Recent developments

The surprising failure of OPEC+ to reach an agreement on oil production cuts over the weekend dealt a negative blow to already ailing financial markets. After the price of crude oil fell by up to a third from Friday to Monday, the stock indices also started the new trading week with substantial declines of up to 10%.

Oil prices at such low levels were last seen in 2015 and 2016, giving cause for concern that highly indebted oil production companies, especially in the US and the sub-sectors of fracking and oil shale/sands, could run into difficulties. In addition, the very positive sentiment of US consumers, which is based on full employment, could suffer from lay-offs. However, as recently as Friday, a very good jobs report was released by the U.S. Department of Labor, which shone with the creation of 273,000 new jobs outside of agriculture and an unemployment rate of 3.5%.

 

Current facts

    • Equity indices have fallen by up to 20% since their highs, bringing attractive valuations with dividend yields of 2.5 to 5.0% on average.
    • Yields on 10-year government bonds fall to all-time lows at plus 0.35% in the USA, minus 0.86% in Germany and minus 1.04% in Switzerland.
    • At almost 7%, the US dollar is trending weaker against the euro compared with this year’s high of under 1.08. The Swiss franc and Japanese yen are the strongest among the major currencies, rising to multi-year highs.
    • Gold reaches more than USD 1,700, an increase of about 45% in just over 18 months.
    • Interest rate spreads between investment grade and non-investment grade bonds widen but remain at levels only marginally above historical averages. Only slight increases in default rates are expected. Small and medium sized companies in cyclical sectors will be most affected.
    • Sentiment indicators on Fear and Greed (2 out of 100 points) and Volatility (>60%) signal significant oversold values, which historically have been buy levels.

 

Changes in the balanced portfolio

    • Reduction High Yield Emerging Markets (minus 2.0 to 2.5% weighting) in favour of cash (thereafter between 9.5 and 12.5%)
    • Unchanged equity investment ratio at 43.5% in balanced portfolios. As the risky sectors of energy, financials, automotive, travel and tourism are mainly avoided, no immediate sector adjustment is necessary. The focus on companies with strong growth and stable cash flow continues to drive our equity strategy.

 

Immediate outlook

In anticipation of the meetings of the ECB this Thursday and the Federal Reserve next Tuesday and Wednesday, the equity allocation could be increased to 46%.

We view equities, alongside gold and real estate, as one of the asset classes justifying a much higher weighting to cash and bonds in a historically low interest rate environment.

We remain positive for real assets in the long term and regard current developments as temporary in the first half of 2020, which will bring with it a technical but not a sustainably substantial recession.

Christian Tury