German 10-year bond fell to -0.33% the lowest level ever recorded (US 10-yr has dropped below 2.0% again). With geopolitical tensions running high between the US / Iran and US / China, markets remain nervous. Asia stocks are lower and European indices feel shaky as U.S. President Donald Trump meets with Chinese President Xi Jinping this week. The event puts the risk of no-trade deal back in focus. Any sign of a de-escalation in the trade war will support another move higher in global equities. In longer-term, US data continues to weaken highlighted by a weak Dallas Fed Index. CHF and Gold are in the sweet spot further benefiting from historic safe-haven status. Our bullish scenarios for stocks revolve around an agreement at the G20 to restart trade negotiations.
Clearing this hurdle markets will focus back on loose policy that supports risk taking. In this environment, the SMI will continue to improve. In a historic event, the leading Swiss Market Index (SMI) broke through the 10’000 point mark for the first time. We suspect that a highly probable driver is expectations that the Swiss National Bank will further loosen its ultra-easy monetary policy.
In an unprecedented reversal, the Fed has gone from three hikes in 2019 to signaling interest rate cuts in July. The markets are now pricing in dovish action from the Bank of Japan and the Bank of England. But most critically for Switzerland, their closest neighbor, the European Central Bank, has now opened the door to deeper negative interest rates and setting additional unorthodox policies. Let’s not forget that the removal of the EUR/CHF minimal exchanges rate (i.e. the abrupt shift in SNB policy) was due to expectations that the ECB would take interest rates into negative territory.
Against a decent economic backdrop of forecast 2019 GDP growth of 1.6%-1.9%, and a lagging P/E ratio, we may be tempted to quote fundamentals as a rationale for the outperformance of Swiss stocks. However, we suspect yield-seeking behavior is the strongest momentum driver.
Within this context of global banks easing, pushing yields lower, and Swiss yields significantly negative for the foreseeable future, investors need to seek yields in stocks, as there is simply no other source for yields. The SMI has advanced 21% YTD, outpacing its European peer indices in the UK, Germany, Italy, and France. This is due to demand for dividend flows, with the added benefit of investing in safe-haven assets amid a trade war, with the likes of Nestle, Novartis, and Roche. With a dividend yield of 3.0%, Novartis looks attractive for risk-averse, yield-seeking players. There is the marginal risk of Swiss names being cut off from EU investors, but the risk is slim despite threats.