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Market Commentary

1st quarter 2021

Reading time 10 minutes
  • Vaccination campaign, expansionary monetary and fiscal policies set the stage for record economic growth in the coming quarters.
  • Inflation and real interest rates are on the rise. So far no reason to worry, this is typical when economy returns to robust growth after a contraction.
  • Risk indicators continued to fall and the equity market has made a strong start to the year. IT and technology companies have lost the lead and have underperformed companies with lower valuation multiples.
  • Notwithstanding the rising twin deficits of the US (trade balance and fiscal budget), the USD has appreciated significantly. The CHF, on the other hand, has depreciated, giving a tailwind to the Swiss economy and the stock market.

Much better than most optimistic expectations 12 months ago

The vaccination campaigns in Great Britain, the USA and Israel have been successful so far, are running at full speed and have made the fear of a pandemic disappear. Mass vaccinations are also underway in continental Europe. Leaving aside all the criticisms related to the management of the pandemic, lockdown fatigue, lack of strategic planning, etc... we can say that overall we are in a much better position than we would have expected 12 months ago. Most likely we will return to a more or less normal life next summer, while consumption and investment are expected to boom. We are all eager to spend more money again. Indeed, savings rates have risen significantly around the world in the last 12 months. If that is not enough, more fiscal stimulus is in the pipeline, including the brand new $2.25 trillion infrastructure investment plan announced by US President Biden. That's a big number to add to the already trillions-plus plans in the US and Europe. 

Economy on the rise, inflation and interest rates as well

As is typical in anticipation of an economic upswing, inflation and interest rates have risen significantly in the first quarter. So far, however, inflation is not expected to rise to a level that is problematic for the stability of the economy and the financial system. Central banks have clearly signaled that they will not change their monetary policy and that interest rates will remain low for a long period of time. Investors have nevertheless reacted by pushing up interest rates. The rise in interest rates occurred globally, with AUD, GBP, CAD and USD rates rising the most. The rise was less pronounced for EUR and CHF, with both curves still below the zero mark for maturities up to 10 years.  Rising interest rates have had a negative impact on fixed-income investments, especially with regard to bonds from issuers with high ratings and quality.  The USD has regained the confidence of the global investment community and has appreciated significantly during the quarter. At the same time, economists around the world are highlighting its structural weakness due to the twin deficits (fiscal and trade balance). In parallel to the USD appreciation, we have seen a significant depreciation of the CHF against major currencies, which is very supportive for the Swiss economy and equity market.

Equity markets no longer dominated by technology

All leading economic indicators worldwide (such as the Purchasing Managers Index PMI) are signaling a coming economic boom in both manufacturing and services. This has contributed to the US equity index S&P 500 rising above the iconic 4’000 mark for the first time in history at the end of March. Interestingly, this surge was not driven by the technology-heavy companies that led the upswing in 2020. Rather, the rise was primarily driven by, so to speak, traditional companies that were actually the laggards in 2020: Oil, Transportation, Industrials and Financials. Particularly in the second half of the quarter, technology companies, which are characterized by high valuation multiples, lost some of their appeal, not least because of rising interest rates, which affect their market price more than companies with lower valuation multiples. As we have commented several times in the past, our risk-based strategy tends to be less invested in such growth-oriented, technology stocks. This has helped to limit underperformance in a quarter characterized by very positive equity markets worldwide and falling risk levels - an unfavorable combination for our strategy.

A perfect world, at least for financial markets

We are definitely experiencing a unique combination of favourable circumstances for the financial markets: unprecedentedly expansionary monetary and fiscal policy, high liquidity, rising debt but no financing bottleneck, a booming economy, moderate rise in inflation and interest rates, widespread optimism. Last but not least, in the background is the prospect of emerging from the pandemic nightmare. How long this perfect equilibrium will last is difficult to say and we do not dare to make a prediction, frankly we hope it will be very long.  Our investors have questioned a very dismal performance over the past year in a market dominated by a few technology-based companies. In Q1, notwithstanding an unfavorable combination of declining risk and very positive equity markets, our funds have kept the pace of the market with a relatively low underperformance or even outperforming the market, as is the case with Swiss equities. In particular the March performance was very pleasing, with our strategies performing significantly better than the market. This is an important result for us and our clients after a rather difficult and disappointing 2020.

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