Investment Strategy in Light of Central Bank’s Decision
How does the latest decision of the ECB and the SNB affect the investment strategy of Credit Suisse? We asked Michael Strobaek, Chief Investment Officer, and José Antonio Blanco, Head Global MACS.
SNB Decision: A Shock With a Limited Impact
Michael Strobaek: The SNB decision to remove the 1.20 floor in EUR/CHF and to cut interest further into negative territory was indeed a shock and came as an absolute surprise to the investment community. This can be seen in the extreme market reaction. The CHF appreciated more than 20 percent against the EUR and the Swiss equity market sold off by a similar amount. A daily move of this size in a developed market only occurs once or twice in a lifetime.
It is important to stress that this is an isolated event. It has significant implications for the CHF, Swiss equity markets and Swiss bond markets. But for financial markets outside Switzerland, the impact is very limited.
ECB Announcement: European Stocks to Benefit
Michael Strobaek: The ECB announcement has more far reaching implications. Although the program is rather small compared with previous quantitative easing (QE) programs of other central banks, it has satisfied market expectations.
The weaker currency should also help European stock markets. We were already overweight in European equities and the ECB decision is adding to our conviction there.
In fixed income, we have decided to go underweight in German Bunds. Experience with QE in the US shows that yields tend to decline ahead of the decision and actually increase during the purchasing program. We could see a similar development for bund yields.
Discretionary Mandates: CHF Investments Most Affected
José Antonio Blanco: The impact was mostly felt in Swiss Franc mandates. This is because they have a sizeable exposure to non-CHF currencies and the Swiss equity market, which both went down.
In contrast, the impact on non-CHF portfolios is either negligible or has resulted in a small positive contribution from the exposure to the Swiss franc incurred via Swiss Equities.
We are reviewing the situation but so far have not changed the allocation because markets are still adjusting to the news and are very volatile. We believe both the Swiss Franc and the Swiss Equity market have most likely overreacted.
A Look Back to 2014: Frequent Portfolio Adjustments
José Antonio Blanco: 2014 was a challenging year: The persistent weakness of the main economies (except of the USA), geopolitical tensions, the debate about government debt in the Eurozone, the need for fiscal stimulus and monetary policy actions and the collapse in oil prices were the main market drivers last year. However, most financial markets did well despite the many unresolved issues.
Against this backdrop, we took a broad and dynamic investment approach by diversifying our positions very broadly and adjusting the allocation quite often. This generally worked well.
For example, we adjusted our equity allocation at various times during the year increasing our equity weighting particularly in the second half of the year. Also, we adapted our regional allocation quite often, taking into account the diverging economies. For example, our increased, hedged investments in Japanese equities showed positive results. The same is true for our investments in Eurozone stocks that we had increased after the October correction since the rebound in Eurozone stocks turned out positive.
Investment Strategy for 2015
- Market view: move from outperform to neutral on overall market
- Sector view: opportunity to overweight telcos, healthcare and high-dividend stocks
Opportunity to selectively buy Europe, Japan and Australia
- Sell/take profits on Swiss bonds after ECB; don't buy long CH bonds
- If investors must remain in CHF bonds, they should reduce duration and/or move to cash-like
- Buy very short dated USD-denominated fixed income (USD to strengthen)
- Outperform: high yield bonds and emerging market local currency bonds
- Take profits on CHF and reduce positions after ECB
- Hedge CHF FX risks if needed