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Market Insight 2012 Q2 Geneva

Swiss investors are not yet convinced about the recovery of the global economy; 41% of them have negative views on the macroeconomic outlook, while 41% are undecided (see table 3). With funds’ performance deteriorating during this uncertain time, investors have started the year looking for more return in their portfolios by being less risk-averse.

Our research showed investors are keen to use exotic investments to do so, as opposed to last year, when cash investments were preferred as it allowed them to be more flexible during turbulent periods. This is backed up by figures from the Swiss Fund Association (table 1) where cash experienced outflows.

Low coupons, coupled with high inflation rates during the past few months, have triggered negative net returns. With the ECB and Federal Reserve keeping interest rates at record lows, it has not been easy for investors to get positive returns from conservative fixed income products.

 

News Roundup
• Government plans to extend the due diligence requirements of banks and improve assistance on international tax matters have been greeted with scepticism by the Swiss press.
• Eleven Swiss banks are under scrutiny from the US authorities for allegedly aiding tax evaders. An investigation launched in January helped bring down Switzerland’s oldest private bank, Wegelin.
• If the European Commission proposal to tax stock, bond and derivatives trades is introduced, Switzerland would also benefit hugely. The levy may raise billions of dollars in badly needed revenue. But the concept has drawn fierce criticism.
• The Government has demanded UBS and Credit Suisse should hold enough capital to prevent them becoming a failure that would drag down the economy.
• Switzerland’s biggest bank, UBS, reported a chf 3.3bn ( € 2.7bn) fall in profits to chf 4.2bn ( € 3.51bn) last year in the wake of a rogue trading scandal.

Hot Topics
What everyone is talking about
• Fixed income – what’s the next step?
• Equities – where into the emerging markets?
• Commodities – what to expect from gold
• High Yield – corporate or government?

Risk management

Strategically, investors have kept a major part of their portfolios allocated to conservative management – in low-risk fixed income products such as US investment grade bonds, Nordic bonds or AAA-rated companies from core Europe. On the other hand, our research showed investors are taking on more additional risk to extract returns from the markets. However, they strongly indicated they prefer to use Ucits vehicles for such investments.

Market share

Products such as short-term high- yield bonds (at 3-5 years maturity) are of interest, particularly corporate debt within the EU and US, but also emerging markets with a focus on Asia. In 2011, during the first six months, equity funds’ market share beat bonds by approximately five percentage points.

In December 2011 (see table 2), equities and bonds are almost in balance. Money-market funds’ share remained stable over the past year along with mixed asset funds (around 13% and 12% respectively – see table 2).

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Global equity funds

The balance and flexibility of global equity funds appeal to Swiss investors. Emerging markets equity brings sustainable returns while developed countries equity have a real potential to rally. Swiss equity funds have more than chf 196bn (€ 163 bn) in December 2011 (see table 1).

Swiss investors are split between a positive or negative view regarding EU equities. According to our research (see table 5), 45% of them believe they will allocate more money to this type of asset class within the next 12 months, while 40% do not.

Broader appetite

According to those with a positive view, Europe has become an attractive market where good deals and opportunities can be found. They hope to benefit when broader appetite for European equities returns.
Nonetheless, a fear of debt crisis contagion is still in investors’ minds and will be watched closely. For this reason, emerging markets equities are deemed the place to be.

US and EM equities

Swiss investors we interviewed as well as investors from boarding countries expect to increase their weighting to US equities in the next 12 months (table 5).

As highlighted, emerging- market equities are very attractive with BRICs being the favourite, especially China. They prefer to be invested in US dollar denominated funds to limit exposure to less liquid local currencies.

Bonds

Swiss market bond funds almost gathered chf 200bn ( € 166bn) in December 2011 (table 1), slightly more Than in November 2011. As Swiss investors are trying to generate higher returns, corporate high yield has been mentioned as a good alternative with which to do so. Some 53% of investors are ready to increase their exposure to this asset class during the next 12 months (see table 4).

Investors consider emerging market sovereign debt more attractive than developed market debts. According to our data, a significant number of German investors (see table 4) are keen on increasing their exposure to high yield, even though the majority are undecided at this stage.

Gold

Investors feel that, with interest rates at an all-time low and inflationary pressures caused by higher commodity prices and several rounds of QE from the Fed and the ECB, the US dollar might be devalued. This will result in increasing exposure to gold, with some saying it might hit $2,000 an ounce.

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tom@ybc.tv

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