Review & outlook

April 2023

The financial markets have long been warning on the risks posed by the massive interest rate hikes by central banks. But for us too, last month’s collapse of Credit Suisse was a previously unimaginable scenario. The takeover by UBS that has now been decided upon for the bank became possible only because the Swiss government put in place massive guarantees. The anger in the country is immense
and will inevitably result in financial institutions needing yet more capital and further regulations leading to more restrictive lending practices. But lessons from the past also teach us that banking crises are never resolved overnight and their negative effects are likely to stay with us worldwide for years to come.

Considering the steady increase in trouble spots around the world, the financial markets, and therefore our portfolios too, turned in a very gratifying performance in the first quarter of this year. The reasons for this are manifold, which is why we would like to address several points in detail below:

During the course of last year, interest rates rose sharply around the globe. Debt servicing is leading to ever higher interest costs, especially for highly indebted countries, and so public deficits are rising. The cost of borrowing is an increasing cause of funding difficulties for small and medium-sized enterprises especially, as they are unable to pass on interest costs to customers in full or can no longer obtain credit at all due to the banks’ more restrictive practices. The effects of interest rate rises only ever show through in the economy after a lag of several months and so we believe that an economic downturn is likely in the US and Europe in particular in the course of this year.

The central banks now face an almost-hopeless dilemma: if they raise interest rates in an attempt to counter the still-excessive rate of inflation, they risk an economic downturn. But if they want to forestall a recession and bide their time or even cut interest rates in the course of the year, inflation will undoubtedly rise at a faster pace again. Let’s not deceive ourselves, though; central bankers never have a genuine interest in bringing down inflation, as only inflation’s erosion of value can reduce debt significantly over the long term. Given the risk of a slump, the monetary watchdogs are therefore likely to give the economy priority, prime the central bank pumps and cut interest rates again. The stock market is already anticipating this scenario,
which is currently propelling prices on the equity markets.

The tensions between the US and China have increased dramatically in recent months, and there is still no sign of a solution in the war between Russia and Ukraine. Combined with the risk of an economic downturn and the crisis smouldering in the banking industry, we remain very cautious in our investment policy. We are holding to our heavily overweight positions in precious metals, which have already brought us appreciable gains this year.

Moreover, our option strategies mitigate the risk in the event of unexpected market fluctuations. We also favour investments in sectors that are profitable even when times are difficult. Our primary objective, however, is to ensure that all investments are broadly diversified.

We are pleased to serve you in these exciting markets and wish you more beautiful spring days to come.

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