2021 was an exceptionally pleasing year for investments. The Swiss Market Index went up by 23.73% year on year, while US and European equities also performed extremely well, rising by 29.85% and 23.66% respectively.
This was undoubtedly a result of the ultra-expansionary monetary policies of the central banks. US monetary policy remained extremely expansionary, despite the announcement by the Federal Reserve that it would be scaling back its bond-buying programme. The infrastructure package amounting to more than USD 1,000 billion that was approved by Congress, as well as the decision not to go ahead with the planned rise in US corporate tax, likewise had a positive impact on investor sentiment.
At the regional level, industrialised countries performed better than developing countries owing to the strong US dollar and the slight rise in long-term interest rates.
At the start of 2022, markets were rattled by the war in Ukraine. The main factor unsettling the financial markets was the rise in oil and commodity prices. The European equity markets lost between 15% and 17% between the beginning of the year and the end of March 2022. The United States – which is not directly affected by the war – has fared better, with the S&P 500 losing 12% since the start of January (as at 5 April 2022). The Swiss SMI also went down by less than the other European equity markets and its fluctuations were significantly lower. This can be attributed to the overweighting of defensive sectors in the index, such as healthcare and food manufacturing.
The focus this year will therefore be on issues such as rising consumer prices and the war in Ukraine. We believe that a large number of companies will abandon their presence in Russia in the light of the continuing war and persistently high commodity prices. Central banks will take the high prices and economic uncertainty into account in their strategy and raise interest rates more slowly than anticipated by the market. This may ease the cooling in investor sentiment and in turn slow the weakening of the economy. As trade with Russia is low, globally speaking, we think further-reaching risks in production and consumption are unlikely and that switching procurement to other markets may lead to strong short-term disruptions in industrial production in particular. We favour high-quality large caps with a strong international focus.
In the short term, the various uncertainties (war, central bank policy, economic performance, geopolitics) will lead to increased volatility. Defensive Swiss equities have proved to be a stabilising factor for the portfolio.
In the medium term, however, we do not believe that consumer prices in Switzerland will rise any further and we expect the geopolitical tensions to ease in the coming months. Investors will then concentrate on companies’ fundamentals again. Owing to the high weighting of defensive stocks in Switzerland, analysts nevertheless expect corporate profits to increase by just under 10% in 2022. For 2022, we expect the Swiss equity market to go up by between 5% and 8%, which is in line with the predicted increase in corporate profits.
In asset management, we are sticking to our long-term outlook and broad diversification across asset classes. Past experience has shown that setbacks triggered by geopolitical stress events are generally of limited duration when portfolios are well diversified. Selecting high-quality Swiss companies provides a degree of protection, even in times of crisis. We remain committed to individual stocks with strong fundamentals and have protected the portfolios selectively with hedging instruments.
We favour the following stocks and topics this year. Among defensives, we like Novartis, Zurich Insurance and Galenica. In cyclicals, we favour ABB, Holcim and Logitech, while AMS, Basilea and SoftwareOne are the small and mid-cap stocks we are backing.
With themes, we are very excited by developments in the food sector. In line with this, we would support the technologies of the future in this area. Food produced worldwide amounts to around 10% of global GDP. To produce this 10%, our food sector causes 26% of global emissions, employs one-third of all workers and uses half of the habitable land on the planet. This must and will change, providing corresponding investment opportunities.
Another topic that has gained impetus as a result of the most recent crisis is cyber security. We expect M&A activities in this area to increase. This and the rising security budget around the world will probably be the most important sources of growth for this theme. In addition, cyber security will be a key topic for governments and private companies. The sector has experienced a sharp upturn in recent years, and we expect this trend to continue.