«If everyone’s right, a drama will follow.»(Hans Ulrich Bänziger, Swiss psychologist and author)According to the Nash equilibrium in game theory, developed by mathematician and Nobel Prize winner John Nash, the stakeholders in the Greek situation will hold fast to their positions. Neither party will move from its position because both assume that the other will give in sooner or later. On one side, creditors insist on their right to collect the debt that is due; on the other, Greek borrowers assert their right to solidarity. But ‘right’ doesn’t necessarily mean ‘correct’. As in a game of chicken, creditors and borrowers are headed straight for one another, each hoping that the other will veer off just before they crash. If both parties are firmly convinced that they are right, the stage is set for a drama. Although the last quarter wasn’t quite a drama for investors whose reference currency is the Swiss franc, it wasn’t very positive either. The MSCI World global equities index was nearly unchanged at the end of June compared with the end of March, but this resulted in a loss, as the dollar depreciated by nearly 4% against the franc over the same period. However, investors who calculate their returns on an annual basis and in francs could still record a positive return: stocks in Switzerland and abroad gained 5% and 7%, respectively. Assuming interest rate and currency risks and the search for diversification have not paid off for Swiss investors. Foreign currency bonds posted a loss of 2% over 12 months, while raw materials fell by 21%. Investments in franc-denominated bonds and Swiss real estate recorded a healthy increase over one year of 4% and 13%, respectively, although in the second quarter of 2015 they fell by 1% and 5%, respectively.
Everyone is talking about Greece, and the media is brimming with data, speculation and predictions. We might be tempted to go along with the crowd, come up with new ideas and anticipate the possible market reaction. However, firstly, this does not seem possible for us, and, secondly, we are concerned that the wrangling over Greece could distract from a gathering storm in another direction. Following a robust rally on the Shanghai stock exchange over the last 12 months, Chinese equity indices have fallen sharply from mid-June. The price decline of more than 30% represents a loss equal to the market capitalization of the entire German equity market. Although mainland China’s stock market has virtually no links to the rest of the world – less than 2% of the stocks in question are owned by foreign investors – there is a danger that this will have a negative impact on Asian economic performance and thus, indirectly, on the global economy as well.
|Asset Class||Index||Return |
|Equities World||MSCI World Net USD||0.31%||1.43%|
|Equities Switzerland||Swiss Performance Index||-2.39%||5.48%|
|Bonds World||JPM GBI Global Traded TR USD||-1.68%||-7.46%|
|Bonds Switzerland||Swiss Bond Index AAA-BBB TR||-0.93%||4.22%|
|Commodities||Thomson Reuters/Jefferies CRB TR USD||7.23%||-26.28%|
|Real Estate Switzerland||SXI Real Estate® TR CHF||-4.86%||12.88%|
|Exchange rate EUR/CHF||-0.15%||-14.18%|
|Exchange rate USD/CHF||-3.81%||5.48%|
- the low interest rate policy pursued by central banks continues to push investors from nominal assets, such as cash and bonds, into stocks. According to a survey by the industry organization Swiss Funds Association (SFA), investors held 39% of fund assets in equity funds at the end of May 2015. Our analysis revealed that this is the highest level since data was first collected in 1998. The analysis also showed that with an equity component of 36% or more, the returns of the Swiss Performance Index (SPI) were negative in four-fifths of all cases in the subsequent 12 months.
- Furthermore, the six-month period starting on May 1 is usually a period with an unfavorable risk-return ratio for equities. Data from over 100 years shows that the six months from the beginning of May to the end of October are characterized by both higher risk (based on daily fluctuations) and lower returns (based on daily returns).
Our caution during the first half of 2015 gave way to a temporary confidence at the end of June. Markets gained momentum as a result of the consolidation over the previous few months. As a result, we switched from an underweight to an overweight position in real assets. However, our indicators worsened again in mid-July 2015. We responded by reducing our weighting in real assets to a neutral level.
Global financial markets – review
(See previous table)
Globally, equities inched into positive territory, with a narrow increase of 0.31% by quarter end on June 30. This modest growth occurred mainly thanks to Asian stock markets, with Japan’s Nikkei Index and the Hang Seng in Hong Kong both posting returns of more than 5%. European stock markets, by contrast, were dragged down by developments in Greece. Germany’s leading DAX Index fell by 9% from April to June, while the Euro Stoxx 50 declined by 7% over the same period. With a decrease of 2%, the Swiss Performance Index almost managed to hold its ground, while in the US the S&P 500 was unchanged in the second quarter.
Globally, the historically low interest rates have encouraged borrowers to issue long-term bonds with coupons near zero. Accordingly, the duration in the indices has gradually risen, leading to an increase in the inherent interest rate risk over recent months. Subsequently, the slightly higher interest rates at the long end of the yield curve have led to a quarterly loss for bonds denominated both in Swiss francs (-1%) and in foreign currencies (-2%).
Commodities prices showed a clear turnaround in the past quarter from their long-term downward trend. As a result of the quarterly increase of 7%, the loss over 12 months stabilized at 26%. However, the recovery in the commodities markets will probably not last long. The price slump on the Chinese stock markets from mid-June heightened the persistent concerns about the economic growth of the world’s largest importer of raw materials. If China’s economy continues to cool, demand for commodities will also decline sharply.
The months-long rise in the premium (the amount paid over the net asset value) for Swiss real estate funds came to an abrupt standstill in the last quarter. Profit-taking led to a loss of 5%, but calculated on an annual basis the index still posted a double-digit rise of 13%. US real estate funds had a tougher time, falling by 10% from April to June and with an annual performance of now only 4%.
Despite the crisis in Greece, the euro stabilized against the franc. The advantages and disadvantages of a Grexit appear to have about the same number of backers, and accordingly the EUR-CHF exchange rate remained unchanged in the second quarter. The single currency even strengthened against the US dollar by just under 4%.