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08.04.2024
Beware of Butterflies
All are saying that at this very moment, it is particularly difficult to assess the markets and the outlook. This is a platitude, of course: it is always challenging, be it in a stock market boom like the one we are currently experiencing or be it in the dark days of a crisis like in 2008. What we have seen recently is, however, really somewhat strange and it looks to a certain degree like a crossroad situation. Look e.g. at the impact statements and/or economic figures have on the yield of the 10y treasury bond and on the reaction of the stock market. Last Thursday Fed member Neel Kashkari was critical of interest rate cuts, which caused concern among investors. In his view, there is a possibility that there will be no interest rate cut in 2024. This is not really balm for the market, of course, as it expects at least three interest rate cuts this year. The reaction was accordingly and plausible. The treasury yield jumped immediately 10 basis points and the stock market corrected by almost 2%, mainly the especially interest rate sensitive growth stocks. Quite different from the reaction to the labor market figures last Friday. The March jobs report came in hot: The US economy added 303,000 positions last month which surpassed economists’ forecasts by 50% and the unemployment rate fell to 3.8%, the lowest reading in the last twenty years. This strength in the labor market sends some doubts into the market about the further trend of the inflation rate and the ability and willingness of the Fed to lower the fed fund rate. As you would expect the treasury market was not amused and the 10y treasury yield shot up by 12 basis points within seconds. Unlike a day before, however, the stock market had on Friday a sort of counter-rally, especially the growth stocks which were beaten down a day before.
Disparities like this ring a warning bell. We must realize that the current situation and the expectations respectively correspond to a Goldilocks scenario: Inflation is under control, the Fed and all other central banks move to a more accommodative policy and lower key rates; the economy is and stays in good shape, etc. But there are a few things that cause frowns. That inflation is really defeated (the cornerstone of the current market resilience) is quite probable but not yet a given. Take into account e.g. the cited strong US labor market, the shortage of skilled workers everywhere, and the soaring energy prices (in the US the price for one gallon of gas increased 15% since the beginning of the year). While the broad-based expectation that a recession in the US can definitely be avoided (six months ago this was a 50% probability) is now on solid footing and even good old Europe is coming out of the swamp, the numerous geopolitical risks are more or less ignored. The low market volatility is a clear sign of the prevailing complacency. The all-time high of the gold price gives, however, some food for thought, especially as it rose at the time of a strong US dollar – normally a rising gold price goes hand-in-hand with a weakening greenback.
We are not expecting a crash. The economic figures support the Goldilocks scenario reasonably well. It seems to us, however, that the market equilibrium is quite labile and that the proverbial flap of a butterfly’s wings could trigger a storm.
In this situation, we hold our portfolios well diversified. We are still quite substantially invested in the beneficiaries of AI like e.g. Microsoft, Meta, and Nvidia as we think that AI will remain a key driving force in the future. But we hold more defensive stocks like AXA (see our comments on the “hidden stars” in our last House View) as well and we have an exposure in oil stocks like e.g. Shell. Moreover, five percent of the portfolio is invested in gold and silver and almost as much in bitcoin.
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25.03.2024
Hidden stock market stars
In the last ten years, the absolute star performers in the stock markets were the tech stocks. Remember the acronym FAANG which emerged in the middle of the last decade. It referred to the stocks of the five most popular and best-performing US technology companies which were Meta (formerly known as Facebook), Amazon, Apple, Netflix, and Alphabet (formerly known as Google). At the beginning of the twenties (not the roaring ones of the last century but with some similarities) seven stocks really took off, mainly driven by the most powerful propellant rocket: artificial intelligence (AI). The famous “Magnificent 7” are Apple, Nvidia, Alphabet, Meta, Amazon, Tesla, and Microsoft. At the moment, however, we should probably better be talking about the “Magnificent 5” as the upward momentum has started to slow down, especially at Tesla and also somewhat at Apple. The top team is getting smaller, and the air is getting thinner. The rally can, however, go on still for quite some time as good old financial analysis standards like e.g. valuation seem to have become something of the past. The crowd wanted to have a story and got one which assumably creates a new world and opens up limitless opportunities. In the late nineties of the last century, this was the internet, today, AI. We, of course, acknowledge that AI really has the power to dramatically change many aspects of life and we have a few of the beneficiaries of the IT revolution in our portfolios as well. But as value investors and bearing in mind what happened on the stock market when the internet bubble burst in 2000, we do not put all our eggs in one basket.
In addition to investing into the few stocks with an admittedly sensational but also somewhat dizzying performance, we invest in favorably valued stocks, preferably in such with attractive dividend payments as well. These are not in the headlines, but they have the discreet charm of investments with low volatility (good for your health) and a still impressive total performance over time: the hidden stars of the stock market. Two examples of this type of stocks we own are from A to Z: Axa and Zurich Insurance.
The stock of the French multinational insurance company advanced by 55% in the last five years. But this is only half the truth. With dividends reinvested the total performance of a five-year investment in the Axa stock was 111%.
The stock of Zurich Insurance advanced (in a much harder currency) by 47% in the same time span. With dividends reinvested the five-year performance was 89%, however.
By investing in favorably valued and somewhat neglected stocks as well and not going a hundred percent into the certainly promising but already quite advanced growth leaders might miss the utmost possible performance but also avoid substantial risks in case the wind shifts. And we still reach a very good value appreciation.
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11.03.2024
Happy Birthday, QQQ!
The exchange-traded fund (ETF), which tracks the Nasdaq 100 and bears the stock ticker QQQ, was celebrating its 25th birthday yesterday. The Nasdaq-100 index is a stock market index made up of the 100 largest domestic and international non-financial companies listed on the Nasdaq stock exchange. As the most popular bet on tech stocks, the QQQ showed massive inflows and today has a volume of USD 170b. There are some parallels to spring 1999 on the stock markets currently. While the emergence of the internet caused euphoria back then, artificial intelligence is currently generating great enthusiasm. We have nothing against the QQQ or index ETFs in general and we use them from time to time as well, be it as core holdings or to be able to quickly play market trends without having to analyze dozens of stocks in detail.
Here we just would like to share a few thoughts on the pitfalls of passive resp. index investing. In the late seventies of the last century, John Bogle, the founder of the Vanguard Group, revolutionized the mutual fund world by creating index investing. Passive funds now represent more than 50% of all assets managed in U.S. equity funds. Many investors think that this eliminates the need for well-based investment decisions. Without going into detail, we just point out a few important features of index investing.
There is a myriad of index ETFs almost for every investment preference, be it sectors (e.g. biotech), investment styles (e.g. dividend/value stocks), or, of course, countries. The latter, as an example, shows that even in index investing you have to make decisions and that these can have a significant impact on investment results: while the iShares MSCI China (once touted as the future of the world and the place to be) made 0 (zero) percent in the last five years the iShares MSCI Japan (until recently seen as a failed economy) advanced 45% in the same time span (all in USD). Many would now make the point that to avoid such misleading allocations, you just invest in the MSCI World. This at first glance obvious approach is, however, also an asset allocation decision with its own characteristics. You don’t just own the world stock market as you might assume, but you are 70% in the US market and US-dollar and 25% in high tech – mainly in “the magnificent seven” (now more like the “magnificent six” as Tesla lost some glamour and 40% of its market value since mid 23) like Nvidia, Meta, Microsoft, and Amazon.
Passive investing doesn’t save you from making decisions. You must know what exactly you are investing in. Take e.g. the leading index in Switzerland, the popular SMI. Many people think that they own the stocks of a solid, successful economy by investing in an SMI-ETF. What they, however, really own is a heavyweight in just three stocks, Nestle, Roche, and Novartis, as the index is market capital weighted. By the way: the SMI is a price index and not a performance or total-return index which includes dividend payments – a very relevant difference for passive investors as well. Another example of a somewhat abstruse index would be the world-famous Dow Jones Industrial Index. This index is not market cap-weighted but price-weighted. United Health (USD 476) is the stock with the highest weight, and Microsoft (USD 406) is the one with the second highest one. Really amazing as the market cap of Microsoft is USD 3trn, the one of United Health only 430b. Moreover, technical events can lead to massive shifts in weighting. Two weeks ago, Walmart fell from the 17th place with a weight of 3% of the index to the 26th place with a weight of 1% only due to a 3:1 split of the stock.
Index investing may make investing easier, but it cannot and must not replace well-founded decisions. It is not a no-brainer.
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19.02.2024
Why not a bit of Bitcoin?
Bitcoin has no intrinsic value, meaning it is not an asset that generates income the value of which is calculated by the net present value of future returns. Classical assets of this type are stocks and bonds. Similar to gold the “value” of Bitcoin is the price paid in the market based on supply and demand. There is no safety net in the form of an income stream and theoretically, the price could go to zero. However, the disproportionate supply/demand situation creates a strong case for Bitcoin for the foreseeable future.
Supply
As opposed to other cryptocurrencies where the outstanding amount can be inflated as the central banks do with the Fiat currencies, the maximum number of Bitcoins is limited to 21 million. Currently, there are about 19.6 million Bitcoins in circulation, leaving just around 1.4 million to be released. The generation of new Bitcoins in the globally distributed database only can happen with the consent of the proof-of-work of a block. This is done by miners who get a reward for their work. After the network mines 210’000 blocks – roughly every four years – the block reward given to Bitcoin miners for processing transactions is cut in half. This is called halving. The halving event is significant because it marks another drop in the rate of new Bitcoins produced. The first halving took place in November 2012. The subsequent ones were in July 2016 and in May 2020. The next one will be approximately in mid-2024. In 2012 Bitcoin rose by 1’467% within 12 months after the halving, in 2016 by 270%, and in 2020 by 553%. Of course, historical performance is no guide for the future – but sometimes it is a pattern for what could happen.
Demand
While the supply of Bitcoins is limited and loses steam through the halving process, demand is virtually unlimited. Due to its volatility, the use of Bitcoin as a transaction currency may be of minor importance if you look e.g. at G7 countries. But in countries like Venezuela or Argentina, which just reported an inflation rate of 253%, even an alternative with crazy swings can be an option. The big and increasing demand for Bitcoins, however, stems from the investment demand. Bitcoin is nowadays more and more accepted as a valid asset class. A milestone in this respect was the approval of 11 spot bitcoin exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission on January 10. This will make investing in the cryptocurrency much more accessible. The drop of the Bitcoin immediately after the approval has to do with “selling on good news” and switching transactions out of the Grayscale Bitcoin Trust ETF (which traded significantly below net asset value) and it is by no means a sign of declining demand. The market value of all outstanding bitcoins is USD 1 trillion – only one-third of the market cap of Microsoft. Imagine what could happen if a hype ignites…
Even if all lights seem to be green for Bitcoin, we must be reasonable and cautious as history – especially last year – shows that one must be able to live with huge swings: in 2023 Bitcoin fell by 58%. But this also gives us chances to establish new positions, which we did. We now hold 5% Bitcoin in our portfolios and at this point, we are not taking profits yet but letting them run.
Maybe the right time to say goodbye to Bitcoin – at least temporarily – is the moment when Jamie Dimon, CEO of the world’s largest bank JPMorgan, turns bullish. He has always been deeply opposed to Bitcoin and called it again a “hyped-up fraud” a month ago. But at some point, reality will catch up with him. After all, JPMorgan itself will play a key role in BlackRock’s Bitcoin ETF.
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05.02.2024
Creeping disasters
We comment in our House View on “business as usual”-events like e.g. the Fed meeting last week (not surprisingly for us Powell tempered down the expectations for rate cuts) or on greater or smaller catastrophes like e.g. the collapse of the Benko/Signa house of cards which costs a bank CHF 600m (banking at its best!) or – more important – the collapse of Evergrande in China. The latter has relevant implications for the world economy and even global stability. Firstly, it could further slow down the growth of the world’s second-largest economy (and once the driver of global growth) and secondly, Xi Jinping might increase the pressure on Taiwan, a common approach in authoritarian states: aggressive foreign policy to distract from the crisis at home. Without going into details, the Evergrande debacle had and further has one positive effect: it supports the gold price as global gold demand is at record levels mainly driven by demand out of China.
As we have done a few times already, we, however, also take the liberty to point out creeping developments that could have a devastating effect on industry and the economy, particularly in Europe, as they are increasing already existing competitive disadvantages.
One of them is the resurgence of socialism. Spoiled by prosperity, the entitlement mentality is flourishing. Work is something that should be avoided as far as possible – and if it is necessary, it should be compensated by ever-increasing wages. The strikes in Germany where unions are blackmailing the whole country by paralyzing the traffic system is just a recent example: fewer working hours and more pay.
Another dangerous trend for the industry is the imposition of very strict sustainability criteria across the board regardless of costs. Especially the forced decarbonization causes huge costs without having a great effect on the climate as long as e.g. China’s carbon dioxide emissions (33% of world output) continue to rise – not to mention India and other developing nations. Don’t misunderstand us. The world must be decarbonized. But the question is how fast and at what collateral damages (e.g. the German car industry). Decarbonization should be a question of proportionality and common sense as well. A recent example in the city of Zurich shows the absurdity and the exorbitant costs of well-intentioned world-saving measures. The CO2 emissions of a sewage treatment plant shall be captured. 50% of it is to be bound in recycled concrete, and 50% will be transported to Denmark and stored at a depth of 2000 meters under the North Sea floor. Sounds great, but keep in mind: Switzerland’s CO2 output amounts to 40 million tons annually which is only a bit more than 0.1% of the total world output. The 20’000 tons captured in the sewage plant in Zurich are 0.05% of the Swiss output and the whole thing will cost upfront CHF 35m and thereafter CHF 14m p.a. This is only a striking example in a little town of a tiny country. In Germany (1.9% of world CO2 output) the gigantic costs of the so-called “Energiewende” amount to EUR 500 billion (some estimates even put the figure at EUR 2 trillion). This is a heavy load on an economy already challenged fiercely by the competition of cheaper producing and less regulated countries like e.g. those in the Far East. Moreover, the whole concept doesn’t work. You can’t phase out nuclear power, use coal, and build power plants for gas at the same time.
And by the way: we sold Novartis. The company will almost double Vas Narasimhan’s (CEO) compensation to CHF 16.25m. Without us. This is just amazing looking at the achievements. Just for comparison: the total comp for 2023 of Lars Fruergaard Jorgensen, CEO of Novo Nordisk, the most successful pharma company and the most valuable one in Europe is DKK 68.2 million (ca. CHF 9m).
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22.01.2024
Swimming against the tide
Every month the Bank of America produces the highly regarded Fund Manager Survey (FMS), for which around 200 international and professional investors, portfolio managers, and asset managers are asked about their institutionally managed assets. The survey from the beginning of January is particularly interesting as it can be seen as a kind of consensus outlook for the whole year.
The key findings from the survey published last week are that the “soft landing” scenario – a cooling of the global economy without a recession in the US – is now consensus going with a solid positive earnings development and that all respondents expect falling short-term interest rates, i.e. the central banks – led by the Fed – will lower the key interest rates. A few other interesting results of the survey are that for the respondents US stocks remain the most attractive ones, UK and Europe markets will underperform clearly, and small caps will do distinctly better than large caps. Moreover, China with its real estate disaster is seen as a major negative.
Knowing based on the FMS what professional investors are thinking one could be tempted to implement a contrarian strategy, as surprises that drive the markets can theoretically only occur as a divergence from the consensus view. A splendid idea but unfortunately, it’s not that simple in real life.
For one thing, people often don’t do what they say. For example, the survey participants hold a relatively high cash position despite their positive market view, and they increased their holdings in defensive sectors like consumer staples even though their answers would suggest a more cyclical allocation. But even if the consensus was crystal clear it is risky to bet against it as it is not always wrong. The expectations of lower interest rates in this year e.g. will most probably turn out to be correct. Here the critical point will be the timing: sooner or later than the market assumes.
Moreover, even a solid contrarian strategy coming close to a “no-brainer”, and which ultimately turns out to be right can be wrong and costly for an extended period. An example would be Michael Burry a famous California-based hedge fund owner. He correctly determined that the subprime market was mispriced and overheated already in 2005 and he shorted it. It took, however, a few years and his fund was nearly unraveled as investors wanted to withdraw money, until he finally was proven right and made a fortune in the financial crises.
The most prominent and successful “contrarian” is Warren Buffett. He, of course, is more recognized as a value investor, which is, however, to some degree a synonym for a contrarian investor. As Seth Klarmann, another famous hedge fund manager, said: “Value investing is at its core the marriage of a contrarian streak and a calculator.” And indeed, Buffett’s famous “I will tell you how to become rich. […]. Be greedy when others are fearful, and fearful when others are greedy” is basically the dogma of contrarian investing. In Buffet’s case, of course, it is underpinned by solid research. But even Mr. Buffet was not always right and there were periods, when he underperformed the market substantially, the most prominent one during the so-called internet bubble. Berkshire Hathaway, Buffett’s investment vehicle, lost 44% from June 1998 to February 2000 while the Nasdaq index was up 145% before collapsing by 75%. Fighting a hype and swimming against the tide requires patience and steadfastness.
Our approach is pragmatic, a mix of value/contrarian investing and trend following. A consistently solid performance with low volatility shows that this works.
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08.01.2024
Investment Outlook 2024
All the exogenous imponderables that already exist and still could develop might have a significant impact on markets. 2024 is one of the biggest election years in history with elections taking place in half of the world. Many of the coming results will determine how the geopolitical tensions will be heightened or resolved. The first big presidential election will take place in Taiwan next weekend. Depending on the outcome Xi Jinping’s “reunification” actions will potentially dramatically increase and the already unstable situation in the Far East could send shivers throughout the world. Indians will go to the poll in April and, of course, the elections in the US will dominate all – at least in the Western world. And the outcome here is harder to predict than ever. Many say that it is like an election of the lesser evil. We will follow all these developments closely and are ready to act rapidly in case of need. Below you find our scenario disregarding exogenous shocks.
Economy
We will definitively see a growth slowdown in the first half as a lagging consequence of the extremely high interest rates until three months ago and the phasing out of government support measures that were taken to avert a collapse in the wake of the pandemic. Earning revisions will be downwards. As the economy and the labor market are showing astonishing resilience so far, we expect, however, a soft landing. The positive effect of the slowdown will be the further easing of inflation pressures.
Interest rates / bond markets
The central banks will start lowering the key reference rates for sure. But not as soon and as fast as now generally expected. The bond markets seem to us a bit ahead of themselves after the recent rally. Furthermore, they will not only positively reflect lesser inflation risk but on the negative side also the dramatically increasing debt loads all over the world. Remember e.g. that the US just surpassed the USD 34 trillion and faces again a shutdown risk.
Stock markets
In our view, 2024 as a whole will turn out to be a rewarding year again for investors in the stock market if the world does not fall apart. In the first half of the year, slower interest decreases and lower earnings than generally expected will, however, weigh on them. Once the markets have adjusted to this the overall positive environment of persistent low interest and inflation rates and a fairly solid economy – maybe even supported by an accelerated recovery in China – gives room for rising stock markets. With regard to sectors the tech-highfliers, which certainly stay attractive with a longer term view, may take a breather. Stocks and markets with more defensive characteristics like healthcare or the Swiss stock exchange – one of the worst last year – will do better short term.
Gold
After the impressive rally to new highs gold needs a break. Low interest rates, i.e. low opportunity cost, will support it but we do not expect price increases in the double digits in the near term.
Currencies
The Swiss franc will remain the strongest currency in an uncertain world where Switzerland stands out with its stability and record low debt. The US dollar will stay the leading world currency and its recent weakness is overdone. The structural EU problems will further limit the potential of the euro, whereas the yen could show a nice recovery after its crash last year. Finally, Bitcoin will increasingly be accepted as an institutional asset class and might surprise again on the upside.
With our best wishes for a happy and prosperous New Year!
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11.12.2023
2023: the year in Review
The outgoing year was characterized by increasing geopolitical tensions, weather disasters, bank failures, trade conflicts, and the further accentuating debt problem. We are not going to comment on all of these. The media will do the job in this respect. Here we focus on the financial markets and the key drivers of them in 2023. Generally speaking, it could once again be seen, that geopolitical crises and even wars, as shocking as they may be, have little impact on the markets if their key parameters, such as energy prices, do not change significantly and persistently.
Economy: Following the massive, largely state-supported growth spurt after the COVID-induced slump, global economic growth slowed further, as it did already last year. However, with the prominent exception of Germany, the widely feared drop into a recession did not materialize for the time being. But the growth deceleration led to widespread negative earnings revisions which weighed on the markets. The outstanding economic event in 2023 was undoubtedly the tremendous decline in inflation brought about by the central banks’ massively restrictive measures. In the US e.g. the inflation rate fell from 9.1% in August 2022 to actually 3.2%.
Money and bond markets: Money market rates rose significantly in line with central bank rates. Bond yields also rose to record highs in many countries in October (in the US from a low of 0.5% in 2021 to 5%) due to the still prevailing inflation fears, but in most countries the yield curve showed an inversion. The maxim TINA (there is no alternative) of the past years gave way to BARBARA (bonds are back and really attractive). Much smaller yield increases in absolute terms were registered in Switzerland and Japan where the 10y bonds yield a meagre 0.75%. Since October bond yields in the G7 countries leveled off again as recession fears paired with increasing confidence that we have seen the worst in inflation relaxed the bond markets.
Stock markets: Mainly driven by inflation and/or recession fears and the development of the interest rates the stock markets experienced a roller coaster this year. First, they recovered nicely from the weakness in 2022, reversed the uptrend briefly in summer only to enter then into a year-end rally in November. Overall, 2023 was a good year for the stock markets with big divergences, however. Especially in the US, where driven by new opportunities through Artificial Intelligence, seven tech stocks (the magnificent seven) accounted for 90% of the positive performance of the broad market. The best market this year was therefore the Nasdaq in the US, one of the laggards – the value-oriented Swiss stock exchange. By sector, the winners were information technology and communication services. Health service, consumer staples, and energy on the other hand quote year-to-date mostly in the red. Despite the overall hype about green energy, these stocks showed one of the worst performances.
Gold, crypto: Precious metals had on balance a good year. On a volatile path, gold reached a new all-time high. Bitcoin, the only cryptocurrency we invest in, recovered very significantly from the crash it suffered from its high in 2021. This is mainly because it is increasingly accepted as a valid asset class.
Our performance in this challenging investment year was very satisfactory and we are pleased to share this success with our clients, and we thank them for their trust.
Season’s Greetings and a Happy New Year
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27.11.2023
Guru-Striptease
Every quarter all the investment gurus in the USA must lift the veil. The Securities and Exchange Commission (SEC) requires all institutional investment managers with at least USD 100 million in assets under management (AUM) to deliver Form 13F which discloses their equity holdings. We list below a few of the largest/most prominent managers with their investment vehicles. In Brackets, we give their AUM in billion USD followed by the three largest positions. Data as of the end of the third quarter according to 13F (s.e&o.).
- Warren Buffett, Berkshire Hathaway (313.3, Apple, Bank of America, Amexco)
- Jim Simons, Renaissance Technologies (58.7, Novo-nordisk, Apple, Palantir)
- Ray Dalio, Bridgewater (16.5, iShares Emerging Markets, iShares S&P500, Procter&Gamble)
- Bill Ackmann, Pershing Square (10.5, Chipotle, Restaurant Brands, Hilton)
- Daniel Loeb, Third Point (6.5, PG&E Corp, Microsoft, Danaher)
- Seth Klarman, Baupost Group (5.2, Liberty Global, Veritiv, Alphabet)
- David Tepper, Appaloosa Management (5.1, Meta, Microsoft, Amazon)
- Stanley Druckenmiller, Duquesne Family Office (2.8, Nvidia, Coupang, Microsoft)
The idea often circulates that one could just piggyback on the portfolios or on the latest transactions of these gurus and make a fortune. Unfortunately, this does not really work. First, you must choose the best investment manager. In the long run, this is undeniably Warren Buffett. We don’t want to be cynics, but Keynes once said, “In the long run we are all dead.” In shorter periods of time, the performances of the investment stars vary dramatically. While e.g. the S&P500 index with reinvested dividends returned 207% in the past 10 years, Berkshire Hathaway yielded a respectable 211%, the worst player in the group, however, only 10%. To copy portfolios is, moreover, somewhat demanding, at least in terms of money needed. While e.g. Warren Buffett holds 45 stocks, Jim Simons’ Renaissance has amazing 3’611 holdings. In case you try to pick just a few – maybe the largest holdings – there is no guarantee for success either. Even the most renowned managers have their little flops at least as measured in the short run. Berkshire e.g. held Bank of America already at the end of 2021 as the second largest position and still does. The stock declined 33% since then. Druckenmiller’s second-largest position was and is Coupang. The stock of the South Korean e-commerce company lost 45% in this time span. Simply piggybacking on the latest transactions of the gurus is ambiguous at least: In the third quarter e.g. Jim Simons sold his position in Meta almost entirely while David Tepper nearly doubled it.
One of the biggest cornerstones in replicating the gurus is the fact that the data we get may be already completely outdated. Managers are required to file Form 13F within 45 days after the last day of the calendar quarter. Most of them wait until the end of this period to conceal their holdings from competitors and the public. Berkshire’s investment in Apple amounts to an incredible 50% of the portfolio. At this point in time, we don’t know whether this still holds true. Imagine what would happen to the stock if it became obvious in the next 13F that he significantly reduced it.
We follow the 13F forms of the “masters of the universe” closely. They serve us as a valuable source of investment ideas, but they can in no way replace our job of building and managing portfolios in the best interests of our clients.
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13.11.2023
Sawing off the branch you are sitting on
We are observing trends that have clearly intensified in recent years and that are increasingly undermining the economic system of the free world and the basis of our prosperity. In the House View of September 11th (David Ricardo and Adam Smith would turn in their graves) we talked about the damaging effects of restricting international trade (reshoring, trade conflicts) and of escalating state intervention in the economy (subsidies). On the time bomb of massively rising government debt, we have elaborated several times, e.g. on May 15th (high noon of the debt balloon).
Two other worrying trends are the creeping spread of socialist elements in politics and in the economy and the shift away from market economy maxims towards a planned economy because of the claimed climate emergency.
Manifestations for the former are the recent actions of the resurgent trade unions, which are to some degree devastating for the economy. This can be observed in all countries. The outstanding and shocking event, however, was the strike in the US car industry which ended two weeks ago. Union members will get massive double-digit pay increases and some additional goodies, like e.g. a say in any plant closures as part of the switch to the production of e-cars. This will cost e.g. GM nearly USD 7bn over the next 4.5 years and heightens the cost of each car by USD 850 to USD 900. And all this happens in an industry that is fighting a bloody battle for survival, especially against the rapidly growing and subsidized Chinese competition. “We wholeheartedly believe our strike squeezed every last dime out of General Motors” UAW President Shawn Fain declared proudly. This is really cutting off the branch you’re sitting on. Ok, one could argue that this is the job of a union. But Fain had a powerful ally in the White House: President Joe Biden traveled to one of the striking sites and expressed his solidarity with the workers.
In the wake of climate change, which has been classified as an emergency in many countries, another worrying trend intensified: the one towards a centrally managed and guided economy. We, of course, acknowledge the need for decarbonization. But the illusion of stopping climate change overnight with harsh measures that completely disrupt vital processes in our economies is frightening. In Switzerland e.g., which is responsible for ca. 0.2% of the global carbon dioxide output a wave of government measures was unleashed to bring society and the economy onto the noble path of green virtue. This is costly for the economy, threatens our competitiveness, and reduces our prosperity, while at the same time in China, for example, two new coal-fired power plants are connected to the grid every week and Germany generates 35% of its electricity from burning lignite because of the shutdown of nuclear power plants. There is no space here to elaborate on this at length. Just one more example: a misguided policy and especially the massive pressure from ideologically driven NGOs had led to a veritable collapse in investments for oil exploration. Maybe good for the climate. But somewhat illusionary as well. The global energy upstream capital spending virtually collapsed to ca. USD 300bn, 60% lower than it was ten years ago. A shrinking oil supply is clearly in the cards as the production of existing wells declines constantly. The global oil demand will, however, further increase at least until the mid-thirties (driven mainly by emerging and developing economies) as forecasted by the International Energy Agency IEA. Declining supply and rising demand will have ultimately one effect: the price of oil will rise. This is certainly not a positive for the industry and the consumer. It enhances, however, the prospects for the oil industry quite substantially. Those who want to invest accordingly should have a look at Shell and BP.
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23.10.2023
Interest Rate Peak vs Peak in Tensions and Problems
We are quite confident that the interest rates in the G7 countries have reached their peak in this cycle. The sheer extent of the rise in interest rates since mid-2022 is impressive: The yield of the 10y US treasury rose from 0.5% to 4.9%, the yield of the 10y German Bund in euro quoted at a negative 0.5% and scratches now the 3%. The drivers of this massive increase were, of course, the exploding inflation rates due mainly to skyrocketing energy prices and the subsequent very hawkish reaction of the central banks. Both will now fade out gradually. Inflation rates are coming down (in the US e.g. from 9.1% in June 2022 to a current 3.7%) and will continue to do so as the high interest level will slow economic growth even more and temper the inflation pressure further. The first clear signs of this can be seen in the housing market. In the US the interest rate on a typical 30-year fixed-rate mortgage touched 8% for the first time since 2000 last Wednesday. In Germany, the decline in building permits is continuing at a rapid pace. Housing permits fell 31.6 percent in August compared to the same period last year. Sooner or later, all this will have a significant negative impact on the behavior of consumers, who are already suffering from higher prices. The tempering effect on the economy and on inflation will take over the job from the central banks and these can refrain from screwing the interest rates even higher.
We do not expect interest rates to shift into reverse gear quickly now. But the mere absence of the fear of even further rising interest rates is a balm for the beleaguered stock markets. Moreover, the earnings reports for the 3rd quarter, which just started, will most probably once again beat the expectations as the bar seems to be set quite low.
The increase in geopolitical tensions and the significant risk of a conflagration in the Middle East worries us, however, as the stock markets seem to largely ignore the existing problems and the new dangerous developments. Jamie Dimon, the CEO of JPMorgan Chase & Co, said at the earnings release conference that “this may be the most dangerous time the world has seen in decades.” Beyond the military conflicts in Ukraine and now Israel, Dimon cited the rampant national debt and “the largest peacetime fiscal deficits ever.” We agree and his roundup was even far from being complete. He e.g. didn’t mention the ongoing US government dysfunction, i.e. the leadership vacancy in the House of reps and the inability of Congress to act which is short term especially dangerous as a new government shutdown looms on November 17th.
We do not want to paint doom and gloom here. It is a fact that geopolitical distortions rarely have a big or lasting impact on stock markets as the Ukraine war shows. The accumulation of the numerous problems and risks calls for a bit of caution, however. We also know that the old stock market adage “the stock market climbs a wall of worry” is often true. But it should be remembered that even skilled climbers have trouble on overhanging walls.
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09.10.2023
No Shutdown, but a Shut-up and a Bond sell-off
The Saturday before last, the U.S. Senate passed the spending that the House passed earlier, averting a government shutdown. The legislation, which was signed by President Joe Biden before the midnight deadline, gives Congress time until November 17 to negotiate a full FY2024 budget. As has often been the case in the past, a default on the Treasury was averted, this time even proverbially at the last second. We have written about this repeatedly. The last time was at the beginning of August when Fitch lowered the rating of the U.S. from AAA to AA+ to the dismay of Treasury Secretary Janet Yellen.
The avoidance of the shutdown this time even led to a unique political upheaval in the House of Representatives. The House issued a clear “shut up” to the House speaker Kevin McCarthy. A small number of Republicans, who had sought deeper cuts to the federal budget, succeeded in removing him from his position. This is the first time in history that the House has removed its leader. The ouster increases the political uncertainty in general massively and heightens the risk of a government shutdown next month. Against the background of the government finances, which are out of control resulting in an 8% budget deficit this year and a flood of new treasuries issued to finance it, this was the straw that broke the camel’s back: The bond market plunged in a veritable sell-off as the yield of the 10y treasury bond increased from 3.2% in April to close to 5% last week. Looking back a bit further, owners of bonds have encountered heavy losses since the financial markets said goodbye to the zero-interest rate world of the last almost 15 years. The value of the 10y treasury bond in the US e.g. declined almost 50% since March 2020.
But as with any bloodbath in the financial markets, opportunities are opening up. In this specific case, because last week’s interest rate spike could actually mark the peak in this cycle and, moreover, because it was not inflation, which eats away all returns, which caused it. Inflation is falling again actually, in the US to 3.7% from its peak of 9.1% reached in June 2022. The inflation expectation reflected in inflation-protected bonds (breakeven rate) shows clearly as well that not inflation was the driver of the recent yield jump.
In other words: in the bond market you now get returns in real terms again, i.e. inflation adjusted. And if the central banks refrain from further screwing up interest rates, you even can expect some capital gains. In short: bonds are finally back as an asset class.
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25.09.2023
The roaring bull falls silent and the bear starts grunting
The stock markets dropped substantially in 2022 induced by the Russian invasion in Ukraine and an unprecedented inflation shock. Then inflation peaked (in the US at 9% in June 2022) and the stage in the stock market was cleared for the roaring bull again. Since October 2022 the S&P 500 e.g. gained 21%. All major indices quote now again close to their historic highs reached in November 2021. Everything ok? Not really. There is a very distinctive difference to the golden days: the interest rate level. In the US the 10y treasury bond yielded 1.2% in November 2021 and short-term rates were at 0% – today treasury bonds yield 4.4% and in the money markets you get a risk-free return of 5%. Needless to say, that such risk-free rates are a compelling alternative to volatile stock market returns and that, of course, in any valuation models lower stock valuation levels result than they prevailed in a zero-interest rate environment.
Stock markets are forward looking. But to assume that central banks will lower short-term rates soon is wishful thinking. Last Wednesday the Fed held interest rates steady at their highest rate in 22 years and predicted in their “dot plot” that there would be at least one more hike this year and that cuts in rates wouldn’t begin until June of 2024. And bond rates stay stubbornly high in a period of massively falling inflation. The reason for this counterintuitive development is the good old economic theorem of supply and demand. In the US e.g. the new issuance, i.e. supply, of treasury bonds and bills is driven by the development of the national budget deficit, and this knows only one direction. The fiscal year-to-date national deficit rose to USD 946bn this year from USD 578bn for the same period last year, an increase of 63%. At the same time demand for treasuries even shrinks. China’s holdings of Treasuries e.g. dropped to USD 776.4bn, the lowest figure since May 2009, when it held USD 821.8bn. And in the context of its quantitative tightening policy the Fed is also shrinking its holdings of Treasuries.
While high money market rates and structurally higher bond rates are a constant drag on stock market valuations the other side of the coin, the earnings, might lose its supportive character as well. High interest rates are beginning to bite into the real economy. This can be seen e.g. by the housing starts in the US which were reported last week. They tumbled 11.3% to a seasonally adjusted rate of 1.238 million, the lowest level since June 2020. No surprise with mortgage rates at 7% and above. High energy prices are also taking their toll. Today’s average price of gas in the US e.g is USD 3.90 per gallon which is almost 60% higher than in the last years (if you eliminate the spike after the war-breakout). Economic growth tumbles in many countries, Germany is in a recession and China, once the growth engine of the world, is weakening and struggling with a massive real estate crisis.
On top of this, the euphoric spirit mainly driven in the tech sector by the sheer limitless opportunities generated by AI is faltering. The IPO of Arm Holdings, the huge chip design company controlled by Softbank had a stellar start on September 14 as the stock jumped nearly 25% on its first trading day – but since then it fell back to the issue price. It could well be that the upcoming IPO of Birkenstock, a manufacturer of medieval-looking footwear, will prove to be more successful than the one of a leading tech unicorn.
Overall, it’s time to get a bit more cautious and to remember the signs you often come across in Canada: “Beware of Bears”
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11.09.2023
David Ricardo and Adam Smith would turn in their graves
In recent years a few crises like the COVID pandemic which caused supply chain disruptions or the Russian war which caused skyrocketing energy prices reinforced trends that grew already before due to the resurgence of socialism in a society spoiled by affluence and through the all-dominating climate change topic. We are talking about a forced deglobalization and a massively increasing state interventionism.
David Ricardo’s comparative advantage theory showed already in 1817 that all nations can benefit when each of them focuses on making goods that it can produce at the lowest opportunity costs as compared to other countries. In his famous example he demonstrated numerically that if England specialized in producing cloths and Portugal in producing wine, then the total world output of both goods could rise – and this even though in absolute terms both goods can be produced cheaper in Portugal. Ricardo’s insight is the basis for international trade which experienced a real boom after WWII. This created wealth as practically every country became richer, some emerging countries substantially so when globalization gained steam. Now we seem to be in a trend reversal. Deglobalization or reshoring – you name it – will lower the economic dynamic in the world.
Another phenomenon that goes hand in hand with this makes it even worse: The explosion of state interventionism, often in the form of massive subsidies. A striking example is the US where the new era is somewhat cynically called “Bidenomics”. The “Neue Zürcher Zeitung” called it recently the industrial policy license to waste taxpayers’ money and summed up: Tax cuts are out – interventionism is in. The centerpiece of Biden’s policy is the Inflation Reduction Act which among other topics addresses climate change and will invest USD 783 billion in provisions relating to energy security and climate change. Another part is the CHIPS Act which provides roughly USD 280 billion in new funding to boost semiconductor production in the US. Taiwan Semiconductor Manufacturing Company (TSMC), the world’s leading semiconductor foundry, expects to get a tax credit of USD 8bn for investing USD 40bn in two new chip factories in Arizona. Such distortions of a market driven economy can now be found everywhere. The European Union and China are investing trillions in their economies to rebuild local industries and avoid supply chain risks. Germany e.g. lured chip manufacturer Intel to Magdeburg in June with subsidies amounting to EUR 10bn, TSMC will build a plant in Dresden and get EUR 5bn state money. And the subsidy fashion is by far not restrained to semiconductor manufacturing. Meyer Burger e.g., a not too successful (to say the least) Swiss manufacturer of solar panels, gets a government grant of USD 1.4bn for a solar cell and module manufacturing unit they are going to build in Colorado.
Adam Smith sends his regards. In his famous masterpiece “The Wealth of Nations” (1776) he made the striking statement: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” With this, the forefather of capitalist thinking outlines the driving force in a successful economy. It is the pursuit of one’s own interest in a market regulated as little as possible and certainly not the state steering through massive subsidies. The latter leads to inefficiencies, misallocation of capital, and, last but not least, to a further inflation of all the debt balloons which are anyway already close to bursting.
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28.08.2023
BRICS against the rest of the world
On Friday Jerome Powell gave his speech in Jackson Hole. Unlike last year, when he shocked the markets with very bluntly hawkish statements and when we wrote our House View about it, his comments this time were more subdued: “We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” So, as expected by us, for the time being, the markets will have to live with high interest rates, which will slowly eat into the real economy and dampen growth.
We therefore take the liberty here to share a few thoughts on an event, which also took place last week: The BRICS group held its 15th summit in Johannesburg. BRICS is an acronym for Brazil, Russia, India, China, and South Africa. A Goldman Sachs economist coined the term BRIC (at the time without South Africa which joined the club in 2010) in 2001. It was originally a term to describe investment opportunities between developed markets and emerging markets. It had not been a sort of organization until 2009 when their governments started annual meetings and tried to coordinate multilateral policies. The problem was and still is that this bunch of countries is quite heterogeneous. It ranges from a country that achieved the role of an industrial powerhouse (China), to a country, which further weakens its industrial base also through a war of its own making, to less relevant countries on a global scale. There was a lack of aligned economic interest and a common political consensus. As a substitute for positively formulated goals two hostile images were created and became the DNA of the group: rejection of the “Western world”, esp. the system and values of the G-7 countries, and the refusal of the US-Dollar as the dominant world currency. While the first point is a geopolitical issue on which we don’t elaborate in a House View which focuses on investments, the second point deserves a few clarifications. It is basically wishful thinking. The USD is currently involved in more than 88% of all forex transactions executed worldwide. The euro is second with 30%, followed by the yen (17%) and finally the Remimbi RMB (only 6%). This is despite China’s high share of the international trade. Not surprising, however, if you make a reality check: with RMB, which one receives from exports to China, one can finance needed imports only from China and not, e.g., from Germany. This will not change soon, if at all. The other side of the coin is the importance of the USD as an international reserve currency. 58% of official foreign exchange reserves were held in US dollars at the end of 2022, 20% in euros, and 5.5% in yen. The RMB comes to 2.7%. The dollar offers optimal conditions for assuming the leading role as transaction and reserve currency. It is freely convertible, the U.S. offers the most liquid financial markets in the world, it has no capital controls and most importantly, the U.S. is running a huge current account deficit and thus plays the counterpart to the surplus countries. It is definitively too early to intonate the dollar’s dirge, even if all BRICS countries are intending to sing it loudly.
At their summit in Johannesburg, the five BRICS countries invited Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the UAE to join the group. These additions – especially the oil producing countries – would, of course, increase the relevance of the BRICS and their power to change the global landscape away from Western standards. The example of Argentina shows how contradictory the enlargement can be. Argentina has defaulted on its debt nine times since its independence from Spain, and three times in this century. After four months of negotiations, the IMF has now released a loan tranche of 7.5 billion US dollars for Argentina to keep it afloat. The IMF is predominantly financed by the USA, Europe, and Japan – not by any BRICS members.
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07.08.2023
Fitch ditches AAA and itches Yellen
Last Tuesday, Fitch Ratings, one of the Rating agencies with a global standing (the others being Standard & Poor’s and Moody’s) lowered the rating for the USA from the top-level AAA to AA+. The downgrade by one notch is actually minuscule but as it means that the US drops out of the exclusive AAA-club it triggered quite a stir. Fitch cited as reasons for the downgrade of the country’s deteriorating finances, doubts about the government’s ability to tackle the growing debt, and the erosion of governance over the last two decades that has manifested in the debt ceiling standoffs and last-minute resolutions. The downgrade immediately prompted a rather harsh reaction from the Secretary of the Treasury, Janet Yellen. “Fitch’s decision is puzzling in light of the economic strength we see in the United States,” Yellen said. “I strongly disagree with Fitch’s decision, and I believe it is entirely unwarranted.” While there is certainly no doubt about the still very high creditworthiness of the largest and most liquid bonds of the world, the high and massively increasing debt of the US is clearly a negative and can’t be glossed over. The General Government debt-to-GDP ratio is projected to rise to close to 120% by 2025 and it is over two-and-a-half times higher than the AAA median of 39.3% of GDP and the AA median of 44.7% of GDP, Fitch said. Even Ms. Yellen can’t ignore this and in case of doubt, she should have a look at www.usdebtclock.org. The market knows the problem and wasn’t greatly surprised. Unlike in 2011 when the debt ceiling battle led to a downgrade by S&P and the stock market lost almost 20%, it fell this time only by ca. 2% – but it nevertheless immediately spurred in a sort of risk-off sentiment. The bond market reacted, however, quite strongly. The yield of the 10y-Treasury bond jumped from 3.9% to 4.20% – an absolutely astounding move for a bond market.
Especially the further rise in interest rates confirms our policy of investing more defensively. As we rightly assumed a month ago, the earnings reports of the companies came in still quite strong. 84.0% of the S&P 500’s market cap has been reported by now and earnings are beating estimates by 7.2%, with 75% of companies topping projections. But now the market will focus more on valuation again. And valuation is indisputably high. The earnings yield of the S&P500 index (the reverse of the P/E-ratio) is now 4.9%, the same as the yield of the 2yr treasury bond, i.e. the difference in earnings yield minus treasury yield is zero. In other words, there is no risk premium anymore for investing in stocks. Just as a reminder: ten years ago it was 6%.
Our more defensive stance is reflected above all in our stock selection. We tend to favor value stocks and we e.g. recently invested in the French bank Société Générale, which looks cheap and is benefiting from higher interest rates. We also try to take advantage of special situations. These are not riskless, of course, but have a positive reward/risk ratio in our view and they are less exposed to market fluctuations. An example was Activision Blizzard which will be now finally acquired by Microsoft. In view of a successful takeover, we bought Activision Blizzard about one year ago and now took profits.
Currently, we hold two takeover situations. Tower Semiconductor, a leading Israeli semiconductor foundry, whose stock is also traded on NASDAQ. Intel plans to acquire Tower at USD 53 per share. Due to the uncertainty of whether China will block the deal, the stock currently trades at USD 37. The other acquisition target we hold in several of our portfolios is SoftwareOne, a Swiss company active in enterprise software and cloud procurement. Bain Capital, a private equity firm, seeks to acquire SoftwareOne and two weeks ago made a new indicative proposal in the range of CHF 19.50 to CHF 20.50 per share. The board of SoftwareOne rejects the revised proposal and initiates a strategic review process to ensure the Company has considered all options for value creation, including continuing to operate as a public company, a merger or sale of the Company, as well as other possible strategic transactions. The stock on Friday closed at CHF 18.27.
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24.07.2023
Rule Change during the Game?
The NASDAQ-100, the most popular tech – index which includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market, is experiencing a special rebalancing. The reason for it: If the aggregate weight of the subset of issuers whose weights exceed 4.5% does exceed 48%, the aggregate weight of the subset of issuers whose weights exceed 4.5% is set to a max of 40%. The adjustment of the weights was made on Friday and they are effective today. It mainly affects the concentration amongst the top six names which have combined become larger than 50% of the overall index: Microsoft, Apple, Nvidia, Amazon, Tesla, and Alphabet. After the rebalancing, these stocks will only make up for 39% of the new Nasdaq-100. The change in the weightings is quite pronounced. It leads e.g. to a reduction of 3% in the case of Microsoft and Apple (both from 13% to below 10%). Investors who are invested in the Nasdaq-100 through ETFs like e.g. the Invesco QQQ Trust, a fund we ourselves use from time to time as a liquid, flexible, and low-cost proxy to the index, might find it unfair to lower the weightings of the best ingredients in their investment: Year to date Apple is up 53.5%, Microsoft 43.5%, Alphabet 34.7%, Amazon 51.5%, Nvidia 209.5% and Tesla 140.5%%. It is, however, quite normal that indices are adjusted, especially when a few stocks make up for a huge weight of them. In the case of the Swiss Market Index (SMI) e.g. the maximum weight of every single stock is 18% and, if higher, it will be reduced to this level on a quarterly basis (impacts Nestle, Novartis, and Roche). Such rebalancings make indices less risky, i.e. less exposed to single stock – risks, and bring them closer to the reality of the underlying economic power of the constituents in times of excesses. This makes sense depending on the purpose the index is used for. Many of the popular indices are therefore moreover calculated in different ways as well: e.g. performing (including dividends) or equal weighted.
The real question here is whether one can profit from the impact such rebalancings have on stock prices. The answer is yes and no. Short term, the adjustments the index funds have to make in real money to further replicate the index might lead to fluctuations. In the case of Microsoft and Apple e.g., the ETFs will have to unload about USD 8 billion in each of these names and in the case of Pepsico e.g. which is rebalanced from 1.7% to 2.1%, they will have to buy its stock for USD 1.3bn. In the longer term, however, index weightings, even inclusions and exclusions don’t have a measurable impact on stock prices. Just one example: in 2011 Apple accounted for 20% of the NASDAQ-100 and it then was cut dramatically to a weight of 12%. The Apple stock nevertheless showed virtually no punching effect and ten years later it quoted 12 times higher while the Nasdaq-100 only had increased sixfold. Another example would be Kühne&Nagel, one of the world’s leading logistics companies, which we hold in our Swiss portfolio. On June 13 of this year, the stock replaced the one of Credit Suisse (here the index membership obviously was no help) in the SMI. Since then it advanced 4% while the index was flat. Whether this was due to the index inclusion is difficult to say. It has to be considered in such cases that a stock simultaneously normally drops out of another index, in this case, the Mid-Cap-Index SMIM. In the long run, it is always the development of the fundamentals which make the story. In the last five years e.g. Kühne&Nagel stock rose 71%, the SMI only 22%.
The performances of the constituents make the performance of the index – not the other way around.
In our last House View, we said that the earnings reports of the companies for the second quarter will still be good compared to the low expectations. This now turns out to be the case: 18.8% of the S&P 500’s market cap has been reported and earnings are beating estimates by 7.0%, with 68% of companies topping projections.
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10.07.2023
No “Copy / Paste” in the second half
Despite major uncertainties such as inflation-, interest rate- and economic development, and many geopolitical risks the global stock markets clearly performed better in the first half of 2023 than many market participants had expected. The main reasons for this are the so far more robust US economy than expected by the market and the expectation that the cycle of interest rate hikes is coming to an end. The MSCI World gained 14.0% in the first six months. Markets were, however, primarily driven by large-cap tech stocks such as Nvidia (+189.5%), Meta (+138.5%), Apple (+49.3%), and Amazon (+55.2%). This is also reflected in the Nasdaq100-index, which gained 39.7% in H1. The overwhelming performance contribution by some heavyweights (we elaborated on the lack of market breadth in our House View of June 30) is also shown by the comparison between the S&P500 (+15.9%) and the S&P500 Equal Weighted Index (+6.0%), where all stocks are equally weighted. The positive performance of a small number of technology stocks was based mainly on the narrative of further falling inflation and therefore soon falling interest rates. This favored the interest-sensitive growth stocks. Moreover, on top of this, several of the tech stocks were hyped up by the fantasy surrounding the topic of artificial intelligence.
Reviews are helpful to determine the current situation. History doesn’t repeat itself, however, it can rhyme as Mark Twain said. But it might be neither nor. We are convinced that the second half of this year will in no way be a replay of the market melody of the first half. A lot of the “goodies” which drove the markets and the dominant stocks respectively have gone in our view. The most important one is the hope of a soon reversal of the restrictive central bank policies. Core inflation rates in most countries are still too high for a relaxed monetary policy, i.e. short interest rates will stay higher for longer. The bond markets tend now to realize this as well. The yield of the 10-year Treasury bond in the US e.g. has risen within two months from 3.4% to 4.1%. We also see no scope for easing at the long end of the yield curve for another reason, which in itself is not very encouraging: the high and dramatically rising indebtedness of most countries and the resulting avalanche of debt issues in an increasingly saturated market. In the US e.g., also as a consequence of the suspended debt ceiling and the pent-up demand for cash of the treasury, we expect a total issuance volume of USD 1’000 billion in the next few months. As we mentioned a month ago, the earnings will have to do the job for the stock markets now. The earnings reports for the 2nd quarter will still be ok (also due to low expectations) but thereafter the consensus forecast of a “soft landing” might crack somewhat and the market will enter a sobering phase. We do not expect a heavy recession, but many leading economic indicators show weakness, e.g. the Caixin Services PMI in China. China has lost its role as the driving force of the global economy anyway for the time being. Moreover, there are other warning signs: the inverse of the interest structure in most countries. The yield on the two-year U.S. Treasury bond e.g. exceeded the 10-year rate by more than 110 basis points last week. This is a level last seen in the early 1980s and it must be noted that this sort of inverted interest rate curve has always been followed by a recession in the past 50 years.
As mentioned above we started to reduce our equity exposure and we e.g. cut in half our substantial positions in the big tech stocks last week. For the time being, we keep the resulting proceeds in cash, i.e. money market funds or in call money, in order to be able to reenter the market quickly again after the overdue correction of the overbought market situation.