CIO Market update: Leave portfolio unchanged despite setback

The Euro Stoxx 50 closed 4.1 % down, the German Dax and the Swiss Market Index were 3.8 % lower. The US stock markets initially started the day sharply lower, but the S&P 500 recovered from a loss of over 4 % in later trading and closed slightly up. Since the beginning of the year, this has resulted in a loss of 7.5 %, and even 11.4 % for the Nasdaq. Two issues are raised as reasons: Higher interest rates and the situation in Ukraine.

Our view on the Fed: No surprises

The Fed has already prepared the markets for interest rate increases. After the end of the securities purchases and a first interest rate hike, which we expect in March, the reduction of the balance sheet will then also become an issue. At this week's Fed meeting, the outcome of which will be reported on Wednesday (26 January), it will be interesting what Fed Chairman Jerome Powell will say about the reduction of the balance sheet.

Our view on the Ukraine conflict

Another much discussed topic in the market is the situation on Russia's border with Ukraine. Even in the worst case scenario of Russia invading Ukraine, a military escalation directly involving NATO or the US is not to be expected. As much as a Russian occupation of Ukraine and parts of it would strain the relationship between the EU or the USA and the Russian Federation, the financial markets are likely to take a rational look at this situation again quickly.

Our view on the portfolio: No adjustment

After the US stock markets turned positive in the course of trading on Monday, the stock markets in Europe started trading somewhat firmer today, Tuesday. We see this as an important sign and confirm our portfolio positioning against this background.

Even though we do not expect any surprises from the Fed, government bonds are anything but attractive in the current environment. Rising interest rates mean falling bond prices, and this effect is currently even more pronounced for European and Swiss government bonds than in the US due to their higher duration, i.e. higher interest rate sensitivity.

In equities, we confirm our slight overweight and preference for European equities. Market sentiment indicators are already very negative and volatility as measured by the VIX has risen significantly. We continue to expect economic data to improve again in the coming months and that the Fed's credibility will not be questioned by markets. Thus, the chances are good that the equity markets will recover in the coming weeks.

Market phases like the current one show the importance of defensive investments in the portfolio. For this purpose, we use the so-called minimum variance approach in our equity selection. This helps to cushion corrections like the one yesterday. Gold also contributes to stabilising the portfolio.