Review & Outlook

April 2021

Stock markets have performed particularly well since the start of the year in anticipation of a continuing rapid economic recovery. During his first months of office, the newly elected US President has dealt with many issues very effectively. The federal government has ramped up its vaccination programme and the desperately needed economic stimulus package worth $1.9 trillion has passed smoothly through both chambers of Congress. US households will now receive further hand-outs from the government and are likely to fuel the economic recovery with increased consumer spending. Another massive infrastructure package is already in preparation and should be presented to Congress for approval over the course of this year.

The massive spike in coronavirus infection rates, especially in Europe, is now forcing governments to tighten restrictions, however, and is souring the public mood. The opening-up of the tourist and hospitality industry in particular has had to be pushed back even further. This news seems to have barely affected financial markets so far, as central banks continue to pump massive amounts of liquidity into the economy in an attempt to keep short-term interest rates artificially low.

The rapid increase in public borrowing is now creating a situation where the cost of debt servicing accounts for an even higher proportion of government spending. You do not need to be a qualified accountant to see that highly indebted countries will barely be able to afford higher interest rates without eventually going bankrupt. Long-term yields on US Treasuries have risen sharply in recent weeks. The financial press and central banks blame rising inflation expectations as the main cause. But could it not also be the case that investors are demanding significantly higher yields on government bonds to compensate for the steady worsening of credit ratings?

Low interest rates – and assurances by central banks of their intention to keep them low over the next few years – continue to drive equity markets higher, mainly due to the lack of investment alternatives. However, cheap money also encourages excesses, as highlighted by the case of Archegos Capital in the US a few weeks ago. This hedge fund placed a massive bet on the Chinese stock market through the use of leveraged credit limits and derivatives. A sudden short-term market correction totally eroded the fund’s own capital within the space of a few days and led to massive losses for the financing banks. As a result, Credit Suisse had to report a write-down of CHF 4.4 billion overnight. Realistically, it is unlikely that a disaster such as Archegos Capital is an isolated case, and such speculative ventures could blow up at anytime in the face of unforeseen market volatility.

It is difficult to predict how markets will perform over the coming months. We are therefore gearing our investment strategy towards our longer-term expectations. Our portfolios are broadly diversified, with an increasing focus on forward-looking sectors such as climate change and green technologies. In addition, our investments in precious metals and options strategies mitigate the risk any event of unexpected market gyrations.

We wish you good health and all the best for the coming weeks, and hope you enjoy some spring sunshine.

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