Market Insights – July 26, 2021

Each week, our Investment team shares its market views with you.

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Idyllic mountain scenery in the Alps with lush blooming meadows in springtime


Stock markets in mainland China and Hong Kong have been hit hard by a new regulatory push. This time, the Chinese government had education companies in its sights, announcing strict new rules that will weigh heavily on the industry.

So far, 20% of S&P 500 companies have published their Q2 earnings, with the large majority – 87% to be exact – beating consensus estimates. These positive surprises will underpin equity markets and will continue to drive full-year consensus forecasts further upwards.

The eurozone’s PMI, which is lagging a few months behind that of the US, hit a record high in July. The services sector – buoyed by the easing of lockdown restrictions and the vaccine rollout – had a particularly good month. These latest figures are yet another sign that economic activity is picking up in Europe.

Pound sterling will soon be immune to Brexit and the Delta variant

When it comes to monetary policy, some central banks are now getting ready to leave the express lane and head off the motorway. After all, their emergency policies will have to come to an end at some point.

The European Central Bank is not quite there yet: last week it confirmed that it would continue to support the region’s economy. For ECB president Christine Lagarde, there is still too much uncertainty surrounding the pandemic, and monetary policy will be kept ultra loose in order to stimulate the recovery. However, given the recent surge in inflation in the States, the US Federal Reserve is now ready to tighten the purse strings. Its first step will be to ramp down its asset purchase programme. Fed chair Jerome Powell may not even wait until the FOMC meeting in September and he could officially announce a change in course at the annual Jackson Hole policy symposium in late August.

The Bank of England didn’t wait for its prestigious US and eurozone counterparts to begin normalising monetary policy – it has already taken action. No rate hikes are on the cards there either, but there has been a marginal reduction in the BoE’s asset purchase programme. Indeed, the central bank’s liquidity injections into the UK economy have started to slow, signalling the end of a period of unorthodox policies – on both the economic and political fronts.

The Brexit chapter has closed, and the country’s large-scale vaccine rollout gives hope that growth will bounce back sharply despite the emergence of new COVID-19 variants. Surprisingly, pound sterling is still close to its all-time lows against both the US dollar and the euro. That won’t last, however. We believe the pound is undervalued and will strengthen on the back of substantially healthier fundamentals in the UK. We have increased exposure to the pound in portfolios as a result. We may soon be able to apply the same reasoning to the greenback, if the Fed follows in the BoE’s footsteps in the autumn. And even more so if the Fed confirms that it is planning a first rate hike in 2023, which would give the dollar a yield advantage, particularly over the euro and the Swiss franc.

Switzerland – a perfect mix of defensive and cyclical stocks

After getting off to a fairly chaotic start, the rollout of COVID-19 vaccines in Switzerland’s neighbouring countries and main trading partners soon allowed those governments to ease their lockdown measures.

Swiss small caps were not the only ones to fare well in this climate. Since the middle of the second quarter, investors have become increasingly interested in our country’s blue chips. These companies are trading at a discount that finally drew investors’ attention as they search for alternatives to the cyclical stocks that have already put in a good performance.   

We still expect Swiss stocks to outperform in the coming months. Earnings estimates remain upbeat and growth does not yet seem to have peaked – leaving scope for positive surprises that could boost the country’s equities. In addition, Switzerland’s “perfect mix” of defensive and cyclical stocks is a real advantage for the domestic market, especially as we move further along in the economic cycle.

Finally, consumer prices in Switzerland should rise by no more than 1% in 2021. The SNB therefore has no reason to tighten its highly accommodative monetary policy, especially since Switzerland’s favourable inflation differential should cause the Swiss franc to weaken against both the euro and US dollar – a big plus for our export-based economy. 

We therefore remain bullish on Swiss stocks and are still overweighting them in our portfolios.


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