The market at a glance: Levitating.

Summer is coming! As many Swiss people are already packing their bags, we decided to choose a cheerful song, one that makes you want to escape to other climes. Our pick for this month is “Levitating” by the English-Albanian singer Dua Lipa. Released in 2020, this electro-disco song that mixes different music styles was an intergalactic ode to fun at a time we needed some. And today it remains a perfect invitation to the pleasures of the holiday season.

There is also another reason why we chose that song. In June, it felt like financial markets were taking a break from bad news and we saw many investments starting to levitate…

Tech stocks led the way, still surfing on the AI wave to reach new highs, followed by digital assets that enjoyed a nice performance. Many stocks related to the theme of travel also joined the ride: Cruise lines, airlines, and car rental companies, to name a few sectors. And from a macro point of view, it also seems that the most exotic countries were also the top performers: Turkey, Brazil, Argentina, and even Japan, which has become, in recent times, the darling of value investors.

The perhaps too-stellar performance of these assets was in sharp contrast with the performance of the rest of the financial markets that struggled to extricate themselves from the laws of gravity. Their take-off was delayed by a cohort of central banks around the world that decided to tighten their monetary policies. After all, if there is something else that we recently discovered can levitate, it is interest rates!

Higher interest rates still put pressure on economies, but we can make a couple of interesting observations: First, inflation is retrenching. Second, markets are getting used to that higher interest rates regime and seem to be preparing already for what comes next. Third, not all the sectors of the economies are affected in the same way, and we are seeing it this month through the performance of assets. The good thing about disparity is that it creates future opportunities. The patient investor can start building positions into sound investments that could catch up later.

Overall, our portfolios benefitted from this market rally and the recent introduction of a homeopathic dose of digital assets in our allocations was timely. As we keep saying, it is important to enjoy positive market developments when they happen. Will we let the holiday breeze blow us away and switch to autopilot mode fully? No. We learned a long time ago that levitation can be dangerous, as sooner or later, one needs to come back down to earth. 

Demystification room: Can AI predict markets?

AI has made its way into the world of finance as well. Its applications range from fraud detection and revenue optimization to high-frequency trading.

However, the most anticipated application of AI in finance is market predictions. Could machines make us rich?

At Alpian, we have a strong inclination toward models. Our team has a combined experience of about 40 years in applying models to finance, and our passion remains intact. However, over time, we have learned that financial markets are one of the most complex systems that exist.

 Consider this: A five-day weather forecast can accurately predict the weather about 90 percent of the time. If we had the same level of accuracy in predicting market movements, we wouldn't have to worry about our financial future.

What makes it so hard for machines (and humans!) to forecast the course of financial markets? Let’s review some of the main difficulties:

• The first is the lack of data. Let’s say you’d like to forecast the price of Tesla stock. You could probably find a wealth of variables to extract information from news, financial and economic data, social media discussions, and even the data collected from the car directly. The issue is more on the other side of the equation with your target variable. Tesla was launched in 2010 and you have limited data points available to train your models.

•  AI works well when it can uncover hidden rules within a system, cutting through the noise to find valuable information. However, the issue with the financial markets is that the noise-to-information ratio is very high. Essentially, you are trying to find a needle in a haystack.    

• Markets are auto-adaptive systems. Let's say you identify a trend in the market and decide to trade based on that. The very act of placing your trade alters the information in the system. To paraphrase a hedge fund manager who wrote on this topic: A cat remains a cat after you identify it in a picture, but the same does not hold true in markets.

• Large players can distort markets. Remember when the Swiss National Bank suddenly decided to peg the Swiss Franc against the Euro? Unless you have insider information, it is challenging to predict such events.

In conclusion, AI models provide valuable insights for investors, but they still have more work to do in order to unravel the enigma of the markets.

Let’s talk about wealth

What better way to start the holiday than with a little extra money in your cash account?

Following the Swiss National Bank’s decision to increase the policy rate in June, we have followed suit by increasing the top interest rate paid on Swiss Francs deposits to up to 1.50%. From the 1st of July 2023 onwards, there will be a 1.0% interest rate on deposits up to 100,000 francs, and 1.5% on deposits between 100,001 and 250,000 francs.

Only a month ago, we already doubled the maximum interest rate to 1.0% for deposits in Swiss Francs, setting the benchmark in the banking environment. With the announced increase, we demonstrate our commitment to providing outstanding opportunities for our clients to grow their wealth.

We wish you all a pleasant summer!