The sector rotation in October from cyclical to defensive was a statistical outlier and weighed on our positioning. However, there is little in the way of fundamental justification: technology companies are delivering strong earnings growth and the use of AI is increasing. Nevertheless, capital markets are demanding higher risk premia due to the enormous financing needs. Although we expect a countermove after the US midterms, we are slightly reducing our high exposure to the AI supply chain in view of the increased uncertainty and are using global government bonds for hedging.
Text: Roger Rüegg
Our expected scenario for government bonds materialised in October. For some time now, we have believed that concerns about government debt and inflation are exaggerated and that government bonds are attractive at this yield level. In October, the yield on 10-year US government bonds fell back below 5% despite a renewed rise in oil prices, higher inflation figures and solid economic data. Our tactical position in long-dated US government bonds has generated a performance of 6% as a result. We are therefore increasing foreign duration once again – also as a hedge against potential further price losses in technology stocks.
As in July, we experienced pronounced sector rotation in October. AI-related stocks were heavily punished and many investors favoured defensive sectors. The overall market remained surprisingly robust, but beneath the surface the differences were massive: technology -7%, energy +10%, consumer staples +8%. We now expect a countermove, particularly in heavily sold off emerging-market equities. These now trade on a price/earnings ratio of below 9, making them very cheap and fundamentally significantly more attractive than Swiss equities. The relative performance difference between these two markets of 15% within three weeks is extraordinarily high in historical terms and has in the past led to strong countermoves. In return, we are reducing our overweight in global equities, as the pressure is increasing due to tighter financial conditions.
Listed Swiss real estate funds, with a loss of around 4%, are among this year’s losers. Valuations have now eased somewhat and seasonal effects are turning positive. We therefore already closed our underweight position in October and, despite isolated capital increases, expect prices to rise until year-end. In return, we have closed our overweight in alternative investments, as we now see greater price potential in traditional investments and are using these as a source of funding.
We continue to prefer the Australian dollar and emerging-market currencies to the euro and US dollar. For the Swiss franc, however, we are reducing our underweight, as the downward trend has been halted by political unrest in Europe and the franc is once again in demand as a safe haven.
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