The capital market is currently expecting US key interest rates to be cut five times by 0.25% each time over the next 12 months – to a target range of 3.5% to 3.75%. This means that the market is not quite as optimistic as the Fed. The differences are not large, and individual macroeconomic data can quickly change the market opinion again.

The biggest change was the strong growth in the US, which can also be attributed to robust consumption and the low savings rate. Many fail to understand the fundamentally different savings behavior between the US and Europe.

In the US, saving is primarily done with equities, while in Europe low-yield bank savings solutions predominate. When stock markets rise (the broad US S&P 500 index is up around 20% in the current year), there is a significant wealth effect. Anyone who set aside $200’000 at the beginning of the year now has $240’000 – without any additional savings.

In Europe, bank savings are particularly popular. In Germany alone, 2’200 billion euros are parked in demand deposits or cash: only a fraction of this is invested in equities. This has devastating long-term consequences, also this year: those who had 200’000 euros will end up with between 204’000 and 208’000 euros, depending on the account solution. This does not even compensate for the loss of purchasing power due to inflation.

To achieve the individual savings target, considerably more must be set aside with this investment solution. Only in this way can the gap to the typical US household be reduced. The propensity to consume is therefore lower, which hardly encourages companies in this country to invest more. By contrast, robust consumption is the key growth driver of the entire US economy because it encourages companies to invest.

Furthermore, although the US, with 350 million inhabitants, has a lower sales potential than Europe, with almost 600 million inhabitants (excluding Russia), the market is fairly homogeneous from coast to coast. By contrast, Europe’s economy is fragmented into numerous countries with different regulations, languages, cultures, and trade and economic alliances.

However, this diversity also gives rise to a rich culture of innovation. Europe can certainly benefit from geoeconomic fragmentation, because the reshoring of production facilities to low-wage Eastern and Central European countries or to high-quality, 24/7 Western European factories is already proving successful in many areas. More people in Europe have jobs than ever before. At least this is a sign of a good degree of resilience.

After hitting a low in mid-September, the yield on two-year US government bonds has risen by almost 50 basis points. Yields on five- and ten-year bonds have both risen by around 60 basis points to 4.2% and 4.4% respectively. Accordingly, bond prices have fallen, especially for long-dated bonds.

The global bond index, which is heavily weighted towards US Treasuries, is marking time. For the year to date, the return is negative (-0.7%). But a look at the past three years does not provide any more insight either, with a total return of -12.0%. Since the crash in 2022 (-13.7%), there have been handsome interest payments, but hedging costs absorbed the bulk of this. Hedging a dollar position from a Swiss perspective currently costs just over 4.0%.

Nevertheless, we believe that a significant portion of dollar positions must be held in conservatively structured portfolios in particular. Their price performance is like a hedge that can be used to profit from recessive economic phases. In addition, liquidity is outstanding.

However, the economic outlook is very good and robust at the moment, so now is probably not a good time to buy long-term US Treasuries.

In fact, it is possible that the costly implementation of election promises will cause the government budget deficit to rise rapidly again, which could herald the beginning of a surprisingly sustained rise in yields.

Bond yields have also risen recently because, after a weak start to August, a number of US releases provided positive surprises in September and October, including positive macroeconomic reports on wage and salary developments and retail sales data.

Last week’s US purchasing managers’ indices, new home sales and jobless claims further strengthened this trend. The Atlanta Fed’s model for real-time gross domestic product (GDP) tracking indicates that US growth remains between 2.3% and 3.3%.

Meanwhile, rising risk in the Middle East and uncertainty surrounding the war in Ukraine after the impending change in the White House are fueling concerns about inflation and fiscal sustainability.

It’s hard for us to imagine that next year, with GDP growth above 2.5% and stubborn service inflation, the Fed will automatically cut rates one after the other, easing the interest rate landscape worldwide.

The COF is characterized by low interest rate risks. Therefore, its fluctuations are small compared to bond solutions that are strongly oriented towards government bonds and their ratings. If one wants to describe the fluctuations of a security as risk, it is clear that a long-term bond – even with a high credit rating – is associated with a considerable risk of fluctuation (see also monthly report October 2024).

These are the bonds in the COF less. These are rather shorter-dated bonds. The main return is earned from risk premiums. This is the name given to the premium over a government bond. We purchased the 3% bond of the Swiss construction group Implenia in spring 2024 and a term of four years with well over 200 basis points above the comparable Swiss government bond.

In the meantime, the bond has risen from 100% to over 103% and the risk premium has fallen to 180 basis points. This still results in a yield of 2.0% over the remaining term.

The fluctuations of this bond are significantly lower than those of the ten-year benchmark bond of the Swiss Confederation and the total return is higher. This is precisely how the COF intends to position itself in the future. This is because the aforementioned government bond will generate an annual return of just 0.3% over the next ten years. In the COF, on the other hand, the expected return is the same, but it is paid monthly. This also takes into account economically challenging times.

If a bond becomes too expensive, it is sold before the maturity date. In January 2024, for example, we purchased a bond issued by the mechanical engineering group Bobst in Lausanne that matured in about four years at 100%. This was last trading at 103.50, which yields a little less than 1.7% over the remaining term.

We felt that this was insufficient, and the sales proceeds were subsequently invested in further, new bonds with significantly better total return prospects (e.g. textile machine manufacturer Rieter).

The solid economic development has recently supported the general credit environment. Credit spreads have narrowed in the past month despite the volatility in government bonds. They are lower at the end of October 2024 than they were on the eve of the 2016 election. But the outcome will not fundamentally cloud the good business outlook.

It is easy to overlook what the situation was like in 2019. Interest rates were at a low level. We were concerned with diversifying our portfolios beyond equities, which are prone to volatility, into other, more defensive asset classes. We hoped for less volatility than with equities, but still a respectable return.

In this search, one inevitably comes across real estate and infrastructure topics. While real estate stocks, due to their strong interest rate sensitivity, show similar fluctuations as bonds with long maturities, infrastructure stocks have a different character. The core of the infrastructure business lies in a concession operation. For example, anyone who has a concession to operate an airport has a long-term license for a potentially profitable business in an orderly framework.

A regulator monitors the aviation fees, which limits the return on equity. However, investments in the fees can be included: the modern renewal of the baggage sorting and baggage handling system has increased the usage fees. In addition, the concessionaire is free to manage the existing area efficiently. Therefore, when it comes to earnings development, a distinction must always be made between aviation and non-aviation income.

Flughafen Zürich AG is a prime example of this. With well over a hundred properties at the airport and beyond (e.g. Balsberg, Circle), it is also a real estate company. However, its portfolio is less interest-rate sensitive and also has better long-term prospects (value appreciation potential). In the economically strong Zurich North area, the airport has numerous properties with development potential.

But the pandemic threw a spanner in the works. Dividends were canceled in spring 2020, 2021 and also 2022. The recovery of air traffic made it possible to resume a distribution in 2023. In spring 2025, the dividend should be more than 4 francs and dividend growth should accelerate in the coming years.

Passenger numbers are gradually increasing beyond 2019 levels, and passengers are spending significantly more on consumption. Gross profit will be lifted to a new record level over the next two years with an estimated 33 million passengers and 4% more flight movements. These profits are also needed to cope with the upcoming investments and the associated depreciation.

The reporting season peaked in the last week of October. For some technology stocks, expectations were exceeded, for others not. At Alphabet (Google), investments in artificial intelligence led to a 35% increase in cloud revenues and YouTube advertising revenues rose significantly in the third quarter due to US election campaign spending. Total revenues reached USD 88.3 billion (+15%).

Apple’s AI-powered iPhone 16 series drove fourth-quarter sales to $94.9 billion. Amazon beat earnings and revenue expectations for the third quarter, driven by a 19% increase in AWS cloud revenues.

Ultimately, the shares of the big tech companies moved relatively unspectacularly from the beginning of the quarter until the beginning of November: Amazon was practically unchanged, Nvidia (+11%) and Alphabet (+3%) were slightly higher, and Microsoft (-6%) and Apple (-3%) were each slightly lower. In Europe, SAP and Deutsche Telekom (each +5%) as well as Holcim (+3%) were among the clear winners.

The fluctuations in the industrial sector were more pronounced. Sika (-14% since the beginning of the quarter) saw its latest earnings estimates revised upwards, but the share price moved in the opposite direction. Like Givaudan (-12%), Kühne+Nagel (-7%) and Partners Group (-6%), the construction chemicals company is one of the losers in phases of rising global yields and one of the winners when the trend is in the opposite direction.

The economic news from Europe was positive. Of the Stoxx 600 companies that have reported so far, 60% exceeded earnings estimates. Although the German economy grew at an annualized rate of 0.8% in the third quarter, which was not as strong as the Eurozone as a whole (+1.2%), German retail sales rose surprisingly in September (+1.2%).

The mood in the boardrooms of companies brightened surprisingly significantly in October. The business climate index rose to 86.5 points (+1.1 points compared to the previous month), as reported by the Munich-based Ifo Institute based on its survey of around 9’000 executives.

Consumer sentiment also improved again for the second month in a row. Consumers are apparently feeling better again about their personal circumstances than about national affairs. Unemployment in the EU remained at a record low of 5.9%.

What is important is that the industry has developed strongly. In the area of alternative investments, it is our view that each asset class has a few unique characteristics in terms of expected return, risk, income, liquidity and capital requirements. This requires a closer look to better understand the different advantages that each asset class can bring to a portfolio.

When a bank grants a loan, it has to back the transaction with equity. When a private market provider grants a loan from its private debt fund, it does not have to do so. Furthermore, the fund contributes to financial market stability. The investor places his capital in the private market manager’s corresponding vehicle for a fixed period of many years. The manager only receives a performance fee if all funds have been repaid and a pre-agreed minimum hurdle (e.g. 5% annually) has been exceeded. A typical bank’s compensation regime is designed to be comparatively short-term and also creates more instability because the loan can be terminated in a crisis. Mark Twain (1835 – 1910) once said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back as soon as it starts to rain.”

Bank balance sheets are vulnerable to crises of confidence because customer funds can quickly migrate. The best example of this was Silicon Valley Bank, which had over $175 billion in customer deposits. When rumors about the poor quality of its balance sheet emerged in spring 2023, payment orders for over 140 billion dollars were issued within 48 hours. The bank would have become insolvent had it not been taken over by the US deposit insurance agency FDIC.

In contrast, private market providers are long-term investors who do not operate with short-term customer deposits and can continue to grant loans even in crises. Companies in the portfolios of private market providers are less likely to go bankrupt than their bank-financed peers.

Financial market regulators are also demanding economic stress test scenarios from banks and their liquidity and capital adequacy because these are potentially much more crisis-prone than private market vehicles.

Some of the private market sub-asset classes serve more of a growth and capital appreciation purpose, while others protect against inflation and/or provide stable income.

Furthermore, the range of characteristics is broad and continues to expand as the innovative industry finds new ways to provide added value (e.g. an increased sense of security) to their end-users.