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Investment Report

Area of low pressure with occasional showers

Economically sunny, politically overcast, is a good summary of financial markets during the second quarter. In places, equities managed to recover some ground from the dive in the first quarter, whereas bond prices partially continued their slide. Gold found few friends, alternative investments attracted little attention.

Economy still on course

In the past quarter plenty of factors were at play for financial markets to either rejoice or get het up about. The summit with US President Trump and North Korea’s leader Kim Jong Un counts among the positives. Amazed, the world took note as these two arch-enemies, who only a few months earlier threatened each other with nuclear destruction, met in Singapore all smiles and banter (not to say holding hands). Now the world is hoping for this ceremony to yield concrete results. One would wish for that. Meanwhile, critics point out that Kim Jong Un probably landed the coup of his career, whereas the American President fell more or less blindly into the North Korean PR trap. We shall see.

Average growth and inflation forecasts from “The Economist’s“ June poll of economists:


The global economy continues to radiate positively. Admittedly, these past few months have left a slight dent in the growth curve. The Purchasing Managers Indices, an important leading indicator for economic development, softened in important countries and regions during the past three-month period, but in general, remained above 50 points and with that, solidly in growth territory. Unemployment dropped nearly everywhere, in the Eurozone, for example, to 8.4%, the lowest reading since December 2008. At 3.8%, the unemployment rate in the USA recently hit its lowest point since April 2000.

Overall, the augurs expect a stable macro weather situation with lots of sunshine. On average, the economists polled by “The Economist” magazine expect Switzerland’s gross domestic product (GDP) to grow by 2.2%. Unchanged from the previous quarter, the USA has 2.8% to its name, the same as the Netherlands. Expectations for Germany and the Eurozone were lowered slightly to currently 2.2% and 2.3% respectively. These are sound readings, but lie clearly miles off China and India’s pace, where 6.6% and 7.3% are forecast.

Change in Equity Markets since the beginning of 2018:

everywhere. Swiss equities, for example, continued their retreat throughout the second quarter, as did other markets. Politics obviously cast its shadow. The interminable and unsettling formation of a government in Italy, for example, has been and still is, unlikely to entice investors’ enthusiasm. Falling equity prices, and in Italy bonds too, were the consequence. Too fantastical are the promises of the new government, which, if seriously pursued, would see the “Bel Paese” drift far away from a European course. The country cannot afford a higher budget deficit and further strongly-increasing debt without sliding into severe difficulties. Today, the country’s liabilities already amount to about 130% of GDP, placing it in second position behind Greece on Europe’s ranking of debt champions. To compare; this figure amounts to 64% in Germany, 43% in Switzerland, and 108% in the USA (source: Wikipedia/IMF).

The equity funds employed by us achieved the following returns since the beginning of the year, with some beating their benchmarks:


The currently averted, but invariably flaring up whenever a crisis arises, discussion about an exit from the common currency would have unforeseeable consequences for Europe, and weigh heavily on financial markets. Because one thing is clear, Italy is not Greece. Measured on GDP, the fourth placed economy in the EU (behind Germany, UK and France) has a GDP of about ten times the size of that of Greece, which from 2010 on has kept markets in turmoil for years, in spite of its manageable economic weight.

The White House, too, continues to act as a spoilsport. The new tariffs were immediately met with the very same ammunition in return. The trade dispute is propelling itself ever higher. Mexico and Canada as well are getting their just deserts. To be fair, one has to say that Trump has not decreed new tariffs out of the blue, as if it just had occurred to him. His allegations that important trade partners such as China and the EU have been undermining American economic interests for some time by transferring technology without permission, and/or unilateral trade barriers, are not entirely made up out of thin air.

Should the trade war escalate, however, there will not be any winners, only losers everywhere. Even countries not directly affected by customs measures, will feel the chill descending on the world trade climate, as they will be affected by the negative feedback from global supply chains.


US rates continue to rise

Faced with such an abundance of news, other events were pushed out of the spotlight. The hike of short-term key interest rates in the USA by a further quarter point, to a target range of now 1.75 to 2% had been expected and did not yield any surprising headlines. The rising trend of interest rates in America, however, is weighing on fixed interest securities. The American central bank, the Fed, is likely to lay on further interest rate hikes this year, as well as next. Admittedly, Europe has not reached that point yet, but here too, the ultra lax monetary policy is being reigned in gradually, even if ever so gently.

Since the beginning of the year, yields on 10-year government bonds have developed in a non-uniform manner

With the exception of the USA, yields on long-term government bonds fell slightly in the major industrialised countries. In Switzerland, they fell back into negative territory again. In emerging markets and for corporate issuers of lower credit quality, however, one cannot avoid noting the pressure on bond prices (also see section Asset Allocation).

Conclusion: Changed Down One Gear

The economy is currently offering little cause for complaint. However, the risks are lurking in the political corner. The trade dispute contains explosive power, as do the developments in the USA and Italy, where according to the motto, “The end justifies the means”, ever more debt is accepted. We have reduced the portfolio risk slightly by reducing the overall equity allocation to neutral.

Asset Allocation

At its meetings, the Investment Committee decided on the following changes to the asset allocation for medium-risk balanced Swiss Franc portfolios, not subject to client’s restrictions (mandates in different reference currencies at times display different nominal weightings and weighting changes).

Money Market

The money market allocation increased slightly as the equity allocation was reduced (see section Equities USA). It now corresponds to its long-term strategic allocation, or to put it in other words, we are neutral weight.


The second three-month period was not a showpiece quarter for bondholders either. On the one hand, there is hardly any current income to be had in hard currencies like the Swiss Franc, Yen or Euro. On the other, the rising interest rate differential (e.g. between the Swiss Franc and US Dollar) increased hedging costs, acting as a drag on results. Last but not least, the yields of lower credit rated corporate bonds and lesser-established markets increased. All in all, this put pressure on prices of fixed interest securities, including various bond funds, resulting in a negative performance. An active change has not been made to the allocation. Unchanged, we continue to be underweight..

Other funds employed by us developed as follows:

Equities Switzerland

The weighting of Swiss stocks did not experience any changes during the second quarter, however, the composition of the stocks selected according to value criteria did. During the course of the regular annual rebalancing, the stocks of Adecco, Bobst, Feintool International and Orior were added to the “Swiss Stock Portfolio” (SSP). Also Holding, Cembra Money Bank, Sonova Holding, Vifor Pharma and Zurich Insurance were further new introductions to the fundamentally attractive stocks. As previously, Autoneum, Baloise, Bell, Coltene, Metall Zug, Nestlé, Novartis, Roche, Siegfried, Swiss Life, as well as Vetropack, feature in this selection comprising of 20 stocks.

In contrast, Georg Fischer, Gurit, Kudelski, Mobilzone, Swisscom, as well as Zehnder Group, had to give up their position. The stocks of Swiss Re, Tecan and UBS suffered the same fate. Obviously, the same rebalancing was applied to the certificate “Strategy Certificates linked to the SIM Swiss Stock Portfolio Basket” (Valor: 36524524, ISIN: CH0365245247)

The total return year-to-date (incl. dividends) of the SSP amounts to 3.9%. With that, it is identical to its benchmark SPI (Total Return). Since 2010, the SSP’s annual performance amounts to 11.4%, a result that clearly beats the benchmark performance of 7.4%. Since 2010, this strategy’s cumulative total return amounts to about 151%. The SSP figures bear transaction costs and withholding taxes, whereas the benchmark index does not bear any costs.


Equities Europe

The directly invested “European Stock Portfolio” (ESP) equally underwent its annual rebalancing. New entrants among the most attractively valued European stocks are; Repsol (oil), the industrials, Babcock International, Aurubis and Meggitt, as well as the British utility, SSE. New entrants in the consumer sector are; Tate & Lyle, in financials, Legal & General, Aegon, ABN Amro and Sybank were added. The German pharmaceutical stocks, Merck and Covestro, round off the list of new additions. Holding on to their place amongst the 25 most attractively valued stocks on Europe were; Saras (refining), UPM Kymene (paper), Dürr (engineering), EDP Energias de Portugal (utility), Amsterdam Commodities (commodity trading), as well as the consumer stocks of Barratt Developments and Renault. Also staying on are Eutelsat Communications, Capgemini, BNP Paribas and Nordea. Rounding off the line-up are Fresenius Medical Care and the chemicals producer, Arkema.

Neste, Eiffage, Centamin, Jeronimo Martins, Freenet, Dialog Semiconductors, Swiss Re, L.E. Lundbergforetagen, IG Group, Novo Nordisk and Evonic Industries were retired from the portfolio.

Since the start of the year, this selection has achieved a return +0.5%, and in doing so beating its benchmark, the Stoxx 600 Index, by 80 basis points (both values calculated as total return, i.e. including dividends). In a comparison with a pure value-benchmark more closely corresponding to our investment style, the ESP’s outperformance even amounts to 1.3 percentage points.


Measured on the price/earnings ratio using the latest 12 months profit figures, most equity markets have become more attractive:

Since 1993, this equity selection’s average annual performance amounts to 9%, compared to the 7% achieved by the above-mentioned broad benchmark. The transaction costs, as well as taxes withheld, are deducted in ESP figures, whereas the index is calculated without bearing any costs. The cumulative performance of the ESP since 1993 amounts to 890%. We have not made any changes to the positions during the first quarter (exception: a small reduction for Euro based mandates) and carry an unchanged neutral weighting.

Equities USA

In the USA, we reduced the equity position to a neutral weight towards the end of the quarter. Higher tariffs and the lower exports associated with that, rising interest rates, rising wages, as well as the uptrend in cost of energy (oil prices increased by a good 65% during the past twelve months) will, slowly but surely, erode American companies’ high profit margins. American equities carry a high fundamental valuation, so that any possible earnings disappointments are unlikely to go unpunished. The Performa US Equity Fund employed by us developed very pleasantly during the course of the year. It significantly outperformed the market, so the partial sale realised handsome gains.

Equities Asia (excluding Japan)

Emerging market equities have been ruffled during the course of the year to date. As the US Dollar rose and US interest rates increased, money left the emerging markets heading towards established financial centres. With markedly higher oil prices also supporting that trend, we continue to be neutral weight..

Equities Japan

We did not make any changes to the position in the Land of the Rising Sun. By means of price changes, Japanese equities’ weighting fell slightly. There is a small but negligible overweight position remaining.

Alternative Investments

We have not made any changes to alternative investments. Both positions have hardly moved and, as far as performance year-to-date is concerned, are ahead of equities and bonds.

Precious Metals Asset Allocation

Gold found little enthusiasm with investors during the second quarter, in spite of various central banks verbally expressing their confidence in the precious metal. During the past three months, its price followed the often-observed pattern, where gold falls as the US Dollar rises. We continue to hold the position in unchanged volume as an alternative currency with a high security factor.

Summary of our current Asset Allocation


Price/Book and Dividend Yield of major equity markets:

Summary of our current Asset Allocation



Price/Book and Dividend Yield of major equity markets:



Closing words

Closing words

We wish you many sunny and restful summer (holi-) days and thank you for your trust placed in us.

Alfred Ernst, Director, Relationship Manager

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Legal Disclaimer: Limitation of offer: The information published in the Salmann Investment Management AG Investment Report (referred to hereafter as SIM) is not to be viewed as an invitation, an offer, a recommendation to buy or sell any investment instruments or enter into any other transactions. Its contents are not targeted at individuals subject to a jurisdiction prohibiting the publication and/or the access to such information (be it on grounds of nationality of the respective person or their residence or any other reasons). The information presented is collated by SIM with the utmost care and diligence. The information is not intended to be used to base a decision. For investment advice, please consult a qualified person.

Risk warning: The value of investments can rise as well as fall. Investors should not extrapolate future returns from past performance. In addition, investments in foreign currencies are subject to exchange rate variations. In-vestments with high volatility may be subject to extreme price fluctuation.              

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