Download Our investment approach in the current market environment

Our investment approach in the current market environment
Zuger Kantonalbank focuses its portfolios rigorously on the long-term anticipated market environment. In this conjunction, attention is paid in
particular to long-term interest rate trends and anticipated growth. This is in order to base its decisions on the soundest possible foundations.
Rise in interest rates foreseeable
In response to the 2008 financial crisis, central banks around the
world cut their key lending rates to levels in the region of zero.
In addition, they also bought up substantial volumes of government
bonds. Huge quantities of money were pushed into circulation in
order to prevent a depression such as that seen in the 1930s. As a
consequence, interest rates remain at record lows. In 2014 the Fed
(US Federal Reserve) is planning to reduce its bond buying programme.
This programme is currently buying around 40 percent of all newly
issued government bonds. In addition, the possibility of an initial rise
in key lending rates has been put forward for the year 2015 or
2016. By then, the US Federal Reserve is planning to withdraw entirely
as a buyer. This should lead to higher interest rates. In Switzerland,
bond rates have experienced a trend turnaround. On the one hand,
demand for Swiss bonds has fallen as Eurozone growth picks up.
On the other, a steady rise in inflation means that the very low yields
generated by bonds are becoming increasingly unattractive for
investors. The resulting decline in demand is likely to push interest
rates higher.
Recovery in demand producing strong growth
The austerity measures in the Eurozone are increasingly producing the
desired effects, and have enabled Italy, Spain and Portugal to reduce
their structural deficits markedly. As a consequence, the focus of attention has been shifting towards growth-boosting measures. In addition,
unemployment levels appear to be stabilising. In fact, this is actually
declining in France and Spain. This means more stable incomes and
budget security for an increasing number of households, which will
boost consumer demand. As corporate capacity utilisation remains low,
it will be possible to respond quickly to higher demand, causing a
direct rise in growth. Provided that austerity measures in the Eurozone
are not tightened further, we are expecting this region to produce
above-average growth in the coming years. Switzerland will also profit
from this. In step with the pick-up in demand in Europe, the United
States are also experiencing an economic upturn. This is attributably
partly to the stabilisation of the US housing market. This sector, which
is crucial to the economy at large, has bottomed out and the real estate market is now slowly returning to the path of growth. At the same
time, the US government is set to boost its investment activities. Over the
coming years this should be able to continue rising, at the expense
of the budget deficit, thus facilitating higher government demand.
Maturity yields in Switzerland and abroad
Growth in percent
5
5
4
3
4
2
1
3
0
–1
2
–2
–3
1
–4
–5
0
1/1/2005
1/1/2010
1995
1/1/2015
2000
2005
USA
Real GDP
Switzerland
W&P Economic Climate Indicator
Germany
2010
2015
8163–0715
Repercussions on the portfolios
These long-term trends are also reflected by the portfolios of Zuger
Kantonalbank. In the medium term, rising interest rates will make bonds
more attractive. In order to minimise the interest rate risk, though,
money market investments and bonds with short maturities continue to
be favoured. The portfolios of Zuger Kantonalbank also contain precious metals, commodities and real estate investments. These will provide protection against possible increases in inflation, should central
banks prove unable to withdraw excessive liquidity from the economy
sufficiently quickly. Equity markets should profit from strong economic
growth. This is because stronger demand leads to higher sales of goods
and services, and ultimately to earnings growth at producing companies. This will then be reflected by higher equity prices.
Current portfolio matrix
Weak
economic growth
Strong
economic growth
Rising
interest rates
Money market
Precious metals
Commodities
Real estate
Equities
Sinking
interest rates
Bonds
Equities
and some
bonds
Current market environment
Research-Partner