The previous winners stumble at high hurdles

It's not just the Olympic Games in Paris that are getting everyone into a sporting mood – there's also a lot going on in the financial markets. It's important to react to this. Gold, on the other hand, is also shining at the highest levels.

Stefano Zoffoli

Equity valuations remain sporty (Image: iStock.com)

The financial markets are currently defying the usual summer slump. With the attempted assassination of Donald Trump, Joe Biden's withdrawal from the race for the US presidency, the massive sector rotation, the heavy losses in the previous winners of the current year such as technology or in the Japanese Nikkei, there was plenty to talk about for all investors who didn't go on holiday.

Revival of the outperformed defensive stocks

However, this was not the only reason for movement on the stock markets. Due to the 3% lower inflation figures in the USA and the sudden weakness in the US labour market (4.3% unemployment), the market has, on the one hand, once again priced in more future interest rate cuts by the US Federal Reserve. On the other hand, however, economic fears are also weighing on cyclical companies. Since the publication of the inflation figures on 11 July, for example, defensive consumer goods have risen by 3%. This is in contrast to the largest American IT stocks, which have lost 10% on average. Nevertheless, the market breadth has improved as a result, which can be interpreted as a positive signal.

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Chief Strategist Stefano Zoffoli comments on the tactical asset allocation for the month of August.

The bulls are wavering

On the negative side, however, valuations on the global equity markets are close to the record levels of the post-corona period with a forward-looking price/earnings ratio (P/E) of 19 and racy profit expectations. Furthermore, despite the withdrawals in recent days, investors' positioning in equities is still high. Until recently, surveys were dominated by the "bulls", but they have now begun to waver.

In view of the seasonally difficult months of August and September, we are therefore reducing our equity allocation and thus ending our overweight. Regionally, we continue to favour the Swiss, UK and emerging markets over the eurozone and the USA. In contrast, we are not making any changes to bonds; we remain heavily overweight in global government bonds compared to the very expensive Swiss franc and corporate bonds.

How do we currently assess the financial markets and how are we positioned?

  • Sector rotation is becoming more pronounced. However, potential winners and European stocks are experiencing significant turnover problems in China.
  • We therefore favour US companies in the shadow of the ‘big tech’ stocks. This is because they have better earnings momentum and, with a P/E ratio of 17, are not as expensive as the large US IT companies (P/E ratio 30). To achieve this positioning, we use the equally weighted US index instead of the traditional weighting by capitalisation.
  • The discrepancy between the equally weighted index and the market capitalised index is historically extremely pronounced, both in terms of price gains and valuation. However, the gap is likely to close to some extent in the second half of the year.
  • In return, we are selling shares in energy companies and stocks from the eurozone. This is because the former are suffering from the weak oil price. Eurozone stocks, on the other hand, are being weighed down by the weak economy in China and the threat of new trade tariffs.
  • Since the 20% bull run last March and April to USD 2,400 per ounce, the gold price has been moving sideways. Although the attempt to break out to USD 2,470 in mid-July has failed for the time being, we expect a sustained upward trend.
  • After the central banks have long been regarded as the price drivers for the yellow metal, the positions of exchange-traded index funds (ETFs) are now also increasing; it seems as if private investors are jumping on the bandwagon.
  • We expect lower real interest rates in the US (compared to currently 2%), while concerns about sovereign debt and geopolitics are likely to continue to dominate.
  • We are buying gold and moving back into an overweight position.
  • Listed property funds in Switzerland have recovered from the interest rate shock. Since the low in October 2022, they have gained an average of 25% in value. With a premium to the net asset value of around 20 per cent, the valuation has now also returned to the historical average.
  • The various capital increases were absorbed surprisingly well, and capital has also flowed back into the market. The low interest rates in Switzerland have certainly helped in this regard.
  • However, we are now facing very difficult months due to seasonal factors: Interest rates in Switzerland are unlikely to fall much further. We have therefore sold 1% of our position and are now tactically slightly underweight.

Tactical Asset Allocation in August 2024

Relative weighting vs. Strategic Asset Allocation (SAA) in % in July and August 2024 (Source: Zürcher Kantonalbank, Asset Management)

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Investment Strategy