividend portfolio, cash distributions have risen year on year – and significantly more than the SMI average. Dividend strategies remain attractive for Swiss investors, as the difference between dividend yields and the yields on 10-year Swiss bonds has already increased by 70 basis points this year.

Despite significant growth and huge progress in public support, clean energy has been underperforming on the stock market recently. The European renewable energy stock index includes the largest and most liquid stocks in the hydro, wind, geothermal, biomass and solar sectors. The index is already 29.1% lower than at the start of the year (the global index is even down -34.1% since the start of the year). It has lost a lot of ground in the last three months in particular. The higher interest rates on loans are eating into margins, and in some places the guaranteed energy purchase prices are not linked to inflation. Added to this are slow approval procedures and a lack of grid capacity to sell and distribute surplus electricity within Europe. In addition to the already challenging industrial environment that has prevailed for years, this resulted in a mixture that many investors did not like. The index fell sharply as a result of increased selling activity in shares related to renewable energy.

The European Commission plans to increase the share of renewable energy in Europe many times over by 2030 in order to achieve the targets. To this end, it has presented a “wind package”. According to this, approval procedures are to be accelerated in conjunction with a stronger expansion of the electricity grids. Wind auctions are to be redesigned, in particular to promote the development of a European supply chain and to once again support the ailing offshore industry. Approval procedures currently take an average of four to seven years, as in Switzerland. This means that the decarbonization targets for 2030 will never be achieved. The EU wants to reduce the maximum duration to 24 months. This would provide a tailwind for developers such as RWE and SSE and would significantly accelerate the smart grid investment projects of Enel, Iberdrola and Endesa.

Even if these are still very ambitious targets and the actual implementation at country level is still 12 to 18 months away, this will provide positive impetus.  Faster approvals – and therefore lower execution risks – would accelerate the electrification process in Europe. We therefore see most stocks in the entire renewable energy value chain (developers, manufacturers as well as grid operators and service providers) as long-term beneficiaries of this development.

The DecarbRevo portfolios have been particularly affected by the deterioration in sentiment towards clean energy over the last three months. Since the beginning of the year, 1.1 billion dollars flowed out of the global Clean Energy ETF. In the DecarbRevo portfolios, the decline was never as sharp as in the European Renewable Energy Stocks Index, but it was still painful. The current level is attractive for long-term investors. This is because the fall in interest costs alone should provide a boost in the coming years – both in terms of the net margin and the present value due to the lower discount rate.