Market Insights – March 4th, 2019

The world’s largest economy held up much better than forecast at the end of last year. In the final quarter, GDP grew at an annualised rate of 2.6%, far outstripping economists’ expectations. For 2018 as a whole, the US economy grew by 3.1% year on year, a rate not recorded since the second quarter of 2015. Yet everything pointed to an abrupt slowdown at the end of the year as political risks escalated on both the domestic front – with the government shutdown – and the international front because of the trade war. These solid figures were mainly a result of particularly robust consumer spending, together with a rise in inventories as companies prepared for a potential hike in customs tariffs in the first few months of 2019. It’s therefore likely that some of the growth recorded in the final quarter of last year was at the expense of the first quarter of this year. The slowdown is yet to be reflected in GDP figures, and recent political developments should cushion the blow. First, a solution to the shutdown was found after Donald Trump backed down over the Mexican border wall, no doubt for tactical reasons. And second, the tariff hike scheduled for 1 March on imports of Chinese goods and services was postponed, and the world’s two superpowers seem poised to announce a major trade deal. Global growth is likely to pick up again in 2019, thanks to a decline in political risks, aggressive stimulus measures in China and more accommodative monetary policies from the major central banks. This should help to soak up the temporary excess in business inventories in the USA – and elsewhere in the world as well. Barring a sharp rise in oil prices, the combination of an economic uptick and low inflation should continue to boost risk assets. This is particularly true for equities, which still show upside potential in 2019. However, a short-lived consolidation of YTD gains is still possible – if not desirable.

Investors in Swiss real estate funds were relieved to see the back of 2018. The SXI Swiss Real Estate Funds Index ended the year down by more than 4%, its worst annual performance since its inception in January 2008. Among the reasons for this downturn: these funds raised records amounts of capital at a time when investors became much more bearish on risk assets. Yet the most dangerous factor for real estate securities – an interest-rate hike – has not materialised. We have therefore taken the opportunity to increase our exposure to this segment. In early January, agio dropped to its ten-year low, and dividends were not at risk. Since then, this asset class has recorded steady growth, mainly because investors have regained their risk appetite.

We remain bullish on Swiss real estate funds. Average agio has gone from 15% to 18%, but is still far from the 30% reached in 2017. What’s more, they offer a tax-exempt return of 2.9%, which is particularly appealing given that Swiss government bond yields are negative on all but the very longest maturities. Finally, the Swiss property market remains healthy, with just a few well-contained hotspots.