Market activity
12. January 2024
5 minutes

Interest rate hopes lead to extended year-end rally

At the beginning of the year, few would have predicted such a good year for equities. In view of the many interest rate hikes, the gloomy economic outlook and geopolitical tensions, uncertainty was justifiably high. The fact that the substantial gains on many stock markets are very unevenly distributed only becomes apparent at second glance.

At the beginning of the 4th quarter, it did not look like the end of the year would be quite so conciliatory. Although the major central banks paused their interest rate hikes in October, market interest rates continued to rise. This did little to help the performance of either equities or bonds. Added to this was the (at least short-term) uncertainty caused by the outbreak of war in the Middle East. From November onwards, the market narrative changed once again in the past year. The economic data in the previously very resilient US economy became gloomier after all. Good news for the Fed and its fight against inflation. Further interest rate hikes thus became much less likely and the peak seemed to have been reached. Good news for shareholders and bondholders too: interest rates will soon be going down and share/bond prices up. And once again it is clear that "bad news" (a weaker economy) can also be "good news" on the financial markets. In December, Fed Chairman Jerome Powell provided additional interest rate optimism and further price rises by holding out the prospect of interest rate cuts for the first time in a speech.

Thanks to the final spurt, the major share indices posted a very pleasing performance for the year. However, both in the fourth quarter and over the year as a whole, it is clear that the strong gains were not truly representative of the market as a whole. While the seven major US technology stocks (Apple, Microsoft, Amazon, Nvidia, Meta, Alphabet, Tesla) set the pace and pulled the cap-weighted indices along with them with new highs, the rest bobbed along. The dominance of these heavyweights therefore increased once again last year - and with it the cluster risk for passive investors. Those who diversified more broadly or even focused on more defensive stocks and sectors were barely able to keep up. On the other hand, optimized diversification paid off for Swiss equities, as the heavyweights Nestlé and Roche lagged behind the market index in the Swiss domestic market.

Our OLZ Equity Switzerland Optimized ESG benefited from this and outperformed both Q4 and 2023. The Swiss Small & Mid Cap fund also benefited from the improved diversification and was also ahead of the index at the end of the year. Risk optimization also paid off for our China equity fund. In a negative Q4, it was able to significantly reduce its loss compared to the index. Our global equity strategies lagged behind their capital-weighted benchmark indices due to the strong performance of US megatech stocks and the unfavourable market environment, which was characterized by very low volatility.

The bond markets were able to recover somewhat from the extremely weak 2022 in the past quarter and year. Thanks to significantly falling interest rates, CHF bonds performed particularly well. Due to the shorter duration of our Bond CHF fund, it also recorded significant gains, but lagged slightly behind the benchmark (duration 6.8 years). On other bond markets, investors had to be content with a less sharp fall in interest rates last year. However, the 4th quarter marked a conciliatory end to the year. Our two government bond strategies also benefited during this period and even outperformed the benchmark in Q4 in the case of the fund with a longer duration.

Last year put the disciplined investor focused on diversification and risk optimization to the test. The idea of limiting oneself to a few price rockets was tempting. However, a look at the Swiss market taught us once again that even giants can falter. We are focusing on long-term investment success and a sustainable return thanks to risk optimization - also in the new year.

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