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A Window of Opportunity

The first deadline for taxes come due on April 15. While this is an unwelcome event for most people, it allows you to have a closer look at your financial situation, including your investments, and reflect on whether your current wealth structure meets your needs. Once you have gone through your accounts, portfolios, and real estate, as well as annual income and expenses, take some time to elaborate on whether any changes are prudent.

Especially your exposure to foreign markets is something you should take into consideration. Studies show that an allocation of up to 30% of your portfolio will significantly reduce your wealth’s volatility. If you have less than 25% of your investments allocated to foreign investments, reach out to discuss how you can optimize your wealth structure through international diversification. That was one window of opportunity; however, stay with us, and later, we will share another one.

The world was on the edge of another financial crisis a year ago. After several regional banks in the US failed, the Swiss giant Credit Suisse became a victim of a bank run, which led to the orchestrated decision to merge with its rival UBS (although it was more of an acquisition). A year later, most of it seems to be forgotten. While inflation stays elevated, as do interest rates, investors bet against the central banks, driving markets higher. What happened to “Never Fight the Fed?” We find ourselves in an everything bubble. Cryptocurrencies are on the rise, next to stocks and precious metals. The ongoing rally does not make much sense from an interest rate perspective, but the inflation trade does, at least to a certain degree. Investors seek opportunities to get ahead of inflation by looking for investment opportunities that allow returns that outpace the loss in purchasing power. However, that trade only functions as long as companies increase their earnings. While they positively surprised so far, it is questionable how long this will remain. Remember, the effects of a contractionary monetary policy always come with some delay. Sometimes, it takes more time (especially if the fiscal policy is still expansionary).

When is enough?

Since our last publication went out, markets have continued their rally. The S&P 500 has further increased, so has the NASDAQ 100 and the Dow Jones Industrial Index. Also, the European indices have gained further. Next to the indices, we saw Bitcoin hit new all-time highs and gold as well. The inevitable question is, when is enough? Are the economies really doing that well? According to an article published by the Business Insider, about 40% of business leaders expect further layoffs in 2024, and about half the business leaders expect a hiring freeze in 2024. Among the companies cutting their workforce are IBM, Google, Discord, Citi, and Amazon. Also, in other countries, companies have announced further reductions in their workforce. While this can help boost their profitability in the short term, it will be interesting to see what the mid-to-long-term effects will be. Furthermore, the survey shows that one primary reason for the layoffs is the expectation of a recession. Considering the sentiment at the markets and recent changes in the expectations of economists towards a soft landing, there is quite a gap.

Although we have seen indices rise further, the US market's valuation has reached a level where many feel uncomfortable in staying invested for the long term. Accordingly, the holding period of equity investments is decreasing. The Buffett indicator follows a relatively simple calculation that divides the Total Market Value of US Stocks by the Gross Domestic Product (GDP). As can be seen in the graph below, the last time the market was as highly overvalued was at the end of 2021. We all know what happened to the markets in 2022. They dropped significantly.

However, looking further back, we can also see that the valuation can stay elevated longer before moving back to and below its historical trend line. Therefore, this finding should not make you sell all your investments, take your cash, and run. It shows that entering the market should be done with caution, and so should the process of choosing your investments.

While it is impossible to forecast a correction precisely, at certain times, it makes sense to stay cautious and keep some dry powder that you can use once markets fall. Nevertheless, keeping your eyes open for opportunities is crucial, although everything seems to be pricey because that is not the case. Even in the current environment of a so-called everything bubble, some industries and companies have fallen out of favor, even though they are doing a great job and have a strong track record. This anticyclical investment strategy also bears some risks since it can take on momentum and push the stock price even further down as it already is. Just as you cannot anticipate the top, you cannot anticipate the low. However, if you have done your homework and the company generates value for its shareholders, the stock will eventually regain. From our perspective, a momentum strategy where you invest in a stock just because it is on an upswing is different than what we understand as taking on responsibility for our clients' hard-earned money. The valuation of the specific stock in favor has to support the upswing. Once it is too expensive, we will not buy any longer.

Switzerland marks the Start

While central banks in developed economies stayed their course to keep interest rates constant, the Swiss National Bank surprised markets by lowering interest rates by 0.25% to 1.5%. That is correct. Switzerland’s interest rate peaked at 1.75%, and inflation reached a high of 3.5%. In the meantime, inflation has fallen back to below 2% (inflation was at 1.2% in February). Even though there are some risks for the Swiss economy to experience another uptick in inflation, the move showed the Swiss National Bank’s independence in their decision. Switzerland is exposed to other central banks’ decisions as a small economy. The European Central Bank and the Federal Reserve significantly impact the Swiss economy since these two geographical regions are our main trading partners. Accordingly, the decision to lower interest rates also relieved Swiss-based companies exporting their products and services to foreign markets. Consequently, the Swiss franc weakened against many other currencies, all and foremost against the USD and the EUR. Despite the devaluation, compared to one year ago, the Swiss franc has still appreciated against the USD and the EUR.

So…. here comes your window of opportunity

We have spotlighted the USD and the craziness of the ups and downs several times. During the last quarter of 2023, the USD experienced a weakening due to the hope of the Fed decreasing interest rates five times in 2024. On top, inflation was decelerating. As it turned out, the hope was premature, and the USD started to regain value. While we have expected this kind of countermovement, we are also convinced that this is not a fundamental change in the sentiment of the USD. We believe the USD will move lower in the long term, especially against the Swiss franc. In the short run, whether we have seen the peak or whether the USD will strengthen further is impossible to forecast. Nevertheless, the current strength in the USD provides an opportunity to lower your exposure to your domestic currency, capitalizing on the long-term devaluation of the USD. Below, we share a graph showing the USD Index that measures the USD against a basket of six currencies (Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona, Swiss franc).

USD Index / DXY

As stated, whether the USD Index will increase or already peaked cannot be forecasted. However, every forex pair must be evaluated on its own. While the USD can gain significant value against one currency, e.g., the Japanese yen, it can simultaneously lose value against another, e.g., the Swiss franc.

Other central banks will follow

Most central banks of developed countries have not yet started to decrease interest rates. While many investors expected that the Fed would make a first step towards lower interest rates this March, they were disappointed. The decision's effect on the market was ongoing pressure on fixed-income investments (a.k.a. bonds). Bond prices highly depend on investors' expectations of future interest rates. While we were skeptical about the anticipated speed in lowering interest rates, we believe that within this year, other central banks will follow the Swiss National Bank in cutting rates. The closer the first cuts come, the more upward pressure we will see on bonds. There is one exception, which would be a shock in the markets that will put pressure on all asset classes. However, that would be a buying opportunity since, as we have learned from the past, central banks will help markets by lowering interest rates quickly and proactively buying bonds and other asset classes to stabilize the markets.

Accordingly, we look for bonds from safe companies with attractive yields. In case of an overall setback, we do not panic but use the situation as an opportunity to add bonds to our clients' portfolios at even better yields.

Gold, the silent winner

Other than my expectations, gold not only kept its value above USD 2,000 per ounce but also gained further and closed the first quarter well above USD 2,200 per ounce. This is especially impressive when considering the strength of the USD. Accordingly, the question is where gold goes next. Will we see USD 2,500 per ounce? We do not know. The USD is already considerably strong, and markets are reaching new all-time highs over and over. Both would indicate a weaker gold price. However, this is not the case. From a theoretical standpoint, considering the markets’ highs and the strong USD, gold's only direction from the current position would be upwards. However, if you take the same measures for the last quarter, gold should trade lower than it does. Such developments teach especially investment managers as myself humbleness.

Besides the gold price, we have observed the mining industry lagging hugely behind the development of precious metals prices. Recently, we have seen a slight uptick. However, there is still a way to go until miners reach levels comparable to what we saw in 2011, 2016, or 2020. Silver also made an effort to catch up with the gold price. The current gold-to-silver ratio of about 89 is still astonishingly high. Platinum itself also made some efforts to trail higher with limited success. The only good news on platinum is that the downward risk seems as limited as its recent performance.