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Switzerland
Strong corporate results
The latest leading economic indicators point to growth that is, however, below potential. In industry in particular, the recovery has been less dynamic so far. The result is in line with the weak purchasing managers' index for the manufacturing sector. It has been below the growth threshold of 50 since the beginning of 2023 and fell significantly last month to just 41. Nevertheless, there are signs of a recovery among Switzerland's most important trading partners, which suggests a positive impact on foreign trade and a modest contribution to Swiss GDP. Inflation expectations have normalized after a steep rise and are at an acceptable level. Rent adjustments and administrative price adjustments in the healthcare sector could drive inflation in the short term. Real wages are expected to rise again slightly after the purchasing power of wages fell by 0.4% in 2023. This will support consumption.
In May, the State Secretariat for Economic Affairs (Seco) published a "flash GDP" estimate for the first time in order to provide the public with more timely information. This initiative follows an international trend that has been accelerated by the pandemic. The aim is to record economic developments more quickly and accurately. According to this new flash estimate, Switzerland's real GDP grew by 0.2% in the first quarter of 2024. This indicates a more robust economic situation compared to Germany, for example, where stagnation is expected. Overall, Swiss GDP is likely to grow by just over 1% in 2024. Growth will be driven in particular by the service sector and private consumption, while export-oriented industry is still weakening. However, the economic situation in Europe could bring a positive turnaround from next year.
GDP 2024 1.00% (SNB)
Inflation 2024 1.40% (SNB)
SNB key interest rate 1.50%
Our conclusion:
The Swiss economy remains in robust shape. The company financial statements presented to date for the first quarter show predominantly pleasing results. The Swiss stock market is currently favorably valued and is on an upward trend. We recommend buying Swiss equities.
Sources: SECO, ZKB, Chefinvest
As of: 17.05.2024
European Union
Encouraging economic recovery
The economy in the eurozone surprised on the upside in the first quarter of 2024 and returned to growth. Seasonally adjusted gross domestic product (GDP) rose by 0.3% from January to March 2024 in both the eurozone and the European Union (EU). The stagnation in which Europe was trapped for five quarters has thus come to an end. In the fourth quarter of 2023, GDP had fallen by 0.1% in the eurozone and remained unchanged in the EU.
In the upswing, industry recently increased its production by 0.6% in March compared to the previous month, after growing by as much as 1.0% in February. The accelerated upturn in the service sector is also positive.
The European Commission is slightly more skeptical about the economy in the eurozone and sees high geopolitical risks for the economy. It still expects GDP to increase by 0.8% in the current year 2024, but only anticipates growth of 1.4% in 2025, according to its spring forecast.
In April 2024, annual inflation in the eurozone is estimated at 2.4%, unchanged from March. Due to easing cost pressures and the influence of the European Central Bank (ECB), overall inflation should fall from 5.4% in 2023 to 2.3% in 2024 and 2.0% in 2025. It should then reach 1.9% in 2026. Core inflation, which serves as a guideline for the inflation trend, eased in April. It fell to 2.7% (previous month: 2.9%).
Due to the continued high demand for workers in certain sectors and the slow recovery of the economy, the positive situation on the labor market is continuing. The seasonally adjusted unemployment rate in the euro area was unchanged at 6.5% in March 2024 compared to February 2024. In the EU, the unemployment rate was 6.0% in March 2024, down from 6.1% in February 2024.
The eurozone economy continued to recover in April, growing at the fastest pace since eleven months ago. The final seasonally adjusted HCOB Composite PMI rose by 1.4 points to 51.7 within the month, exceeding the growth threshold of 50 points for the second month in a row. This was also the strongest growth in almost a year. It is particularly pleasing that Germany and France, the two largest economies in the eurozone, also reported mini growth for the first time in ten and eleven months respectively.
GDP growth 2024 +0.80% (E)
EU inflation 2024 +2.30% (E)
Current 3-month Euribor +3.83%
Our conclusion:
With economic growth of 0.3% in the first quarter, the eurozone surprised on the upside. The economic recovery anticipated by most economists has thus started earlier than expected and should continue in the coming quarters.
European leading indicators are sending hopeful signals and, unlike in the US, inflationary pressure has also eased further. This means that the first key interest rate cuts by the European Central Bank (ECB) are within reach. The ECB is likely to cut short-term interest rates three times this year by 0.25 percentage points each, starting in June. We expect around three further interest rate cuts in the first half of 2025.
We remain positive about the European equity market due to the optimistic economic outlook, the expected interest rate cuts and the attractive valuation.
Daniel Beck, Member of the Executive Board
Sources: European Commission, Statista, HCOB, S&P Global
As at: 21.05.2024
United Kingdom
Light on the horizon?
1. gross domestic product (GDP) growth
GDP growth of 0.8% is forecast for 2024, rising to 1.9% in 2025. This slow recovery will be supported by rising disposable income and robust wage growth. Economic conditions are improving, with the recovery continuing throughout 2024.
2. Unemployment rate
The UK unemployment rate is forecast to rise to 4.7% in 2024, before falling back to 4.3% in 2025. This reflects the slow recovery of the labor market, while structural challenges remain.
3. inflation rate
Inflation is expected to fall further. After 7.5% in 2023, it is expected to fall to 3.6% in 2024 and to 2.1% in 2025. This development is mainly due to lower energy prices and easing price pressure in supply chains. The Bank of England could consider cutting interest rates if inflation continues to fall.
4. High-performance sectors
The technology and healthcare sectors are among the fastest-growing sectors in the UK. These sectors are benefiting from continued investment in research and development as well as ongoing digitalization and an ageing population.
5. Challenging sectors
The construction and real estate sectors are facing particular challenges. Rising mortgage interest rates and high construction costs are leading to falling investment. The automotive industry and energy-intensive industries are also struggling with high energy costs and pressure to decarbonize.
6. Impact of monetary policy
The Bank of England's monetary policy measures, including interest rate hikes, are having a significant impact on the economy. These measures are combating inflation, but are also weighing on borrowing and investment. The Bank of England has signaled that it will continue to maintain its restrictive monetary policy if necessary to control inflation, which affects growth forecasts.
Our conclusion: Neutral
In summary, the UK economy is on a path of slow recovery with modest GDP growth, cautious business optimism and a positive outlook for inflation. However, challenges from low productivity and income inequality remain significant concerns. Earlier interest rate stimulus from the Bank of England could increase the attractiveness of UK assets, particularly from the third quarter of 2024.
GDP 2024: 0.80%
Inflation 2024: 3.60% (GOV.UK)
Lead rate: 4.50% (GOV.UK)
Sources: Office for National Statistics (ONS) with AI
As at: 15.05.2024
USA
Stubborn inflation
The US economy slowed to an annualized rate of +1.6 % in the first quarter of 2024 (compared to +3.2 % in the fourth quarter of 2023). The Conference Board expects the slowdown to continue with annualized growth rates of less than 1 % in Q2 and Q3 2024, but to remain in positive territory and pick up again towards potential growth of 2 % in Q4. This estimate is therefore still well below the Fed's forecast of 2% and the GDPNow model of the Federal Reserve of Atlanta with 3.6%.
As expected, the Fed left the Fed Fund Rate unchanged at the range of 5.25% - 5.5% at its last meeting on May 1. Due to the slightly higher than expected inflation rates in the first quarter, market expectations for interest rate cuts since the beginning of the year have not only converged with the Fed's lower expectations, but have now even fallen below them. Only one or two rate cuts are now expected towards the end of the current year.
In April, overall inflation fell by 0.1% to 3.4% compared to the previous month. The core rate (excluding energy and food) fell 0.2% to 3.6%.
The US Composite PMI weakened by 0.8% to 51.3 points in April compared to the previous month. Both the services (-0.4%) and manufacturing (-1.9%) sub-indexes contributed to the decline.
The picture of the economic slowdown is also confirmed by the labor market. In April, 175,000 new jobs were created outside of agriculture (compared to 325,000 in March). On the other hand, unemployment rose by only 0.1% to 3.9% in April compared to the previous month. For wage inflation to be broken, even higher rates will be needed.
By May 17, 93% of the companies represented in the S&P 500 Index had published their first-quarter figures. 78% of these beat earnings expectations and 60% beat sales expectations. With a profit increase of 5.7 %, they clearly exceeded expectations from the end of March (3.4 %). Based on the earnings estimates for the next 12 months, the S&P 500 Index achieved a slightly lower price/earnings ratio of 20.7 compared to March. The 5-year average is 19.2 and the 10-year average is 17.8.
GDP2024 (IMF): +2.70% (E)
Inflation 2024 (IMF): +2.90% (E)
Fed Fund Rate: +5.50%
Our conclusion:
The restrictive monetary policy appears to be cooling economic growth slowly and according to plan. This means there is a good chance that inflation rates will fall back towards the target value of 2% and that the first interest rate cuts will take place starting in autumn. This outlook and the strong corporate earnings growth are supporting the now currently rich share valuations. We expect the market to move sideways in the summer months in the sense of a market consolidation and to continue its upward trend from the fall onwards.
Sources: Trading Economics, US Bureau of Labor Statistics, Statista, FuW, IMF World Economic Outlook April 2024, FactSet, FMOC
As of: 18.05.2024
China
Continuing tensions
The Chinese economy recorded stronger growth than expected in the first quarter. Gross domestic product rose by 5.3% compared to the previous year. Thanks to fiscal support for infrastructure investments, industrial production also slightly exceeded expectations in April, while growth in retail sales slowed. The ongoing real estate crisis and declining stimuli suggest that the cyclical recovery will soon come to an end. Consumer price inflation rose less strongly than expected in March. Declining deflation in food prices and a modest economic recovery continue to ensure slightly positive inflation rates. The Chinese central bank is encouraging a slight rise in prices, but the oversupply will keep inflation low. We forecast an average inflation rate of 0.5% for 2024.
The disappointing March export figures are likely to be an outlier. Overcapacity in China is causing resentment among trading partners, who accuse China of flooding the market with subsidized goods. US President Joe Biden has imposed tariffs of 100% on electric cars from China. The US government has also introduced new or significantly increased tariffs on solar cells, semiconductors, port cranes and medical products such as cannulas and protective masks. The US government justified its measures by claiming that China is flooding global markets with artificially cheap exports. The punitive tariffs are also limited to a few strategically important areas. The director of the White House's National Economic Council assured that Biden was striving for a stable relationship with China. There is speculation about possible retaliatory measures from Beijing.
IMF Economic Forecast
GDP 2024: 5.00%
Inflation 2024: 0.50%
3 month shibor: 2.03%
Our conclusion:
The political risks remain high. The Chinese stock market is favorably valued, but the risk aspect weighs more heavily. We are taking a wait-and-see approach to investing.
Sources: ZKB, IMF, Chefinvest
As at: 17.05.2024
Japan
Moderate recovery in Japan
The economic environment in Japan is showing a moderate recovery, although some challenges remain. A slight improvement in economic conditions is forecast for the second quarter of 2024, while growth remains below average compared to other developed economies. The construction and real estate sector faces challenges due to high construction costs and demographic changes. The automotive industry and energy-intensive industries are struggling with high energy costs and pressure to decarbonize. These sectors must continue to adapt to structural changes in order to remain competitive. The technology and healthcare sectors are among the fastest growing sectors in Japan. These sectors are benefiting from continued investment in research and development, as well as digitalization and an ageing population. The service sector is also showing positive development, supported by the recovery in tourism and domestic consumption.
GDP growth of around 1% is forecast for 2024, rising to 1.4% in 2025. This recovery will be supported by rising wages, higher consumer spending and a weak yen currency.
Inflation is expected to remain stable. After a rate of 2.8% in 2023, a slight increase is expected for 2024, which should remain at this level in 2025. This stability will be supported by continued wage increases and moderate price rises in various sectors. The Bank of Japan (BOJ) has adjusted its loose monetary policy by abandoning yield curve control and raising interest rates slightly. Despite these steps, monetary policy remains supportive overall in order to promote economic growth. The BOJ plans to gradually increase interest rates to control inflation and ensure economic stability.
IMF Economic Forecasts:
Expected GDP 2024: 1.00%
Expected inflation in 2024: 2.90%
Japanese key interest rate: 0.10%
Our conclusion: Neutral
In summary, Japan's economy is on a path of slow recovery with moderate GDP growth, a stable unemployment rate and a positive outlook for inflation. The stock market has been pricing this in for around a year, so there is no need for us to make a new entry.
Mimi Haas, Lic. rer.pol. HSG, M.A. in Banking and Finance HSG, Partner
Sources: IMF, FT, SSGA Economist and AI
As of: 21.05.2024
Emerging Markets
In the spotlight: Brazil
The US Federal Reserve is likely to delay the interest rate turnaround due to persistently high inflation. This will lead to strong pressure on the currencies of emerging markets, which will limit the room for maneuver of their central banks. Continued monetary easing would reduce the attractiveness of domestic currencies, making imports and foreign currency liabilities more expensive and making it more difficult to reduce inflation. The weaker currencies and declining momentum in reducing inflation argue against rapid interest rate cuts. In countries with robust growth and tight labor markets, inflationary pressure could increase due to rising wages, particularly in Eastern Europe and Latin America. Core inflation, i.e. price growth excluding volatile food and energy prices, has accelerated again and is above the pre-pandemic average.
In view of the possibility that the Fed will further delay interest rate cuts and reduce their scope, the central banks of emerging markets will also be more cautious and slower in their rate cuts. The Asian emerging markets, which have low real interest rate differentials to the US and are pursuing only moderately restrictive monetary policies, will remain cautious.
In the spotlight:
Brazil is the largest country in South America and one of the largest economies in the world. The country has important ecological resources such as great biodiversity, the largest remaining rainforest and the river with the most water, the Amazon. Brazil plays an important international role in world trade and in global forest and climate protection and has an efficient agricultural sector and significant raw material deposits. The country plays a leading role in Latin America and is a member of the BRICS countries and the G20. Brazil is also aiming to join the OECD. The service sector accounts for around 67% of economic output. The industrial sector is significant at around 28% and is mainly driven by mining. Agriculture accounts for 5%.
Our conclusion:
After the Brazilian economy and stock market benefited from the central bank's sharp interest rate cuts last year, the share index is still down this year. The stock market appears favorably valued and offers a high dividend yield.
Sources: ZKB, IMF, Chefinvest
As at: 21.05.2024
Stocks
Stock market wellness: From interest rate yo-yo to AI revolution
The global economy is increasingly stabilizing and expanding. Corporate profits are rising and global employment growth is slowing further, which is easing some of the pressure on higher interest rates. Equity and bond markets recovered strongly after expectations for 2022 were extremely negative. Despite these positive developments, US Treasury yields rose slightly after the Federal Reserve sounded a cautious note. Loretta Mester stated that she considers three rate cuts this year to be inappropriate given the current economic situation. These statements have led and continue to lead to sudden slumps, but these are usually recovered within a few weeks.
In Western economies, further efficiency gains through artificial intelligence are expected, which will also drive share prices. Michael Dell, for example, predicted that AI PCs will be "pretty standard" by 2025. Short-term disruptions on the stock market are caused by fluctuations in crude oil prices. Experts identify potential risks to global crude oil supplies due to the unexpected death of the Iranian president and concerns about the health of the 88-year-old King of Saudi Arabia.
Market stabilization and forecast
The global economy is increasingly stabilizing and expanding. Corporate profits are rising and global employment growth is slowing further, which is easing the pressure on interest rates. We are on the way to a "normalization phase". Unlike in 2023, the markets are no longer generally negative and give roughly equal weight to good and bad news. A bear market is therefore no longer to be expected. However, new excessive customs and trade discrimination to protect their own market is costing them some efficiency again. This means that broad index returns, especially for the S&P 500, will be less spectacular over the next 12 months. Nevertheless, the current phase has positive characteristics that are the opposite of the exceptionally negative developments of 2022.
Our conclusion:
Our global asset allocation is overweight in non-US equities in particular. Our CAIB stock market barometer shows an overall opportunity upside of around 68% for the next 12 months. With global growth stabilizing and pressure on US interest rates easing again, we view broad non-US equities as an attractive opportunity for diversification. Non-US equity returns have lagged well behind those in the US over the last 12 months.
In the US, the high interest yields in the USD bond market offer a good alternative to equities. In the US, we mainly favor innovative companies in the beauty, healthcare and technology sectors. Tencent and Alibaba have reported robust earnings results, which has prompted some analysts to raise their EPS growth forecasts for the MSCI China. We are therefore revising our view on China from negative to neutral.
Sources: S&P, Citigroup, MarketMap, IMF, and Chefinvest
As of: 21.05.2024
Interest
It is time to extend duration.
Government bonds:
Government bonds from industrialized countries have generally suffered from persistent inflation, weaker growth and the expected postponement of interest rate cuts by central banks to a later date.
Our conclusion: We therefore take a neutral view on global government bonds.
Investment grade bonds (IG):
The future performance of investment grade bonds will be significantly influenced by duration. Currently, 75% of total return comes from interest and 25% from spreads, as opposed to the previous 40% from spreads. An environment of slower growth and subdued inflation favors bonds with longer duration. Even in a recession, falling interest rates could even out spreads. However, rising inflation could discourage central banks from lowering interest rates, which would have a negative impact on bonds. The economy is slowly recovering and, despite stubborn inflation, a strong inflationary surge is no longer expected. The risk of higher interest rates seems limited as central banks have already tightened sharply and we are preparing for the shift in monetary policy.
Our conclusion: We remain positive on investment grade (IG) bonds. And favor bonds with a good credit rating and longer maturities (5-8 years), due to the expected key interest rate cuts. It is a good time to lock in the current interest rate level.
High yield bonds (HY):
Global HY bonds are once again benefiting from their lower duration. However, the narrowing of spreads decreased compared to January. At the rating level, bonds in the CCC segment outperformed those with higher credit ratings. The improvement in most key figures means that the default risk is falling.
Our conclusion: However, we recommend this asset class more to investors who can bear the risk. The allocation should be made via an ETF.
Emerging markets bonds (EM):
Emerging markets bonds in local currency offer an excess return compared to IG bonds and are relatively safe against currency losses and credit defaults, especially in the event of a forecast decline in US yields.
Our conclusion: However, we recommend this asset class more to investors who can bear the risk. The allocation should be made via an ETF.
Mimi Haas, Lic. rer.pol. HSG, M.A. in Banking and Finance HSG, Partner
Sources: F&W, Market Map and Bloomberg
As of: 21.05.2024
Currencies
Inflation, interest rates and impact on the markets
EUR/USD: (22.05.2024: 1.08)
The movement of the currency pair has been volatile over the last 18 months. The development of the currency pair depends on the expected interest rate cuts by both central banks and, above all, how often and when they start to do so.
Our conclusion: We expect the currency pair to move sideways.
EUR/CHF: (22.05.2024: 0.99)
The Swiss National Bank has surprised most market participants with its first interest rate cut in 2024. The risk of imported inflation therefore does not appear to be an issue for the SNB. Against this backdrop, we expect the SNB to stabilize rather than strengthen the CHF with its foreign currency transactions. The only risk here remains the "safe haven" function of the currency.
Our conclusion: We expect the currency pair to move sideways.
USD/CHF: (22.05.2024: 0.91)
The interest rate differential between the two currencies is enormous and has widened further following the SNB's decision to be the first to cut interest rates.
Our conclusion: Despite the significant overvaluation of the dollar, we see no appreciation potential for the Swiss franc.
Mimi Haas, Lic. rer.pol. HSG, M.A. in Banking and Finance HSG, Partner
Sources: F&W, Market Map and Bloomberg
As of: 21.05.2024
Oil
Slight slowdown in demand growth
The IEA has revised its estimate of this year's oil demand growth downwards by 114,000 barrels per day in May to 1.1 million barrels per day. The reason for this is the lower demand from Europe. The IEA expects oil production to grow by 580,000 barrels per day in 2024. This is made up of an increase in production from non-OPEC+ countries of just over 1 million barrels per day and a decrease in production from OPEC+ countries of just under 1 million barrels per day (provided they continue their voluntary production cuts).
This means that the supply-demand situation will remain challenging in 2024, but should ease significantly in 2025 with additional production of 1.8 million barrels per day.
Our conclusion: We expect the WTI oil price (currently USD 80 per barrel) to continue to move in a range between USD 70 and USD 90 per barrel.
Sources: F&W, MarketMap,International Energy Agency (IEA)
status: 18.05.2024
Precious Metals
Gold is back in vogue
China has a long tradition of buying gold, especially during the New Year holidays, which usually leads to a rise in gold prices. This can be seen again this year. Despite outflows from gold-backed ETFs, which exceeded 113 tons in the first quarter and come from other regions such as America, demand in China is strong. The daily trading volume on the Shanghai Gold Exchange has doubled, and the spot price in China is around USD 85 above the international benchmark in London.
The Chinese central bank and other central banks, such as those in India and the United Arab Emirates, are buying gold. Reasons for the increase include inflation hedging, geopolitical risks and speculation about a possible renminbi devaluation. The Chinese central bank also bought 225 tons of gold last year. Given the global uncertainties, demand for gold as a safe haven is likely to continue to rise.
Our conclusion: Gold continues to be an effective diversification in portfolios. We recommend that our investors maintain a strategic allocation in the portfolio to reduce overall investment risk and thus increase returns. Our view is underpinned by a recently published study by asset manager WisdomTree.
Mimi Haas, Lic. rer.pol. HSG, M.A. in Banking and Finance HSG, Partner
Sources: WisdomTree, Bloomberg
As of: 21.05.2024
Abbreviations and explanations
bbl: 1 Barrell = 158,987294928 Litre
Bp: Basis points
GDP: Gross domestic products
BIZ: the Bank for International Settlements is an international financial organization. Membership is reserved for central banks or similar institutions.
EM-Bonds: Emerging market bonds. An emerging market is a country that is traditionally still counted as a developing country but no longer has its typical characteristics.
HY-Bonds: Fixed-income securities of poorer credit quality. They are rated BB+ or worse by the rating agencies.
IG-Bonds: Investment grade bonds are all bonds with a good to very good credit rating (Ra-ting). The investment grade range is defined as the rating classes AAA to BBB-.
IHS Markit: Listed data information services company
IWF: The International Monetary Fund (also known as the International Monetary Fund) is a legally, organiza-tionally, and financially independent specialized agency of the United Nations headquartered in the United States of America.
KOF: Business Cycle Research Centre at ETH Zurich
LIBOR: London Interbank Offered Rate is a reference interest rate determined in London on all banking days under certain conditions, which is used, among other things, as the basis for calculating the interest rate on loans.
OPEC: Organization of the Petroleum Exporting Countries
OPEC+: Cooperation with non-OPEC countries such as Russia, Kazakhstan, Mexico and Oman.
oz: the troy ounce is used for precious metals as a unit of measurement and is equal to 31.1034768 grams
Saron: The Swiss Average Rate Overnight is a reference interest rate for the Swiss franc
Seco: Swiss State Secretariat for Economic Affairs
Spread: Difference between two comparable economic variables
WTI: West Texas Intermediate. High-quality US crude oil grade with a low sulfur content.
Disclaimer:
The information and opinions have been produced by Chefinvest AG and are subject to change. The report is published for information purposes only and is neither an offer nor a solicitation to buy or sell any securities or a specific trading strategy in any jurisdiction. It has been prepared without regard to the objectives, financial situations or needs of any particular investor. Although the information is derived from sources that Chefinvest AG believes to be reliable, no representation is made that such information is accurate or complete. Chefinvest AG does not assume any liability for losses resulting from the use of this report. The prices and values of the investments described and the returns that may be received will fluctuate, rise or fall. Nothing in this report is legal, accounting or tax advice or a representation that any investment or strategy is appropriate to personal circumstances or a personal recommendation for specific investors. Foreign exchange rates and foreign currencies may adversely affect value, price or yield. Investments in emerging markets are speculative and involve considerably greater risk than investments in established markets. The risks are not necessarily limited to: Political and economic risks, as well as credit, currency and market risks. Chefinvest AG recommends investors to make an independent assessment of the specific financial risks as well as the legal, credit, tax and accounting consequences. Neither this document nor a copy of it may be sent in the United States and/or in Japan and they may not be handed over or shown to any American citizen. This document may not be reproduced in whole or in part without the permission of Chefinvest AG.
