Our own Roaring Twenties. What's exciting investors.

Optimism among investors

At times, Wall Street and Switzerland seem worlds apart; however, at the moment, both places are showing deep confidence. Entrepreneurial resilience, peaking interest rates and inflation, consumers with high purchasing power, global fiscal stimulus, and innovative strength are just some of the reasons for the positive underlying sentiment. That said, the risks, too, are many and varied. While some market participants are wondering if artificial intelligence (AI) is currently creating a stock market bubble, others outline the far-reaching opportunities of AI. There is no doubt that AI will deliver, above all, technical advancements in almost all areas of the economy and day-to-day life. It is an unstoppable force in accelerating innovation.

However, you do not necessarily have to invest in semiconductor manufacturers to benefit from IT and AI. This is because almost everyone will ultimately be a winner if AI delivers what it promises. As such, the 2020s share certain similarities with the Roaring Twenties of one hundred years ago, which was also a decade marked by disruptive developments.

Swiss businesses and public finances in good health

For Swiss businesses confidence is also high, and for good reason: they are generally healthy. Solid balance sheets, revenues, and order books – not to mention investment discipline – prepared firms well for any economic slowdown. The interest rate reversal has not done much damage as of yet. After all, decisions regarding investments and valuations depend on more than just interest rates. In any case, what sets Switzerland apart is that it has the lowest inflation, the lowest sovereign debt, and the strongest currency in the world.

Switzerland’s debt brake, which is celebrating its 20th anniversary, explains the financial and economic idiosyncrasies when it comes to interest rates, inflation, and foreign exchange. It came into force in 2003 and has done an outstanding job. A debt-to-GDP ratio of under 30% will help future generations and make the country stronger. It is therefore no wonder that at -0.65 percentage points Swiss 10-year yields have recorded the biggest drop this year by international standards.¹ A welcome side-effect is that this also supports investments in Swiss real estate.

From the “capex supercycle” to the “revenge of the old economy”

Marko Papic, renowned American geopolitical strategist, spoke of the capex supercycle recently at Credit Suisse's investor summit in Andermatt. He explained that as a result, demand for rare earths had doubled over the past five years, in turn accelerating the race for commodities, technology, and manufacturing capacity. Papic sees a parallel with the global economic recovery following the financial crisis of 2008. The ownership of many firms changed hands during the crisis, which subsequently sparked a surge in capital expenditure on new capacity. In similar fashion, there is a current construction boom of new factories – more specifically, "smart factories" – in the US.

Papic goes on to recognize that there is a broad investment backlog along the three Supertrends security transition, energy and climate change, and reglobalization. When new factories are built, there is also a need for new machinery, roads, power lines, rooftop solar panels, and much, much more. And because one always leads to another, we can now refer to this as the "revenge of the old economy": Following years of underinvestment, the pendulum is suddenly swinging back in the opposite direction. This ultimately triggered Russia’s war of aggression on the old world order.

And this Herculean task is a long way from being complete. It may take decades and necessitate a great deal of both capital and innovation. This is another reason why investors should rethink their tendency to focus on the US perspective.

What next for China and the global economy?

The idea that the Chinese economy may be on the verge of imploding is a misconception. While China’s real estate crisis is not yet over, manufacturing has stabilized, exports and demand for electricity are on the rebound, and the Chinese government knows how to deploy its stimulus levers only too well. Although it cannot halt the slump in property prices, it has the tools to alleviate some of the pain for private households and banks by creating new jobs, placing non-performing loans under state ownership, and cutting taxes.

The example of Vietnam also demonstrates China’s adeptness in circumventing geopolitical pressure relating to reglobalization. Despite unresolved border conflicts, China has recently become the leading foreign investor in Vietnam. This is due to Washington's trade barriers on products that are "Made in China." The solution adopted by many Chinese companies is to move their production to Vietnam. A similar example is Indonesia, which has become the location for China’s largest battery manufacturing operations. This is a move that curtails production costs and facilitates exports, as “Made in Vietnam” or “Made in Indonesia” labels are still welcome in the US.

Can the US Federal Reserve meet its targets without a recession?

Currently, all eyes are on the US Federal Reserve. At the recent central bank convention in Jackson Hole, Fed chairman Jerome Powell listed three prerequisites for a return to monetary easing:

• a decline in core inflation to the region of two percent year-on-year;
• a cooldown in the US labor market to avoid wage/price spirals;
• moderating private consumption.

Can these three goals be met without a recession? Quite possibly. Three cases explain Credit Suisse's positive assessment:

1. US unemployment is at a record low. Past experience and economic models suggest that the next trend will be heading upwards, which should be welcomed by the Fed. As it happens, the US unemployment rate rose from 3.5% to 3.8% last week.
2. Similarly, the US savings rate is at an extremely low level. A potential move upwards in tandem with unemployment could lead the Fed closer to its goal of taming consumer spending.
3. US core inflation has already reached 2.9% on an annualized basis in the last three months. While it still stands at 4.2% in year-on-year terms, a decline to 3.5% next year followed by a further fall to 2% by 2025 seems plausible.²

Stock exchange winners and losers in 2023

The beginning of autumn is also a good time to take stock of how global challenges and developments have impacted the markets in the year to date. Which companies have been impressive so far, and which have proved disappointing? As always, analyses such as these can reveal some surprises and it is rare for all expectations to be met. Here are a few facts and figures:

1. Japanese stocks have been the top performers, with a gain of 27.8% in the year to date.
2. IT leads the charge in terms of sectors, with growth of 34.24%.
3. Swiss Confederation bonds have delivered the sharpest decline in bond yields this year at −65 basis points.
4. On the fixed-income front, senior loans have performed best in the year to date, outpacing all other bond categories with gains of 9.1% in US dollars and 10.5% in euros.
5. In the emerging-market space, bonds in hard currency have topped the performance charts at 4.3%.
6. Switzerland boasts the world’s lowest inflation and the strongest currency thanks to the Swiss debt brake. The Turkish lira has been the weakest currency of 2023 to date, losing 30% against the greenback.
7. As far as commodities are concerned, industrial metals are down 9.2% owing to the slump in China, while precious metals have gained 5.2%. Meanwhile, natural gas has recorded the sharpest fall in prices.