How would you describe 2019 as far as investments are concerned?
L.C.: Most markets rose strongly after a poor year for equities in 2018. The SPI in Switzerland was one of the big winners, rising 32%. In the USA the tech-dominated NASDAQ also gained 32%, driven up by momentum stocks like Netflix and Amazon. Interest rates fell all over the world as a result of the expansionary monetary policy being pursued by central banks. This helped the real estate sector.
What was distinctive about last year?
M.G.: Global economic data turned gloomy in 2019. The potential trade war hurt economical sentiment, and market liquidity was down notably compared to previous years. Even so, it was an exceptional year for equity markets. The remarkable performance can be put down to the fact that central banks unexpectedly turned more expansive, which supported financial markets. The disconnect between financial markets and the economy is not without risks and needs to be watched closely.
Some investors were taken by surprise by the strong performance of equity markets in 2019. Various factors lead us to expect more volatility this year.
What was your best stock recommendation in 2019?
L.C.: In August 2019 we recommended Sika AG. That was our best recommendation last year. The stock rose 31% after we recommended buying it. This was a much better performance than the SMI (8%) or EuroStoxx (10%) over the same period. Our recommendation was based on the successful expansion of the company, the investor-friendly dividend policy and the positive combination of our fundamental and technical analysis.
What position will Bank CIC be taking in investments in 2020?
M.G.: We started the year with a neutral weighting in equities, but we see opportunities in European stocks. In our view it will become increasingly important to select companies with stable finances.
How do you think the market will perform in 2020?
M.G.: We assume that profit forecasts will have to be cut, either if the trade dispute has a negative outcome or because of the coronavirus. Observers reckon that it will be hard to reach an agreement, given how complex the outstanding issues are. Historically, US presidential election years have been positive for equities, so the SMI is likely to end the year unchanged at best. We do anticipate greater volatility, though.
Which three stocks in the Swiss Market Index would you buy for 2020, and which would you avoid?
L.C.: In our view this is a time for solid defensive stocks like Zurich, Givaudan and Swisscom. In 2019 the Swiss Market Index was largely driven by the three heavyweights Roche, Novartis and Nestlé. We suspect these three might run of out steam after gaining almost 30%.
In light of global uncertainties, we recommend high-quality, volatility-resistant securities. Unlike high-beta stocks, such securities prove more resistance in a crisis.
The price of gold went up 14% in 2019. What do you expect for 2020?
L.C.: Gold is one of our favourites. If you are looking for an outstanding way to hedge your portfolio, you should continue to hold gold. Low carrying costs due to very low interest rates and expansionary central banks monetary policy mean it looks set to do well again this year. Increasing numbers of central banks in developing countries are also replacing their dollar foreign currency reserves with gold. We are expecting a weaker dollar, which will buoy private demand from emerging markets. On top of all that, gold is a very cheap form of protection against all types of extreme risk.
Where will the SMI be twelve months from now?
M.G.: We think the SMI will end the year where it started. However, we expect 2020 to be a volatile year for equities.
Is there anything else the financial markets are concerned by present?
M.G.: We will be feeling the impact of the coronavirus for some time yet. The world economy will need time to recover because country economies are very closely integrated, making it hard to reboot them effectively. Expansive monetary policy is good for the financial markets in the short and medium term, but central banks need to take care that trust in them is preserved. They cannot remain in expansionary mode forever, otherwise they will lose credibility. In the long term, credibility is essential.
Replicating market performance at low cost sounds like a good idea; what are your views on passive investment using Exchange Trade Funds (ETFs)
M.G.: 2019 was a milestone for the investment industry. It marked the first time there was as much money invested in funds that are passively managed as in those that are actively managed. In our view, passive investment vehicles form an important part of portfolio management. But we would advise against holding 100% in ETFs. The ability to replicate market performance at low cost does sound like a good idea, but it involves certain risks. Firstly, 80% of the global ETF market are held by just five providers. Secondly, ETFs are based on the size of a company. The biggest stocks are included in the index, and the more prices go up the bigger the weighting. This can lead to a bubble, since most ETFs are automatically procyclical and invest in stocks that have already performed well. Finally, investors have to remember that ETFs replicate market performance in negative periods in the market, as seen in early March 2020, as well as in positive ones. An active manager can intervene and make a portfolio more defensive, but that is not possible for ETF investors.
After a great year for the markets in 2019, is there a need for caution in investing right now? What should investors be looking out for?
M.G.: Clients often ask us these questions. 2019 was indeed an exceptionally good year, unlike 2020 has not got off to such a good start. But central banks remain determined to keep the monetary taps open and will increase the money supply if necessary, which will continue to support the financial markets in the medium term. The key point about timing is that investing in equities is a matter for the long term. We do not engage in trading; we look for the ideal moment for our clients to get on board. You can invest in good companies with a sustainable business model, a stable dividend and a solid balance sheet at any time. Finally, you have to bear in mind that an equity portfolio should always be viewed over a period of at least ten years. That gives both the portfolio manager and the client the opportunity to go through the different stages of the economic cycle.