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Update on the Markets

In recent weeks inflation indices have reached new heights, an example of which in the US is the year-on-year CPI that has hit 9.1%. This indicates that Central Banks will tend to be more aggressive in raising rates in the near future.

A slowdown in economic growth in the coming years could be brought on by a reduction in yields in the bond curve. A rise in rates has been experienced in the short-term, but could then decrease in the long-term. In the future, Central Banks might relax the previously undertaken rate hike.

In Europe, companies have reported solid balance sheets and the economy is not showing signs of a slowdown. The strong demand in Europe is mainly due to the weakness of the euro, which favours exports and exchange rates on company balance sheets. For example, the German company BASF, the world’s largest chemical company, surprised analysts this past quarter by presenting figures that were far better than expected. Particularly on the earnings side, the weakness of the euro in the dollar conversion improved balance sheet. Fashion, food and beverage, and industry in general are sectors most enjoying the consequences of the weak euro. Economic growth also remains solid thanks to the post-Covid rebound phase that has led to a boom in the tourism sector.

In the second half of the year an upturn in prices is expected to be seen. Apart from special situations that might occur, such as those brought about by the evolution of the war in Ukraine, the trend will be a gradual recovery of share prices, as companies’ balance sheets are very good and are likely to remain strong. Prices will have a natural upward push.

Given the current climate, it is recommended to maintain a portfolio which is highly diversified and contains some francs. The price of Swiss equities have fallen in recent months, and are therefore considered to be an attractive investment option. Exposure to currencies other than the euro, in particular the franc and the dollar, is recommended, but also diversification in terms of securities. Particularly interesting are dollar bonds, which are starting to have attractive yields. This type of strategy helps to reduce volatility and risk in portfolios, especially in the event of systemic market stresses which could arise from complicated political situations.