The first hot days herald the arrival of summer, and the stock markets are already signalling a risk of overheating. We therefore reduced our equity exposure slightly in mid-May and are now only overweight in emerging markets. We consider the recent rise in bond yields to be exaggerated, however.
Text: Roger Rüegg
The Strait of Hormuz has remained closed for nearly three months, and the oil price continues to hover around USD 100. As US inflation figures have come in higher than expected, the bond market has panicked, and yields have risen sharply worldwide. At the same time, interest rate hikes by central banks have been priced in. This may well be the case for the European Central Bank (ECB), but we do not foresee any interest rate hikes from the US Federal Reserve (Fed) this year and expect a reversal. Generally speaking, we find government bonds attractive given such high real yields – for example, over 2% on 10-year US government bonds – and remain overweight despite losses in May. Bond yields are in our opinion likely to fall again over the coming months. We remain underweight in CHF government bonds (Swiss) and global corporate bonds, but are adding to our holdings of CHF corporate bonds. Following the recent rise in yields, these offer a significant yield premium over cash.
Corporate earnings remain strong, and AI chip manufacturer Nvidia has once again delivered a positive surprise. Combined with robust economic data in the US, this should continue to favour equities. However, following an extremely strong rally in tech stocks, equities are overbought; accordingly, our sentiment indicators point to euphoria and are producing sell signals. We have therefore reduced our equity overweight slightly once again and are now only overweight in emerging markets, which remain attractively valued thanks to strong earnings growth in the tech sector and momentum. That said, market breadth in emerging markets is also weak, prompting us to take some profits there as well.
Having been relatively active in recent years with investments in Real Estate, gold and commodities, we are maintaining a neutral weighting across all three asset classes. The momentum in gold appears to have run out somewhat, and we are waiting for a better entry point. As for commodities, whilst we expect oil prices to fall, the risk remains high due to the war in Iran. The risk-return ratio does not yet seem attractive enough to warrant an underweight position. Demand for listed Swiss property funds remains very high. However, premiums are once again clearly above average, and political referendums, capital increases and the interest rate landscape are all exerting pressure in the short term. Things are looking interesting, however, for catastrophe bonds (cat bonds): the hurricane season is about to begin, marking the most volatile period for this asset class. We continue to view the risk premium as attractive.
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