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The Market at a glance: Out of tune

The Market at a glance: Out of tune

8 March 2024

As the calendar turns to March, we welcome not only spring but also significant rewards from the markets for everyone, and crucial discussions on finance in the context of Women’s Month.

At Alpian, we recognise the unique financial challenges and opportunities women face. Our commitment to offering ultra-personalised investment strategies and wealth advisory services deeply reflects this recognition! We’re dedicated to tailoring our solutions to meet the unique circumstances of each individual.

In this issue of the newsletter, we're not just excited about dissecting February's market performance; we're also thrilled to hint at the upcoming announcement of Alpian’s new female-focused financial community! The goal is straightforward: to further empower women by providing a platform for open exchange of questions, advice, and connection.

Stay tuned for more details!

The market at a glance: Out of tune

Key takeaways

  • February was another lucrative month for equity markets, with most indices recording gains.

  • Cryptocurrencies have reached new all-time highs, with broad investor participation.

  • Excessive behaviors were observed in some parts of the market. Some assets appear pricey, sparking discussions about financial bubbles.

  • Not all markets are experiencing euphoria though. Bond investors continue to see disappointing returns, and the commodities markets have also continued to underperform.

  • Diversification remains an essential strategy for investors, and there are few excuses not to employ it given the wide range of available opportunities.

Spring is just around the corner! With longer days and warmer temperatures, we're feeling in the mood for some bossa nova. So, for this month's newsletter edition, let's take a trip down memory lane with a classic from the master himself, Antonio Carlos Jobim.

Our pick for March is "Desafinado" (a Portuguese word often translated as "Out of Tune" or "Off Key"). This piece was Jobim's witty response to music critics who dismissed bossa nova as being out of tune. They argued that this musical genre wasn't suitable for singers with powerful voices. This song soon became a runaway American hit and is still performed today by famous popular artists.

We also chose this song because for many investors, something looks off in the markets: the price of some assets doesn’t seem in sync with what many would expect... This discrepancy has led to the term “bubble” being coined in various journals.

Bubbles are serious matters for markets, often evoking strong memories of financial losses for many. Therefore, as we go through our monthly recap, we'll offer our perspective on this topic.

What happened with equities

February was another lucrative month for equity markets, with most indices recording gains, from US stocks (+5.2% for the S&P) to European stocks (+4.9% for the Eurostoxx), and even Asian stocks this time. Swiss markets are slightly lagging, with the SMI gaining "only" 0.93%.

While such significant monthly returns are not unusual in financial markets, they are not the standard, especially when following an already positive January and a strong end to the previous year.

When examining valuations (i.e., the price investors are willing to pay for the anticipated benefits of owning stocks) equities appear quite expensive. Nvidia serves as a prime example, setting record after record. Despite its strong earnings, the price investors are currently paying to share the company's revenue is remarkably high, with Nvidia's price to sales ratio standing at around 33 (an extreme interpretation of this ratio is that, under the hypothetical scenario where Nvidia maintained its current sales levels indefinitely without fulfilling its financial obligations to taxes, employees, and suppliers, and instead distributed this revenue directly to shareholders, it would take 33 years for investors to recoup their initial investment).

Nvidia is not alone; many of the largest U.S. tech companies are in similar situations, fueling discomfort and talks of a "bubble." While some parts of the markets seem out of tune and comparisons are being drawn with the tech bubbles of the 2000s, not all the typical bubble characteristics are present1. Not all investors are buying equities indiscriminately, and the majority of companies worldwide have not followed the same trajectory as Nvidia. Thus, if a bubble exists, it appears to be localized (still raising questions about its potential to spread).

What happened with bonds

If there's one area of the market that hasn't been bubbling, it's the fixed income markets. February was yet another month of meager returns for bond investors and things continue to feel off. Good news on the economic front means less appetite for central bankers to lower interest rates. For many, the central banks’ decision to keep higher interest rates for longer seems like therapeutic excesses. In retrospect, the remedy they used to shield economies from inflation (raising rates) has proven effective, as inflation is now at more normalized levels in most developed countries.

The question then arises: Why continue with the treatment, especially if it could potentially harm the patient?

The answer is quite straightforward though: Central banks’ main objective is not to generate returns for investors. Consider the following mission statement from our very own Swiss National Bank (SNB): “The SNB is tasked with ensuring price stability while taking due account of economic developments”. Simply put, its primary objectives are to maintain inflation at manageable levels and ensure the economy remains stable. Currently, all indicators seem to suggest that it is achieving these goals, so we'll need to be patient before seeing any cuts to interest rates (meanwhile, we can still enjoy decent interest rates on our savings).

An interesting event that occurred this month was the retirement of Thomas Jordan, the current chairman of the Swiss National Bank (SNB). After 12 years of service, marked by the longest period of negative interest rates on record—a period that our cash accounts will not forget—he is set to benefit from the newly approved 13th OASI pension payment. The question remains: Will he lower rates once more before handing over the reins? We'll find out on March 21. (Hint: chances are low)


What happened with commodities, currencies, and digital assets

On the commodities and currencies markets, the action was rather quiet. Most commodities, with the exception of Cocoa whose price has almost tripled in 3 years, didn’t show clear trends upwards or downwards. Meanwhile, the Swiss franc lost a bit of ground against the Euro and the USD.

But it would be challenging not to at least consider the possibility of a bubble when observing the recent activities in the cryptocurrency markets. Bitcoin has seen a 57% year-to-date increase, returning to its historical highs and pulling along virtually all other digital currencies and tokens, from Ethereum to Solana. In Bitcoin's case, it's noteworthy that the rally has seen broad participation, ranging from ETFs to Bitcoin miners, hedge funds, and 'unknown' whales (a term for large Bitcoin holders) to 'degens' (a colloquial term used to describe speculative retail investors)2.

Similar to 2021, there are already predictions about Bitcoin reaching the $100,000 mark soon. However, the classic definition of a bubble doesn't seem to neatly apply to Bitcoin. Its history is characterized by cycles of rapid increases and sharp declines (at least 8 in the last 15 years), with many having long accepted its volatile nature. So, are there risks of correction in major cryptocurrencies in 2024? Yes, and that statement is a truism.

In summary, February was a positive month, with euphoric behavior observed in certain areas of the financial markets, potentially heralding future turbulence. However, this trend is not widespread, implying two key points:

  1. the range of opportunities remains broad for investors, offering alternatives to those wishing to steer clear of the market's pricier segments, and

  2. in the event of market turbulence, a diversified portfolio is likely to stand a better chance of weathering the storm.

Demystification room: How are deposits remunerated in Switzerland?

Interest rates in cash and savings accounts often feel like a mystery to many of us, to the extent that we frequently give up trying to understand them and simply wait until the end of the year to see what our bank has graciously awarded us. This begs the question: Why do some banks offer higher interest rates than others? To grasp this, it's essential to understand how banks operate.

In its simplest form, a bank's business model involves attracting deposits from a diverse client base and utilizing that capital by investing or lending it. The bank profits if it earns more from its investments and loans than the costs incurred to attract and pay interest on deposits. Operating a bank requires maintaining a delicate balance between investments and loans (the assets) and deposits (the liabilities). Failing to maintain this balance can lead to dire consequences, as recent events with SVB and Credit Suisse have shown.

The interest rates on your deposits are dictated by two main factors: the operational constraints the bank faces in managing its balance sheet (for example, matching long-term loans like mortgages with stable deposits to maintain required reserves) and the bank's decision on how much of its profit margins it wishes to share with its clients (the year 2023 saw record profits for many Swiss banks, which retained high margins). This means that, first, given the similar constraints all banks face, you must set realistic expectations for your cash returns (and consider better alternatives like investments if you seek higher yields). Second, you have the option to choose a banking partner more inclined to share profits fairly.

Below, we present the findings from our analysis of several hundred cash and savings accounts across numerous banks operating in Switzerland. For more details, the complete study can be found here: Comparative study interest rates 2024 | Alpian | Swiss Banking Excellence

Women: This is your sign to start your investing journey now

Every month, we provide you with the latest news from the investing world. But what about those who are not investing yet? With March being Women’s Month, we shine a light on the fact that many women do not actively participate in investing yet.

In this article, we dissect 4 fact-based reasons why it is especially important for women to invest and outline the first steps to take to get started. Read the article here.

1 For a good read:  Are We in a Stock Market Bubble? | LinkedIn

2 Here is an interesting article to understand who are the buyers involved with Bitcoin: As banks buy up bitcoins, who else are the 'Bitcoin whales'? - BBC News

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