Expecting a slowdown in economic growth will most likely lead to a reduction in corporate gains. So far, companies were able to pass on price increases in raw materials to their clients. Additionally, managers try to keep their profit margins by letting off employees and transform their production to more efficiency. Not everyone will be successful in this environment and will be able to keep the profit margin on a high level. However, there will be firms that find ways to become more price efficient or increase their product or service’s quality to a level which increases the consumers willingness to pay higher prices. Long story short, “Cash is King!”. Accordingly, it is crucial to look out for companies that generate a cash flow that enables them to run their business, invest for the future, and if the time is ripe to acquire one or the other company to either grow their market share or use synergies.

Many people are worried that we are back at the Great Financial Crisis. While we are convinced that history does not repeat itself, it often rhymes. The risks that result out of central banks rising interest rates in light-speed are not new. We believe that the decision of the central banks to raise interest rates has been the right one but that they clearly underestimated the inflation and thus started too late. However, not only was it a misjudgment of inflation rates, it was also a misjudgment that the Modern Monetary Theory could work. That is something we and many others have warned from repeatedly. After more than a decade of ultra-low interest rates, many market participants have forgotten how to behave in an environment of rising interest rates.

As we navigate through uncertain times, one phrase that has stood the test of time is "never fight the Fed". This adage is a reminder that the Federal Reserve holds significant power over the direction of the economy and the markets. Its decisions can have a ripple effect across industries, asset classes, and global markets. Understanding the Fed's role and its impact on the economy and markets is crucial for investors and traders alike. Nevertheless, it seems like in 2023 investors have completely thrown this saying out the window. Investors have been optimistic this year despite the Federal Reserve's decision to raise interest rates, believing that the rate-raising cycle may be over and we’re in for a soft-landing. The Nasdaq stock market is up nearly 15% this year, after posting its best January since 2001. While some believe that this is the beginning of a new bull market, we are of the opinion that this is just another bear market rally and that we will continue to experience ongoing market volatility for the time being.

We hope you had a wonderful start to 2023! The beginning of a new year is always a great opportunity to look ahead and share our assessment of what to expect in the next twelve months. Before we do that, however, we would like to look back with a quick look at the most meaningful charts of 2022.

Earlier this month the FED held its latest press meeting where another interest rate hike of 0.75% was announced. This was the fourth consecutive rate hike. During the press conference, a reporter asked about the expected positive reaction from the stock market to the announcement (it turned out after the conference the stock market has not reacted positively to the rate hike news at all) and Powell replied: “…We have a ways to go. And the last thing I'll say is that I would want people to understand our commitment to getting this done. And to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon….”. This statement led most market participants to conclude that the FED is going to continue tightening for quite some more time. Consequently, while we do already asses the current situation as a technical recession, we do expect that in 2023 a formal U.S. recession will be announced and generally accepted.

After inflation started to pick up last year due to supply chain issues, the war in Ukraine started threatening western stability even more. Long story short, we slid from one crisis into another, and then another. Investors, governments, and central banks seem to have erased the concept of economic cycles from their memory. They desperately try to dispute and fight an economic contraction, which is a normal, sometimes even healthy, short-term development. We are convinced that big economies such as the U.S. and the European Union (EU) are in a recession already despite them trying to change the definition in an effort to make the situation look less dire. Nonetheless, it is important to not let fear take over our decision-making abilities and long-term investment strategy. Times of crisis, no matter how painful they may be, also always offer opportunities.

It is done… after a challenging first half of the year, the U.S. economy added an overwhelming 528,000 jobs in July and brought the unemployment rate down to 3.5%. Additionally, the consumer price index rose by “only” 8.5% instead of the expected 8.9%. Having this news in mind, one could think that the technical recession (two consecutive quarters of negative GDP growth) in the U.S. is already resolved. However, on the other side, we are hearing that big companies like Amazon, Shopify, or Microsoft started sending blue letters to their employees and will probably continue to do so. These days, there is many different, mutually contradictory news out there. This can be frustrating when trying to make sense of the current global situation.

Managing the markets has not been easy in the last two and a half years. Who would have thought that after a global lockdown markets would immediately start a new rally bringing them to all time highs? It was clear to us that this rally could not be sustainable. When the markets started to tumble this year, many financial advisors started shouting that now is the time to “buy the dip”. If you had followed their strategy, it would not have ended well so far.

This year, making the right investment decisions has been quite challenging. Markets are down double digits year-to-date. The game was therefore not about gaining the most but about losing less than everybody else. Investors are unsure about how to position their portfolios. While some say that this is the beginning of a bear market, others state that the current weakness in the markets is a buying opportunity. We believe that the current downward movement will not be reversed until there is a mutual effort to change something about the current situation. Accordingly, from our perspective counter-movements represent opportunities to get out at a better price instead of giving confidence that the markets go up further. However, there are always exceptions where it makes sense to stay invested or even take in new investments.

Having conflicts and wars going on somewhere around the world is not unusual. The Correlates of War Project states that there has been no year without war since 1816. We would like to take the opportunity to share our perspective on the effect this war has on Switzerland’s economy paired with some historical insights about how Switzerland managed to navigate through previous wars and conflicts as well as potential investment opportunities that arise from the situation.

As we move through 2022, it becomes very clear that the heightened inflation numbers are not a trifle but are something that should be followed closely. Why is that? While central banks were chasing inflation during the last three decades, now as inflation finally arrived, it seems they did not see it coming. Let's take a look at the kinds of inflations we see out there and how to wade through them.

First and foremost, I want to wish you and your loved ones a very Happy New Year! If we learned one thing in the past two years, it is to be grateful for what we have because we do not know how long the nice things last. Keeping our focus on the financial environment, there were different surprises that might have brought up doubts about how markets work. While it is important to stay open-minded to new developments, the environment we have lived through during the pandemic is everything else than representative of how markets usually work. Thinking back to pre-coronavirus, discussions about helicopter money were more of a theoretical construct. Now, however, governments sending out cash to the people, covering losses that usually are borne by banks and insurance companies, and governments working hand in hand with central banks have become normal.

After the markets broadly corrected during September, they once again recovered relatively quickly. Accordingly, we are seeing new record highs once again. Investors may ask what is going on at the markets. While a clear answer is impossible to give, we believe that it has to do with the enormous amount of money in the system. Some investors missed performance because they were convinced at the beginning of 2021 that the recovery could not endure the way it has over the year. We had a similar perspective. Some of them lost their patience and used the correction in September to get back into the markets. However, we believe that changing the strategy due to frustration is the wrong move. We feel that the situation did not change for the better. Despite the markets rising, there are several new risks like the real estate market in China, the rise in inflation, and the rising tensions between China and the U.S., and Japan due to their provocations of Taiwan.

After observing one high after another at the stock markets, the indices broadly turned red in September. How severe this correction will become is still unsure. Amongst others, the insecurity comes from mainland China, where the property behemoth Evergrande became incapable of making interest payments on their outstanding bonds. However, the tremendous amount of debt carried by Evergrande was nothing new. While the risk of the collapse of Evergrande is not comparable with the Lehman crisis back in 2008, according to different experts in this field, there are threats that, due to the current development, other countries will be affected by as well. Australia in particular is at risk of losing part of their commodity delivery, especially iron-ore, because of unrealized property projects.

Despite the worries about the Delta variant, it seems that, broadly, markets move independently. However, following the reporting period, many companies were able to present results that are even in line with the expectation at the beginning of 2020 before COVID-19. Accordingly, over 50% of all companies listed on the S&P 500 and the STOXX Europe 600 received a buy recommendation. However, not all industries are that lucky, talking in particular about travel and leisure. There, you will find companies that have changed into sideways movement with some tendency of a downward motion. They still trade considerably below their highs reached right before the pandemic measurements hit the economy. Accordingly, quite some potential remains should the borders open again, and tourism becomes broadly possible.

Switzerland currently shows its qualities in many aspects. The International Monetary Fund praised Switzerland for how it traversed the economic implications of the current financial crisis. 2021 also showed a wonderful display of the underdogs conquering giants, as Switzerland was able to defeat the current world cup champions of France in soccer in the European championship. It is a very big deal for the Swiss, as they will move on to the quarterfinals, an accomplishment not realized in nearly a century by the small Alpine nation. However, despite these pleasant pieces of news, the globe is still facing a variety of challenges...

As mentioned above, we believe that European markets should be favored over US markets. While the MSCI US stands around 50% above its long-time average, the MSCI Europe is 15% above its long-time average. In our perspective, this development is not a short-term play but has the potential for a sustainable change. The biggest risks we see for the American market are the various expensive programs that might result in higher taxes for companies and maybe even wealthy Americans. Furthermore, the tech companies were the main contributor to the US markets in the last decade. The Biden administration however might bring on regulatory requirements that have the potential to lower the gains. Not only the US government has a problem with the market power of these companies but the European regulators too. On the other hand, due to the lower expectations in Europe, the possibility to surprise positively is higher than in America where the expectations are already very high.

Central banks have a problem. No matter what they do, investors are not satisfied… This is at least the idea you get when reading the central bank’s publications and the reactions at the stock markets. However, maybe this statement reveals a deeper laying issue. When thinking about the central bank’s functions you will find a variety of duties but nowhere will you find their raison d’etre as pleasing investors. Looking back at the last decade, this fact can easily be forgotten. Printing endless money and keeping up purchasing programs did please investors. But not necessarily the general public.

We see the rally at the stock markets continuing on. Despite the warnings of many economists and experienced investors, markets continue to rise further. Big tech companies that seem to lure people away from reasonable evaluation models lead the rally, just as we saw in 2000. To make matters worse, we see many young and inexperienced retail traders being swiped up in the frenzy, leading to events like the spike in companies like GameStop, AMC, and Blackberry. On top of that, we see ridiculous volatility in penny stocks and cryptocurrencies by people on the hunt for quick money. It looks like everybody is meant to be rich.

First of all, we wish you and your loved ones a very Happy New Year and would like to take the opportunity to express our gratitude for having such a loyal readership! If you feel that your family and friends could profit from our Swiss perspective as well, please feel free to share our newsletter. Also, if you feel that there are certain areas we should work on to provide even more value to you, please let us know!