When there was little doubt that Donald Trump would inevitably become the next US president, the situation changed with Joe Biden's withdrawal from the election campaign. The campaign regained momentum with the candidacy of Kamala Harris and speculation has returned to the question of who will become the next leader of the world power, the USA. Is a Republican or a Democrat more favourable for the stock market? Opinions differ and it is not possible to make a final judgement at this point. The old investor adage that political stock markets have short legs is more apt.

The deadlock in the Ukraine-Russia conflict and the spread of the Middle East conflict to Lebanon show that the USA has lost its military supremacy and foreign policy strength. The USA can no longer end conflicts on its own initiative and to its own greatest advantage. 

However, what applies to politics does not apply to the financial markets. On the contrary, the major growth companies from overseas, such as Tesla, Meta and Apple, continue to set the pace on the trading floor in the third quarter. Following the decline in inflation close to the central banks' 2% target, rising unemployment figures in the summer months led to concerns that the global economy could slide into a recessionary zone instead of the hoped-for soft landing.

Parallel to the fears of recession, however, hope rose for the first interest rate cut in over four years by the US Federal Reserve (Fed), which was finally fulfilled on 19 September with a "jumbo cut" of 0.5%. As the European Central Bank (ECB) and, more recently, the Swiss National Bank (SNB) also made further interest rate cuts, the international investment community appears reassured and well-disposed. The global equity barometer, the MSCI World Index, advanced by a pleasing 6.5% in USD terms in Q3.

Change in Equity Markets since the beginning of the year:

The stock markets from the "global South" - the term does not represent a new investment region but rather stands for emerging markets or developing countries - also experienced a small revival in the third quarter. For example, the Nifty 50 (India, +7,8%), the Hang Seng (China, +21,7%) and the Brazilian IBOVESPA (+6,4%) shone brightly in investors' skies. Some of the few losers were the stock exchanges in Japan (Topix -5,0%) and South Korea (KOSPI -7,3%).

The Swiss franc strengthened against almost all currencies in Q3 due to the narrowing interest rate differential. A rare exception is the exchange rate against the yen, which gained 5,7% due to the rise in Japanese interest rates after many months of depreciation. The franc gained 6,0% against the US currency, 2,2% against the euro and a slight 0,4% against the pound sterling. Currency forecasts are generally difficult to make. However, it seems safe to assume that Swiss government’s debt discipline will ensure that the Swiss franc remains strong.

The equity funds we have invested in have achieved the following returns since the beginning of the year:

In America, inflation (CPI) was last measured at 3,2%, in the eurozone at 2,6%. Fortunately, the CPI rates in the individual countries of the Union are close to this average. The inflation rate in Switzerland is currently 1,4%. Therefore, most inflation rates are close to the year-end forecasts (see also table "Average growth and inflation forecasts").

The central banks have become active in many places. The FED, ECB and SNB have lowered their key interest rates, in some cases several times. Conversely, Japan has left the territory of negative interest rates with a second rate hike this year. Key interest rates are at 5,0% in the USD, 3,65% in the EUR, 0,25% in the JPY and 1,0% in the CHF.

We expect further interest rate cuts in USD, EUR and CHF by the end of the year. 

Prices for fixed-interest securities have benefited from falling key interest rates. In contrast, new investors have to make do with lower yields on interest-bearing securities. In Switzerland, the yield to maturity for 10-year government bonds is currently 0,41%. For the same term an investor in the USA receives a yield of 3,78%, for UK Gilts 4,0% and in the eurozone the 10-year Bund yields 2,12%. 

Average growth and inflation forecasts from the "Bloomberg Composite Forecast" poll of economists:

The price of gold reached a new high in September. The weaker USD and falling bond yields are two additional reasons for the continuing high. 

The performance of the most important industrial metals (e.g. aluminium, copper, nickel and lead) parallels the stock markets: after falling in July and August, prices recovered in September in the hope of an economic upturn.

Other funds employed by us performed as follows: 

The price of oil (WTI grade) fell by almost 10% in the third quarter, returning to the level seen at the beginning of the year. The fall in the price of "black gold" is attributed to a slight supply surplus and a lack of demand from China.

So far, there have been no major recessionary phases. However, global GDP growth forecasts remain modest. Asia (ex Japan) continues to grow at an above-average rate. In Europe, Spain impresses with 2,7% and the estimated US growth of 2,6% for 2024 as a whole is also respectable.

The purchasing managers' sentiment barometer for industry (PMIs) remains below the 50 mark globally, expressing pessimism. In contrast, purchasing managers in the services sector are optimistic. In particular, consumers' positive spending mood appears to support the services sector.

The Chinese central bank (PBoC) announced several monetary policy measures towards the end of the month to stimulate economic growth. It was the most comprehensive easing since 2015 and included lowering the key interest rate, reducing the interest rate for outstanding mortgages, lowering the minimum down payment for property purchases, simplifying access to liquidity for share purchases and direct financial aid for the poorest section of the population. Whether these measures are sustainable enough to solve the structural problems in the long term has yet to be seen.

Conclusion: GDP forecasts indicate modest growth in Europe and North America. There is hope in Asia, but the situation there depends heavily on the recovery in China. However, falling interest rates and intact consumer sentiment, should support the economy.

The fundamental valuation ratios of equities, expressed in terms of price/earnings ratios, for example, remain around their long-term averages for European equities (including Switzerland), emerging market equities and Japanese equities.

Although the key figures suggest overpricing in the USA, this is justified by the intact growth opportunities for large-cap American technology companies. Even in comparison to the decline in bond yields, we still consider a slight overweight in equities to be appropriate.

At our last Investment Committee meeting in mid-September, we decided on the following asset allocation of a balanced Swiss franc portfolio with a medium risk level, without client restrictions. Mandates in other reference currencies may have different changes and weightings. You are welcome to enquire about these with your client advisor. 

Money market

We tactically hold a higher "cash ratio" in our balanced portfolios. This is, on the one hand, at the expense of the CHF bond ratio due to the lack of yield advantage and, on the other hand, at the expense of the alternative asset class. 

Bonds

USD bonds remain attractive due to the higher interest rate compared to their CHF counterparts, with a yield premium of just under 3%. We are maintaining a 4% allocation in this segment as part of the asset allocation. Bonds in CHF have benefited from the interest rate cut by the SNB, but new investments are now becoming less attractive at this yield level. As an admixture and to increase returns, we are focussing on two special funds in this asset class, which have been convincing with a significant excess return since the beginning of the year.

Yields on ten-year government bonds have developed differently since the beginning of the year:

Equities Switzerland

The Swiss Performance Index (SPI) rose by 2,0% over the last three-month period. Our stock selection based on value criteria, the "Swiss Stock Portfolio" (SSP), also posted an overall performance (price changes plus dividends) of 2,0% in the third quarter and was thus on par with its benchmark. Compared to the benchmark, we hold a larger weighting of Swiss equities from the small/mid-cap segment, which usually results in deviations from the SPI. 

Siegfried (+22%), DKSH (+11%) and Lonza (+9%) performed particularly well in the SSP in the past quarter. Bringing up the rear were Forbo (-17%), EFG (-14%) and Tecan (-7%). 

The price/earnings ratios, based on last known earnings for twelve months, have mostly increased:

The SSP has performed very well over the long term. Since 2012, the average annual performance has been 10,31%, significantly outperforming the average benchmark performance of 8,42%. Since 2012, this strategy has achieved a cumulative total performance of around 285%, compared with 204% for the index. Transaction costs are deducted from the SSP figures, whereas the benchmark index is calculated free of charge. 

Equities Europe

The sideways movement seen on the European market as a whole since mid-May came to an abrupt end with the general turmoil at the beginning of August. However, a strong rebound in September enabled new highs for the year. At the end of the quarter, the comprehensive Stoxx 600 Europe NR was up +2,6%, while the Euro Stoxx 50, comprising the 50 largest shares in the EUR currency area, rose by 2,4%. Among European shares, those from Spain were the most popular in the third quarter. The IBEX in Madrid rose by 9,5%.

We have added Siemens, LVMH, Novo Nordisk, DSM-Firmenich and ASML to our European stock selection and have taken two tactical positions in European large caps and Swiss equities by means of corresponding EtF positions. Despite the tactical adjustments mentioned above, our European stock selection, the "European Stock Portfolio" (ESP), was not yet able to make up for the shortfall against the benchmark in the first half of the year. Although the ESP gained +1,15% in the third quarter, it still lagged behind the benchmark index. 

Price-to-Book Values and Dividend Yields of major equity markets:

Tesco, DSM Firmenich (+17% each) and Sanofi (+14%) were among the ESP's best performers in the last quarter. The worst performers were ASML (-23%), Novo Nordisk (-21%) and Gerresheimer (-20%). The figures are shown in the respective local currencies.

The ESP’s long-term performance since 2004 shows an average annual return of 6,62%, compared with 6,95% for the benchmark. Cumulatively, the portfolio has thus achieved a total return of 278% since 2004, whereas the cumulative index performance is 303%. The figures for the ESP also exclude transaction costs and withholding taxes, whereas the benchmark index is calculated without costs.

 The developments of SSP and ESP can always be followed on our website www.salmann.com in the "Investment strategies" section. 

Equities USA

 The performance of the US equity market was also convincing in the third quarter. US equities, summarised in the S&P500 Index, rose by 5,9% in the period under review. The fundamental valuations (e.g. price/earnings ratio) are above the ten-year averages. In terms of market technology, the strong momentum of the US market stands out. Stocks from the technology, financial and communications sectors are performing best. We are maintaining our tactical overweight in US equities.

Equities Asia (excluding Japan)

We have not made any changes to our investments in mainland Asia since our last report. In addition to our long-standing position in the equity fund Barings Asean Fund, which contains equities from emerging countries in Southeast Asia, we are invested in Indian and Vietnamese equities through two country funds. We saw strong price rises in Southeast Asia in the third quarter, and the Indian equity market is really booming. The Vietnamese equity fund also made a positive contribution to returns. 

Equities Japan

The Japanese stock market was one of the best performers in the world until the middle of the year. This year, the Japanese central bank began to raise key interest rates, which led to the appreciation of the yen and, at the same time, to severe distortions on the Japanese stock exchange at the beginning of August. Share prices in the Land of the Rising Sun have since stabilised. Nevertheless, the TOPIX Index posted a negative return of 5,0% in the past quarter. We have decided to reduce the weighting of our allocation to Japan to neutral and to capitalise on price gains.

Alternative investments

We are currently only invested in the AXA Cat Bonds Fund and are underweighted in alternative investments. The fund invests in bonds that reinsure clearly defined loss events from natural disasters. This investment segment currently has an attractive premium-risk ratio. 

Summary of our current Asset Allocation:

Since the beginning of the year, the selected foreign exchange rates have performed as follows:

We would like to thank you for the trust you have placed in us and for your interest in our investment commentary and wish you a golden autumn.

Markus Gartmann, Director, Relationship Manager

Get in touch with us

Salmann Investment Management AG

Beckagässli 8

FL-9490 Vaduz

T +423 239 90 00

F +423 249 90 01

mailvaduz@salmann.com

www.salmann.com

Restriction on offers: The information published in the investment report of Salmann Investment Management AG (hereinafter SIM) does not constitute an invitation, offer or recommendation to buy or sell investment instruments or to engage in any other transactions. The content is not intended for persons who are subject to a jurisdiction that prohibits the publication of or access to information (due to the nationality of the person concerned, their place of residence or for other reasons). This information has been compiled by SIM with the utmost care. However, SIM accepts no liability for the accuracy, completeness or currency.

The information does not constitute a decision-making aid. When making investment decisions, please seek advice from qualified persons. Risk / Warning: The value of investments may rise or fall. The future performance of investments cannot be derived from past price trends. Investments in foreign currencies are also subject to currency fluctuations. Investments with high volatility may be subject to high price fluctuations. Disclaimer: In no event (including negligence) shall SIM be liable for any loss or damage (in particular direct or consequential loss or damage) of any kind arising out of or in connection with access to this report or any links contained herein. Source of graphics and tables: Bloomberg / image sources: shutterstock.com / private images.