Market Insights, May 31, 2021

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

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Couché de soleil sûr les Gastlosen


After falling for several quarters, gold prices rose and broke through various resistance levels. They are being buoyed by the dollar’s decline and stable US interest rates. The sharp rise has not come hand in hand with extreme investor optimism, which suggests that it should continue in the short term.

Italy’s FTSE MIB stock market index has just broken through a key resistance level that’s been in place for more than ten years. This is almost certainly because the EU rescue plan, which will benefit Italy hugely, has now been adopted by all EU Member States. The funds should help the country return to robust, sustainable growth, which will be a boon for the Milan stock market.

China’s latest manufacturing PMI fell to 51.0, in line with consensus forecasts. The sub-index of new export orders declined from 50.4 in April to 48.3 in May, its lowest level since last June. This slowdown in foreign demand came as a surprise but is still to be confirmed.

Is all well when watchmaking is well?

The idea that when the construction sector is doing well, everything is doing well isn’t quite as relevant as it used to be in Switzerland and other developed countries. Construction contributed heavily to the Swiss economy in the 19th and 20th centuries but now makes up no more than a few percentage points when it comes to gross domestic product (GDP).

For several decades now, the health of the Swiss economy has depended largely on exports. Switzerland is a small country with no natural resources. It is very export-oriented, with international trade making up an extremely large proportion of its GDP when compared with other countries. The main export sectors are machine tools, chemicals, pharma, and watchmaking and jewellery.

This means that the Swiss economy is now much more reliant on the global economy. So the uptick in watch exports, which rose by more than 400% year on year in April, was a reassuring sign. This unusually sharp increase can be explained by the slump in demand in the luxury goods sector when the pandemic hit last year. It’s good news for the watchmaking industry, and shows that the global economy is recovering well, particularly when it comes to Switzerland’s main export markets – the eurozone, the US and China. This bright outlook for the Swiss economy was confirmed by the KOF Institute’s economic indicator, which hit a record high in May.

Switzerland’s financial markets seem to be doing well in this buoyant climate. Both the broader SPI and the SMIM index of small and mid caps have hit a series of record highs. This climate has not, however, been good for the bond market, with yields up sharply since the start of the year. Although interest rates are still negative, yields on Swiss government bonds with a maturity of more than 15 years have edged into positive territory for the first time since January 2019.

The ongoing economic recovery and rise in inflation both in Switzerland and elsewhere in the world suggest that bond yields will rise further. We are therefore still cautious on Swiss bonds, which offer paltry returns compared with the potential upside of Swiss equities.

Could Asia be the hare in the Covid race?

Once again, Asia is out of sync with other regions of the world when it comes to the public health situation. Asian economies managed to keep the pandemic under control in 2020, but the US and the eurozone have caught up in recent months thanks to their efficient vaccine rollouts. Compared with most developed economies, the vaccination rate is still low in Asia, with some notable exceptions, such as China and Singapore. 

The low level of immunity, from both vaccination and infection, means that the region is still vulnerable to another wave of COVID-19 infections, as we’ve seen recently in Vietnam, Taiwan and India. Several countries in South-East Asia have even imposed new lockdowns. Borders and the tourism sector will therefore remain closed for the time being, while Europe and the US are opening up in the run-up to the summer holiday season. 

The delayed reopening of the economy could, however, be good news for the tech sector, as many tech companies were weighed down by the rise in long-term US interest rates and by regulatory risks relating to the Chinese government. This type of risk is inherent in tech companies and is not limited to China or Asia, which we think is already partly reflected in the sector’s recent underperformance.

What’s more, the recent sector rotation towards cyclical stocks seems to be stabilizing, not to mention that these tech companies, buoyed by the structural trend towards digitalisation, continue to offer attractive upside potential. We are convinced that one of the best ways to tap into this theme is through a diversified portfolio, such as that offered by our “Emerging Markets Best Opportunities” equity certificate, which provides exposure to a selection of emerging market tech stocks.


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