Market Insights – 9th December 2019

Each week, a team of experts shares its market views with you.

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Shrugging off the uncertainty caused by the trade war, the US added 260,000 jobs in November. This figure, which was much higher than expected, drove the unemployment rate down even further. This should keep consumers spending freely during the crucial year-end period.

Japan’s prime minister Shinzo Abe rolled out the country’s first economic stimulus package since 2016. Over half of the JPY 26 billion plan will consist of fiscal spending spread over 15 months. This is further proof of the growing role of fiscal policy in addressing the economic slowdown around the world.

Opec’s decision to lower production by 500,000 barrels a day is just the latest cut brought in since autumn 2018. It should help to restore the supply/demand balance in the market after the oil glut in recent years.


Stable but expensive Swiss prices

Inflation has still not taken off in Switzerland. In fact, the latest figures show that the country is once again entering a phase of disinflation. Prices dropped slightly in November, with annualised inflation coming in at –0.1%. This decline is not yet a cause for concern, although consumer prices are clearly heading downwards – the decline was 0.3% when calculated using the ECB’s harmonised method.

But what is really astonishing is that prices haven’t risen since the 2008 crisis. Inflation has averaged zero over the past ten years, even though the economy has picked up, the Swiss National Bank’s (SNB) monetary policy is ultra loose, interest rates are negative and the money supply has increased considerably. Thomas Jordan and the other members of the SNB’s governing board may be happy that the Swiss economy is holding up so well, but they must also be worried that inflation has remained desperately low. The macro cycle is maturing, so the SNB – just like other major central banks around the world – would rather be seeing an uptick in prices. That would help to stave off deflation when the next global recession sets in, possibly in the coming quarters but more likely in a few years. That’s because central banks’ dread deflation – a widespread and sustained price decline. When deflation strikes, consumers and companies put their spending and investments on hold as they wait for prices to fall further – and the central banks can do little to stimulate growth.

The SNB has no choice but to stick with its current monetary policy in order to prevent the franc from rising further and importing even more disinflation. It can’t cut interest rates much more, as more and more pension funds are considering placing their money in safe-deposit boxes in order to avoid paying negative rates. The SNB will therefore continue to intervene on the forex market for some time to come, even if that means its balance sheet – which has just reached a record CHF 783 billion – will balloon even further. And the SNB will keep its fingers crossed that inflation will pick up both in Europe and worldwide.

A record year for Swiss real estate funds

What a difference a year makes! Last year, Swiss real estate funds turned in their worst performance since 2008. But at the end of November 2019, they were heading for a ten-year best, with gains of close to 20%. Of course, the 2018 year-end slump provides a very favourable basis for comparison. But still, investors have been in buy mode all year. Why is that? We think that it’s first and foremost because of the level of interest rates in Switzerland. With more than 80% of the domestic bond market offering zero yields at best and a growing number of banks charging interest on deposits, the real estate market continues to generate a tax-exempt yield of 3%. But the average market premium relative to net asset value has doubled and now stands at 32%, which is close to its all-time high.

After increasing our exposure to this sector at the beginning of the year, we now think Swiss real estate funds offer limited additional upside. It would therefore make sense
to take profits on these funds, even if their yields continue to offer strong support. International real estate, however, which has not experienced such a solid uptrend but offers similar yields, is an attractive way of diversifying a portfolio and remaining exposed to real estate over a broader geographical area.


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