Ask the experts: What is stirring our clients (and moving the financial markets) in May 2024

We are always available to our customers for concerns and questions about their portfolios. As a representative of this, once a quarter we summarize the most frequently asked customer questions and the answers provided by our experts, thus giving you direct insights into our asset management and investment advisory services.

Equities

The US presidential election campaign will build to a final showdown in the months ahead. Which (US) stocks stand to benefit from a reelection of Donald Trump (or Joe Biden)?

Kaiser Partner Privatbank: In the runup to the US presidential election on November 5, equity analysts are busy again piecing together “red” and “blue” baskets of stocks, an exercise that probably will be appreciated by trading-oriented investors (and by the stock-market media), but which has seldom paid off in past election cycles. A typical (red) Trump basket this year (just like in 2016) mainly contains financial, mining, manufacturing, and energy stocks – the advertised drivers behind this selection are hopes of less regulation and, last but not least, MAGA (Make America Great Again). Conversely, the favored stocks in the (blue) Biden basket belong to the categories technology and electromobility, and of course the classic pick – stocks in the renewable energy sector – mustn’t be omitted. Investors who let themselves be guided by a selection of that kind over the last eight years may have had interesting discussions around the office coffee machine, but underperformed the broad market with such a “political” portfolio because the markets did almost exactly the opposite of what the majority of analysts predicted. A clarion example of this is the energy sector. Under the Trump 1.0 presidency (from 2017 to 2021), “brown” energy stocks of the Old Economy were the odds-on favorite, but actually ended up being the biggest losers by far in a comparison across all sectors. Under the Biden administration (from 2021 to today) they weren’t favorites, but have turned out to the biggest winners during its term thus far. In contrast, the purported greatest beneficiaries of Bidenomics in the “green” wind and solar power sector have known only one direction – down – since the Democrats took over the White House. The iShares Global Clean Energy ETF, for example, has lost around 60% of its value over the last nearly three-and-a-half years.

Wagered on the wrong horse? | Biden hasn’t helped “green” stocks

Performance of iShares Global Clean Energy ETF (ICLN)

Sources: Bloomberg, Kaiser Partner Privatbank

Looking ahead to the upcoming election, we again are inclined to advise against making political bets, and not just because the odds of victory in the duel between Biden and Trump are more or less 50-50 at the moment. There is uncertainty not just about who will sit in the Oval Office next year, but also about who will control the majority in Congress, what policies the next administration will effectively be able to implement, and what medium- to long-term impacts those policies will have on the different sectors of the economy. Moreover, uncertainty prevails particularly also with regard to the much more important long-term variables that influence the equity market in general and especially affect individual sectors: economic growth, corporate earnings, interest rates, and inflation. Investors should bet on long-term (mega)trends regardless of political considerations or inclinations. The defense and technology themes, for example, look set to remain important and the share prices of corresponding stocks appear destined to continue to outperform in the years ahead largely due to geopolitical trends regardless of whether a “red” or “blue” president is in the White House.

Things usually turn out differently… | …than one thought

Relative performance of sectors vs. S&P 500 index

Sources: Bloomberg, Kaiser Partner Privatbank

Currencies

The Swiss franc has depreciated since the start of this year. Is the currency still a safe haven?

Kaiser Partner Privatbank: The Swiss franc’s swoon this year seems rapid at first glance, at least when viewed through a short-term lens. The franc declined by around 5% against the euro over the first four months of this year through April 30. The speed of the descent may especially frighten many a person because, after all, it corresponds to an annualized depreciation rate of more than 15%. But zooming out a bit from the exchange-rate chart quickly puts the franc’s year-to-date depreciation into perspective. The EUR/CHF cross today is more or less back where it was a year ago. Investors who had grown accustomed to a continual uninterrupted increase in the value of Switzerland’s currency should remember that comparable and sometimes even much worse depreciation episodes have occurred every now and then over the last ten years to a lesser (September 2022 to January 2023: 6%) or greater (February 2017 to April 2018: 13%) degree. Even a very strong and a historically low-volatility currency like the Swiss franc experiences certain fluctuations that can swing downward once in a while.

The reasons behind the recent slump in the franc are easy to explain. After inflation in Switzerland pulled back much faster than the Swiss National Bank predicted it would over the course of last year, the SNB was able to raise its policy interest rate sooner than generally anticipated and, most notably, ahead of the other major central banks. That narrowed the interest-rate differential to foreign currencies, which made the Swiss franc less attractive. In addition, rethinking took place within the SNB in recent months. An overly strong currency now is no longer desired, and currency interventions (purchases of francs) accordingly were ended because the adverse impacts of the strong franc on exporters, for example, were unmistakable in the trade statistics. Switzerland’s central bank officials maybe also glanced sideways with one eye at the real estate market, where the monetary-policy easing is bound to provide some relief for property owners. The franc’s bout of weakness may go on for a bit longer in the near future because now that leading economic indicators for the Eurozone have stabilized lately, economic growth differentials soon will also tend to work to the disadvantage of the franc. A return of the EUR/CHF exchange rate to the parity level therefore seems within reach. However, that level probably will prove to be more than just a tough psychological nut to crack. From a technical analysis perspective as well, the EUR/CHF exchange rate faces major chart resistance at a little above parity at the 1.01 level (which marked a significant high in January 2023).

A safe haven… | …protects against a loss of purchasing power

Appreciation of Swiss franc and inflation differential

Sources: Bloomberg, Kaiser Partner Privatbank

So then, is the Swiss franc still a safe haven? That depends in large part on how one defines a safe haven. In our view, a safe-haven currency must be stable in value and must appreciate in the long run against currencies with higher inflation. That’s exactly what the Swiss franc has demonstrated, including in the more recent past. The general price level in the Eurozone rose by 30% over the last four years following the outbreak of the COVID-19 pandemic, much more than in Switzerland (13%). During the same period, the franc appreciated by around the same extent against the euro. Eurozone investors thus could preserve a substantial part of their purchasing power by rotating into the Swiss franc or into assets denominated in francs. Our second criterion for a safe-haven currency is its strength during periods of geopolitical and macroeconomic crisis. Here, too, there is an example from recent weeks. When Israel responded on April 19 to Iran’s previous massive barrage on Israeli territory (with around 300 missiles) and tensions in the Middle East threatened to escalate, the franc appreciated by almost 1.5% against the euro and the US dollar. Once the retaliatory strike turned out to be purely symbolic and the driver of the franc’s surge vanished, its upswing ended just as abruptly as it started.

Regardless of whether the franc’s current bout of weakness lingers for months or quarters, it is likely to come to an end at some point. The franc continues to possess safe-haven attributes and looks set to appreciate further in the long term on the back of Switzerland’s higher productivity and lower inflation compared to other countries. New all-time high CHF exchange rates are therefore only a matter of time.

Asset allocation

Europe – and Germany in particular – is currently being outpaced by the USA in terms of economic growth. Should investors increase their allocation to US stocks?

Kaiser Partner Privatbank: On this side of the Atlantic, talk about the “sick man of Europe” has resumed making the rounds more frequently these days. What’s meant by that expression is that Germany in recent years has gone from being the growth engine of Europe to a brake on growth on the old continent. Over the last few years, Germany’s ability to compete has, in fact, deteriorated significantly and the country has become much less attractive for investors. Alongside a chronic shortage of skilled workers and high labor and energy costs, sprawling bureaucracy and onerous taxes are stifling entrepreneurial spirit. Germany is also lagging behind in digitalization while education standards in the country have eroded. This stands in stark contrast to the United States. There the economy is booming, partly as a result of major economic stimulus programs and continued vibrant consumer spending. While growth projections for Europe for 2024 have continually been revised downward in recent quarters, the forecast arrow for the USA is pointed distinctly upward.

 At the peak? | Massive growth divergence between the USA and the rest

Consensus GDP growth forecasts for 2024

Source: Bloomberg, Kaiser Partner Privatbank

Eurozone but robust in the USA at the moment, it is easy to overlook that the situation was exactly the opposite two years ago. During the first half of 2022, the Eurozone registered torrid growth while the USA suffered two consecutive quarters of economic contraction. By simple definition, a statistical event of that kind is described as a “technical recession.” The fact alone that the USA’s National Bureau of Economic Research did not affix an official recession seal on this statistical observation is the reason why many analysts and investors today are still awaiting the next recession. However, the near-recession in 2022 had many of the ingredients of a typical economic slump, including on the financial markets: the profit margins of the companies in the S&P 500 index contracted by 11% on aggregate while share prices plunged by more than 20%. In hindsight, this scraping past a “bona fide” recession at that time can also be interpreted as a regathering of energy for the next (i.e. today’s) upturn and is another piece of the puzzle that explains the current divergence between the regions, which appears, though, to have reached an apex at the moment. Leading economic indicators suggest that growth in Europe – including in Germany – will pick up in the quarters ahead, which means that the momentum differential versus the USA should start to narrow again soon.

Recession without an official seal | The USA already went through its growth contraction in 2022

Quarter-on-quarter GDP growth

Sources: Bloomberg, Kaiser Partner Privatbank

This is one of the primary reasons why investors shouldn’t further enlarge their exposure to US stocks at present. America is expensive from a valuation standpoint. The unquestionably still good prospects for the big US technology stocks, which have been the main driver of the US equity market’s outperformance in recent years, are already priced in by now. Whoever is seeking high growth, solid profit margins, and market leadership can find that also in Europe. Germany’s current growth woes and Europe’s political malaise should definitely be viewed critically, but investors shouldn’t let that deter them from soundly diversifying their assets. Above all, investors shouldn’t lose their objectivity and optimism in the face of the blatant challenges because it should be noted that the good companies among European (and Swiss) small, mid-, and large caps have done well in the past – and will probably continue to thrive in the future – even in adverse environments. However, picking the right stocks is crucial to achieving good investment returns.

Fixed income

The Swiss National Bank has already initiated an interest-rate pivot in Switzerland, and the Eurozone is about to follow suit. Should investors take action now to lock in the still-high yields? Can inflation be beaten this way?

Kaiser Partner Privatbank: Officials in the USA are rhetorically pushing a policy-rate turnaround farther into the future like the proverbial can being kicked down the road, but an easing of monetary policy is nonetheless imminent in Europe. For the first time in its history, the European Central Bank looks poised to lower interest rates before the US Federal Reserve does. The rate cut looks set to be put into effect at the ECB’s policy meeting in June. However, the interest-rate pivot actually was already initiated a few weeks ago through a surprise move by the Swiss National Bank, which cut Switzerland’s already comparatively low interest-rate level by 25 basis points to 1.5% in light of a faster-than-expected pullback in inflation.

Out in front of the interest-rate pivot… | …but no return to zero yields

Policy interest rates and bonds yields

Sources: Bloomberg, Kaiser Partner Privatbank

However, falling market interest rates at the short end of the curve do not mean an immediate decline also in yields on government and corporate bonds with medium to long terms to maturity. That’s because in “normal” times, the yield curve slopes upward as investors ordinarily receive higher yields as compensation for the risk of longer bond holding periods. And even if policy rates in Europe drop a little in the near future, there is no prospect at all that they will come close to falling back to the levels seen in 2020 and 2021. A 3% ECB deposit rate and a 1% SNB policy rate seem realistic targets. Government and corporate bonds thus look set to remain attractive for a while yet.

Investors therefore can and should resist FOMO (the fear of missing out) because acting under (time) pressure is never good advice. Whoever is still underweight in investment-grade bonds at present should increase his or her exposure to them at least to a neutral position. However, investors who would like to outfox inflation and earn a positive real return with bonds should bear in mind that this only works if the acquired bonds are held to maturity, provided that inflation over the entire holding period is lower on average than the bond’s yield to maturity when it was purchased. Whoever sells bonds before maturity runs an interest-rate risk and in the worst case – in the event of a sharp increase in the general yield level – loses not only purchasing power, but additionally incurs price losses.

Macro

How much might Japan benefit from the strategic rivalry between the USA and China? What is the outlook for the USD/JPY exchange rate? 

Kaiser Partner Privatbank: An attack on Taiwan by China is not imminent and seems unlikely to happen in the next two to three years. However, given Taiwan’s enormous importance for the global semiconductor chip industry, the technology sector in particular is under pressure to diversify its supply chains and to build large chip factories in other locations. Alongside the USA, which enjoys especially good conditions for regaining market share soon thanks to the multibillion-dollar CHIPS and Science Act, Japan likewise ranks among the biggest beneficiaries of this situation. Taiwan-based chip-making giant TSMC, for example, plans to make one of its largest international investments in years on the southern Japan island of Kyushu. The USD 8.6 billion factory is scheduled to open by the end of this year and received a USD 3.2 billion subsidy from the government of Japan. Construction of another fabrication plant for more advanced chips has already been announced. Japan is benefiting from the enormous investment amounts, but what’s more, the onshoring of chip manufacturing is advantageous also from a technological and know-how acquisition perspective because the new factories are being set up as joint ventures with big Japanese companies like Sony, Denso, and Toyota.

Concerns about China’s future are also helping Japan’s services industry. Two prominent British private schools – Malvern and Rugby – both recently opened a campus in Japan. Many of the new students enrolled likely come from the Chinese mainland. Meanwhile, Chinese investors are growing increasingly interested in buying real estate in Tokyo. However, worries about the future of China’s economy and the mounting geopolitical tensions between Beijing and the West aren’t solely to Japan’s advantage because China is also a gargantuan market for Japanese businesses. A slowing Chinese economy could cause a drop-off in sales revenue. That’s why many Japanese companies view the talk about “decoupling” from China as economic nonsense and a hazard to their future. After all, mainland China is also a vital production site for Japanese companies. If the USA and Europe decide to slap import tariffs on electric vehicles from China, that would also hurt Japanese manufacturers like Nissan.

The Bank of Japan is caught in a real dilemma right now. Although it initiated an upward interest-rate pivot in the first quarter, thus narrowing the interest differential versus other countries, the Japanese yen remains extremely weak because the US rate outlook has changed tremendously in recent weeks, the market has largely priced out the originally projected Fed rate cuts for 2024, and US yields have risen significantly. After the BoJ left its monetary policy unchanged at the end of April, the yen dropped once more against the US dollar to a new 34-year low. But when the USD/JPY exchange rate crossed the 160 mark, a forceful ricochet ensued, which most market observers attributed to an intervention by the BoJ. The future trajectory of the USD/JPY exchange rate is difficult to forecast. The only means of bringing about a genuine trend reversal is for US economic activity to slow and US bond yields to decrease. This lever, though, is not in the hands of Japan’s central bank. It is left with only a choice between a bad option and an even worse alternative. With the help of additional interventions, the BoJ might be able to halt the yen’s downward slide for a short time, but in a tussle with speculators who use the yen for carry trades or benefit from its pronounced trend, the BoJ would probably walk away the loser. The BoJ has a less-than-stellar track record with market interventions of that kind. A marginally better option would be to rapidly implement further interest-rate hikes – they might catch market participants on the wrong foot and could perhaps halt the yen’s swoon for a little longer. However, the BoJ has less leeway here than it may consider desirable. After decades of low to ultralow interest rates, rapid hiking could overwhelm Japan’s economy and its actors. Collateral harm could not be ruled out in that event. It likely would take a substantially shrinking interest-rate differential between the yen and the US dollar to bring about the necessary regime change. Japan has to hope that the recently re-postponed US recession comes sooner than the market is currently anticipating and pricing in.

On an intervention course | The Bank of Japan’s patience could snap soon

US dollar vs. Japanese yen

Sources: Bloomberg, Kaiser Partner Privatbank