To start, we want to take a moment to honor Switzerland's performance at the European soccer championship, where we proudly reached the quarter-finals by winning against the previous European champion, Italy.

Other than that, the first half of the year was characterized by less joyful events. The wars in Ukraine and Gaza are still ongoing. Despite that, stock markets reached new all-time highs. Furthermore, the US dollar returned to some strength, and central banks fear lowering interest rates too soon.

Furthermore, as the US presidential election gains momentum, we witnessed the European parliament election in June. The rise of conservative parties in almost every European country raises questions about the future political environment. Whether this shift in sentiment is a lasting change or a short-term countermovement remains to be seen. In France, this shift prompted President Emanual Macron to call for new parliament elections, with the first part held on June 30.

The Markets Diverge

The S&P 500 and the NASDAQ 100 continued their rally, most other indices have either been flat or come back in value. One exception to this is Japan’s NIKKEI 225 index, showing a comparably outstanding performance to the NASDAQ 100 year-to-date. On the downside, the Japanese yen lost 12.33% against the USD this year after losing value against the USD in 2023 already. The most successful sector is still technology, followed by communication. We find real estate and basic materials on the other side of the spectrum. Furthermore, momentum, growth, and large caps continued to do well while value and small caps lagged in this development.

This analysis underscores a concerning trend: the performance of large companies does not necessarily reflect the overall economic well-being. While this may work for some time, it could lead to small-cap companies being forced to lay off workers, further reducing consumer sentiment. This potential impact on the broader economy is a cause for concern.

However, the question following performance is how to relate it to market valuation. According to Bloomberg, the French market shows the lowest price-to-earnings ratio and the lowest price-to-book ratio. The UK market shows a slightly lower price-to-sales ratio. It is also worth recognizing the high P/E ratio of the NASDAQ 100 as well as the S&P 500.

Another interesting fact is the percentage of citizens who own investments. In the United States, about 61% of the people, in one way or another, own stocks. This is the highest percentage since 2004. To put this into comparison, in Germany, the part of the population that is invested in the stock market represents only about 17.6%.

It is unlikely that people will sell off their investments in their 401(k), IRA, or other form of retirement plan. However, people may reduce investments held through brokerage accounts once funds are needed due to a lack of remaining savings. According to Deutesches Aktieninstitut, this was already observed in Germany in 2023. If that portion is as significant as it is in the US, it could trigger a potential market chain reaction. Considering the portion in the US, such a development could have significant market impacts.

Furthermore, chances are that most of these people do not have the time or interest to follow the markets closely, so they invest in the shares or indices that are most well-known and accessible. These are the S&P 500, NASDAQ 100, and the Magnificent Seven.

Too Much Debt BIS Warns

As the world’s economies enjoy disinflation, the nations debt has reached levels that give them little leeway for potential accidents. According to the Bank for International Settlement (BIS), one major risk is the historically high private and public debt levels that lead to drastically reduced monetary and fiscal policy headroom (BIS Annual Economic Report 2024). Furthermore, the BIS acknowledges that households are decreasing their savings further, which they built during COVID.

On another note, the European Central Bank (ECB) urges its members to cut high debt levels. Of the 20 members, France and six other countries were reprimanded by the European Commission for breaching EU fiscal rules (ECB urges Eurozone countries to cut high levels of debt (ft.com)). Furthermore, expectations are that government spending will tend to increase further due to stipulated challenges that are coming up within the next decades.

Government Debt is Safe until it isn’t

The increasing debt levels from certain developed countries in Europe put investors’ patience to the test. The same is true in the US, where the debt service costs are expected to be 3.1% of GDP this year. In 2023, it was 2.4%, an increase of 30%. The highest level since 1962 was 3.2%, reached in 1991. Furthermore, the budget deficit for the US is expected to be 5.3% of GDP in 2024 after 6.3% in 2023. In France, the budget deficit 2023 was also north of 5%, while the European Union rules allow a maximum of 3%.

The main issue is that the current development gives little hope that the debt levels and the debt servicing levels will sustainably decrease anytime soon. That has already led to reactions from big international investors that have decided to significantly reduce or even get rid of French government debt (Big investors steer clear of French debt as government finances creak | Reuters). They argue that they feel underpaid for the risk they take by holding French government bonds. While it is much harder to ignore the US government bond market entirely, chances are that sooner or later, investors will follow suit by reducing their exposure to US debt. This would probably put pressure on the rentability of Swiss government debt as we are one of the few countries with a debt-to-GDP ratio of about 40 percent. Meaning the debt yield would sink further due to higher demand.

Given the current situation, we continue to favor corporate debt over government debt. Corporate bonds often offer higher yields and more manageable risks. However, it's crucial to conduct thorough due diligence before investing in a corporate bond, as it's essential to be fully aware of the associated risks. This is equally true when investing in a company's equity, if not more so.

What this means for Currencies

While high government debt levels can strengthen their currency in the short term, it usually ends in a devalued currency. Governments proactively increase their debt levels to finance specific projects such as the US Chips and Science Act, the US Inflation Reduction Act, or the European Green Deal. A higher interest rate is usually the first consequence of higher fiscal debt levels.

Higher interest rates generally attract international investors because they get a higher yield on their government bond investments. However, over time, concerns increase about how the government will be able to pay its debt, if at all. Governments print money when tax money is insufficient to ensure its liquidity. That again raises concerns about the value of the currency itself. Eventually, investors move away from the investments and look for alternatives that might give them a lower return but also a lower level of risk.

From our perspective, we are right on track for this development in some European countries and the US, which is one of the prime reasons for our overweight in the Swiss Franc.

Cryptos: The Holy Grail

Since the SEC approved the first Bitcoin ETFs earlier this year, the price of Bitcoin has doubled. In addition to these ETFs, the crypto community was highly enthusiastic about the Bitcoin halving event in April. Some prominent figures in the crypto space predict that Bitcoin could reach USD 1.5 million by 2030. Currently, Bitcoin has stabilized between USD 60,000 and 70,000.

The next significant development is the Ethereum ETF. While the SEC approved a first step of Ethereum-backed ETFs in May, the larger rollout was anticipated for July 2. However, on June 30, the SEC requested that applicants revise their S-1 forms, setting a new deadline of July 8. As a result, the approval of Ethereum ETFs is likely delayed until at least mid-July.

What to Expect from Precious Metals

After a period of volatility, precious metal prices have stabilized near record highs. Gold is currently trading around USD 2,300 per ounce, while silver fluctuates around the USD 30 mark. Meanwhile, platinum is striving to surpass the USD 1,000 per ounce threshold.

The future of gold, in particular, hinges on interest rate decisions. If central banks can achieve a soft landing by reducing inflation to 2% without causing economic disruption, they might lower interest rates, which could decrease the appeal of gold as other investments become more attractive. Conversely, if central banks, especially the Federal Reserve, are compelled to lower interest rates due to economic instability, gold is likely to soar to new all-time highs.

Accordingly, we assume that we will see some volatility in the precious metals’ prices in the second half of the year. Due to the insecurity that goes along with economic development and the interest rate decisions especially from the Fed, we are seeing some risk of precious metals prices going at least through a correction. As mentioned, if the interest rate decision is caused by a recession, chances are that gold, silver, and cohort will participate in the markets correction before they regain strength. If the decision is a consequence of a soft landing, we expect precious metals to lose relevance for the time being.

To conclude, we find ourselves in a rather challenging situation where the US market, especially, could build on the previous year’s success. Historically speaking, a solid first semester is usually a good indication for a second robust semester. Additionally, the presidential election can boost the markets further. However, observing the investors’ behavior towards the end of the first semester, we can see that they are alert, waiting for further signs that give them confidence. While we emphasize this approach, we are keen to see whether this insecurity will create new investment opportunities.