The USDCHF exchange rate recently fluctuated between 0.87 and 0.88 francs. This is around 5% less than at the beginning of the year. Due to falling inflation in the USA and the resulting expectation of several interest rate cuts over the next two years, the dollar is likely to depreciate by a further 10% or so. In any case, the purchasing power parity is around CHF 0.80, i. e. significantly lower. Over short periods, an exchange rate can deviate significantly from purchasing power parity, but not over longer periods.

The EURCHF exchange rate has once again been much more stable over the last twelve months. At -3.7%, it lost less than the dollar compared to the beginning of the year, but also showed significantly smaller fluctuations on a monthly basis. In the case of bonds, we hedge bonds traded in euros in Swiss francs. This currently costs 2.3% annually, with the prospect of lower hedging costs in the next two years. In addition, the purchasing power parity (0.99) indicates that the euro could move closer to parity.

In this respect, too, the dollar is showing its negative side. Hedging the currency against the Swiss franc currently costs 3.9%. In this respect, however, we expect hedging costs to fall in the coming years due to the lower interest rate differentials at the short end of the yield curve. This will make long-term bonds issued in USD by Swiss companies such as Roche, Novartis and Zurich Insurance particularly attractive. In dollars, annual yields of more than 5% are attractive: If hedging costs fall to 2%, this ultimately results in an annual Swiss franc yield of around 3% from Switzerland’s most solid borrowers. This is an enormous difference compared to the yield on the ten-year Swiss Confederation bond, which fell to a meagre 0.7% at the beginning of December.

The inflation trend in Switzerland is on the right track. The national consumer price index (CPI) sank by 0.2% in November 2023 compared to the previous month, reaching 106.2 points (December 2020 = 100). Compared to the same month of the previous year, inflation amounted to +1.4%. At +1.4%, core inflation was also clearly within the price stability range. The strong franc is causing imported deflation.

High inflation gave rise to fears that countries and companies would struggle to cope with the high cost of capital under the restrictive monetary policy regime. Bonds were not considered popular for an extended period this year, especially as central banks only began to stop raising key interest rates in the fall of 2023. The World Bond Index was still at -3.5% year-to-date in mid-October. After the disastrous 2022 bond year, another bad year seemed to be on the horizon.

However, with the end of the cycle of interest rate hikes and the continued fall in inflation rates, opinion has changed in the past six weeks. Just as the rise in inflation in 2022 was underestimated, even central bankers have underestimated the fall in inflation in 2023. In any case, the inflation rate in the eurozone fell much more sharply in November than many had expected. According to the European statistics office Eurostat, the increase in consumer prices was only 2.4% compared to the same month last year. This is the sharpest fall ever seen in the eurozone.

The Netherlands and Belgium are already experiencing deflation. In Italy, inflation was only +0.7%. In Germany it was +2.3%. Slovakia has the highest rate in the eurozone at +6.9%. The country is experiencing a strong upturn, not least thanks to extensive reshoring, i. e. the relocation of production capacities from the Far East to Eastern Europe.

It will therefore take time to assess this. Incidentally, it was striking that core inflation amounted to 0.0% in November – with a small fall in goods prices and a slight rise in service prices. But even if you ignore the monthly noise, the annualized three-month rate of core inflation in the eurozone has cooled from 4.1% in the summer to 0.8% in November, well below the European Central Bank’s (ECB) target.

For the ECB, the new inflation figures provide a strong tailwind for discussing key interest rate cuts. For an economic area that is growing at around 1% and has inflation of around 2%, a central bank rate level of 4% is far too restrictive. We believe that if these inflation figures are confirmed, the ECB will make its first cut as early as the second quarter of 2024.

The ECB’s next interest rate meeting will take place next week. We expect President Christine Lagarde to make a statement to the effect that it is “still too early for victory celebrations”. ECB Executive Board member Isabel Schnabel recently commented that “the last mile” in the fight against inflation could be particularly tough.

Most larger investors use the global bond index (“Global Aggregate Total Return Index Hedged CHF”), hedged in Swiss francs, as a benchmark for their bonds. The probability of default is very low, as it is heavily weighted towards government bonds and top-rated corporate bonds. However, this security also comes at a price. Since we launched the Credit Opportunities Fund exactly eleven years ago, it has gained +23.0% net of all costs and fees. This corresponds to an average return of +1.9%. Over this entire period, the world bond index has suffered a cumulative loss (-2.1%). This results in an enormous return difference of 25% compared to the COF, i. e. the higher security led to a significantly lower return.

Of course, you could argue that you don’t want any bonds from the USA, Germany, etc. in your portfolio. If you base your selection exclusively on the small Swiss franc capital market and the bonds available here, you have much less diversification options. The Swiss Bond Index (SBI) represents the Swiss franc capital market. This does not change the picture significantly. Over the last eleven years, the SBI would have generated a total return of +3.8%, which corresponds to an annual return of +0.3%. The difference in return compared to the COF is around 20% or 1.6% annually.

The ZIF is on its way to positioning itself between the SBI and the COF. Its rating is always of good quality. It has an A- rating. This can also be seen from the fact that the credit risk premiums compared to the corresponding government bonds have been significantly reduced through active trading. During the zero and negative interest rate phase, we considered higher risk premiums to be appropriate. They have now been more than halved to 150 basis points (-170 basis points) in the first eleven months of the current year.

On the other hand, the earnings potential in an environment of higher interest rates has been increased by a trend towards longer maturities. Although the residual term of the bonds is not as high as that of the SBI, it has increased significantly over the course of this year. The so-called duration is used as a yardstick for this. We increased this by 35% from 3.8 (1 January 2023) to 5.2 (30 November 2023) in order to benefit from the higher interest rates on longer-term bonds for longer. From a technical perspective, it should also be emphasized that the convexity has doubled since the summer in an advantageous manner.

The difference between the ZIF and the COF is that the ZIF pursues opportunities in the interest rate structure of the fixed income market and the COF pursues opportunities in credit risks. The maturities are shorter, but have increased the duration from 1.8 to 3.0 since early summer. In a solid economic environment, it can be assumed that exposure to credit risks with fixed coupons is worthwhile.

Real estate prices in Europe have fallen, more sharply in the commercial sector than in residential real estate. Switzerland stands like a price island in the landscape. But when Steve Schwarzman, founder of Blackstone, recently said that his firm is eyeing a number of buying opportunities in real estate across Europe, the time has come to listen carefully.

If Blackstone, which owns almost 10′000 properties worldwide and derives its insights from an enormous in-house pool of market and client information, is to be taken seriously, it is time to listen. The world’s largest private equity and private real estate provider currently likes deals involving data centers, warehouses and student apartments. It is not alone in this. Partners Group is also expanding its private real estate business in Europe. The same goes for the Norwegian sovereign wealth fund, which frequently joins forces with Swiss Life in the European real estate business. Swiss Life is also expanding in both the real estate and infrastructure sectors.

Word is spreading quickly on the capital markets. In the Stoxx Europe 600 share index, the real estate sector was the best-performing segment in November with +15%. All trend indicators are still pointing upwards. The central consideration behind this lies in the income statements and balance sheets of real estate companies. There is an upward trend in rental income. Part of the cost inflation can be passed on in higher rents. In many cases, the balance sheet also includes an interest-bearing debt position of 25% to 40%, i. e. a bank loan or bond must be serviced with interest and repaid or refinanced at maturity.

As interest rates have already fallen significantly and refinancing has become cheaper, solid (residential) real estate companies and infrastructure operators are highly attractive to investors in a phase of falling interest rates. Many institutional investors such as SUVA only invest in the infrastructure sector on the private markets, but the asset class can also be accessed via listed infrastructure shares. The business models of listed infrastructure companies provide robust, inflation-protected returns while offering the daily liquidity and transparency of public markets. The companies have proven resilient in difficult market conditions. Our favorites include Zurich Airport (+32% total return since the beginning of the year), BKW (+23%), Vinci (+25%), Engie (+30%). Only RWE (-3%) lagged behind. However, we are positive about their goals and intentions, which were recently communicated at the Capital Markets Day.

The latest development is not surprising. Technology stocks shaped the year 2023. New business models are emerging at an exponential rate, digitalization is changing the way companies approach age-old processes and artificial intelligence (AI) will continue to develop at a rapid pace. Initially, this has given a boost to those companies that are considered leaders in the use of AI.

However, like looking at an iceberg, most of it remains hidden. We are convinced that there is still a lot of potential. Robotics, automation as well as modern process and procurement engineering are in demand. Companies such as Schneider Electric, Siemens, ThermoFisher Scientific, but also Kühne+Nagel and DHL are among the globally outstanding solution providers. And SAP is used for processing.

We have set ourselves the goal of exploring all opportunities to benefit in the longer term from the generative AI wave, which is currently changing almost everything. This is a movement that will take on greater proportions than the internet. The growth rates are promising, as are the productivity gains that are on the horizon. There’s a positive earnings momentum in our stock picks. Risk remains easing, even though some flip-flopping is going on.

In addition, bond yields have already come back significantly. In Switzerland at least, equities are more attractive than government bonds. The dividend yield in our Zugerberg Finanz portfolio remains unchanged at 4.0% this year and 4.3% next year. While yields on ten-year government bonds in Switzerland have fallen to 0.8% in early December, the expected dividend yield alone has risen to 4.3% (2024). We remain convinced that our dividend strategies will remain the focus of investors in the longer term, especially with such yield differentials.

We also have “dividend aristocrats” with reliably predictable cash yields. Our portfolio contains around ten stocks that have steadily increased their dividend payments per share in each of the last ten years. Some of these companies have also performed well in the current year and have announced dividends that exceed analysts’ expectations. Tax-free dividends are available from five of the companies in our portfolio. They are able to pay out tax-free dividends from foreign capital reserves.

The combination of tech stocks, dividend-related selection and a careful selection of winners from the AI movement is now particularly interesting. We remain confident that the coming years will offer many opportunities to participate disproportionately in the development of the real economy through disciplined stock selection.

The Norwegian sovereign wealth fund, the largest investor in Europe with CHF 1′000 billion, recently decided to reduce its equity allocation and increase its private equity allocation in its strategic investment allocation. The Lucerne-based insurance company SUVA, the largest institutional investor in Switzerland with an investment volume of over CHF 60 billions, will also reduce its equity allocation and increase its private market investments – up to 15% in the pension fund.

This will achieve better diversification. The companies that are not listed on the stock exchange are typically medium-sized companies that are growing strongly. As a rule, they grow significantly faster than the listed shares. All of the Magnificent-7 stocks had become large in the private market environment. Some SMI stocks have also experienced this (e. g. Geberit, Sonova, Logitech). However, many no longer make it to the stock exchange because they can focus more on their customers and develop better away from the analysts’ conferences.

In November, for example, Partners Group acquired the Rosen Group headquartered in Central Switzerland. Founder Hermann Rosen established the fast-growing, innovative technology company in Stans. Around 40 years ago, it already had ten employees. Today it has more than 4,000 employees. Mr. Rosen is a minority shareholder and will remain a member of the Board of Directors following the takeover by Partners Group. Professionally, he can once again devote himself increasingly to new technologies, including offshore wind turbines and underwater inspections. The management of the group, which now has a turnover of around 750 million dollars and a profit of around 200 million dollars, will be handed over by the now 77-year-old company founder to the new shareholder, who intends to “continue Rosen’s unique success story in the long term”. According to reports, there was no one in the family who could have taken over his role.

It is not possible to participate in such companies on the stock exchange. Only very few companies of this size are listed on the stock markets worldwide. Most are privately held and traded. With the “Partners Fund”, we are involved in such companies and their development. But we can only do this in truly long-term investment formats. For those with an investment horizon of less than 10 years, we provide access to more liquid vehicles or to the fund of listed private equity vehicles (“LPActive Value”). These also have their benefits in the long term, but are significantly more volatile in the short term.