In an environment marked by a sharp rise in volatility last week, Swiss equity markets followed the downward movement observed across Europe, as investors indiscriminately reduced their exposure to risk assets. Nevertheless, we believe that domestic equities should outperform their European counterparts under the current circumstances.
While the weakness in cyclical industrial and luxury stocks is understandable, it is more surprising to see defensive names in the healthcare and consumer sectors decline as well. Should geopolitical tensions persist, we therefore expect a greater decoupling of Swiss markets from those in Europe.
Against this backdrop, we continue to favour Swiss equities, particularly domestic small and mid-cap companies, which are far less exposed to surging energy prices and to the growing concerns surrounding a slowdown in the global economy. Within this segment, companies operating purely in the local market are well represented and are currently demonstrating remarkable resilience compared with internationally oriented listed companies.
In a particularly uncertain geopolitical and economic environment, we have decided to adopt a more cautious stance in portfolio management. The military escalation in the Middle East and the direct involvement of several regional and international powers, are fuelling a market environment characterized by reduced visibility. This situation is notably reflected in the very rapid movements observed in energy markets.
The price of a barrel of oil has recently surpassed the symbolic threshold of USD 100. This increase is largely explained by major disruptions affecting supply flows in the Gulf region. The Strait of Hormuz, a strategic passage for global oil transportation, has become virtually inaccessible to oil tankers due to the conflict between Israel and the United States on one side and Iran on the other. This logistical constraint is increasing pressure on supply and reinforcing uncertainty regarding the future trajectory of energy prices.
The potential economic impact will largely depend on how long this situation persists. Should oil prices remain sustainably above USD 100, the consequences for global economic activity could be significant, particularly through increased pressure on production costs, household purchasing power and, ultimately, growth prospects. At this stage, no element suggests a rapid resolution of the conflict, which maintains a high level of uncertainty for investors.
In this context, we have decided to partially neutralize risk within the portfolios managed by the Bank. This decision translates into a measured reduction in exposure to assets that are most sensitive to fluctuations in the economic cycle, particularly equities.
For a balanced portfolio profile, we are therefore reducing equity exposure by 3%. This adjustment is primarily implemented through a 2% reduction in the allocation to US equities, which have also shown relative resilience since the outbreak of hostilities. We are also reducing European equities by 1%, as the economy of the Old Continent has historically been more sensitive to energy shocks.
This tactical adjustment is primarily aimed at preserving capital during a phase in which exogenous risks dominate market dynamics. It does not call into question our underlying analysis regarding medium and long-term economic and financial prospects.
Should the conflict be resolved in the coming days or weeks, potentially leading to a marked decline in oil prices, we would be prepared to quickly revert to the more favourable economic scenario we outlined at the beginning of the year, along with the asset allocations associated with it.
The euro reached a new low against the Swiss franc at the beginning of this week.
In light of the Swiss franc’s continued appreciation, a response from the Swiss National Bank is being closely watched ahead of its next quarterly meeting, scheduled for March 19.