Swiss investors put a net total of almost CHF 30 billion into bonds in the first three quarters of 2017, outstripping the combined net inflows into equities, mixed assets, money markets and commodities, which came to just CHF 11 billion.
Global bonds hedged back to the Swiss franc were a popular pick, as investors attempted to handle currency swings such as the depreciation in the US dollar. Nevertheless, Swiss investors put a net total of CHF 2.4 billion into US dollar corporates, where healthy growth, lower risk premia and potential corporate tax cuts offered an advantageous investment profile.
Outside developed bonds, Swiss investors piled more than CHF 5 billion into emerging market bonds. Both hard and local currency sectors were also favourites among investors worldwide, as the scramble for yield at a reasonable price/risk trade-off continues.
2017 has seen the euro go from strength to strength. Since the Swiss National Bank (SNB) removed the Swiss franc-euro peg, the franc has been steadily shedding the value it gained on the morning of 15 January 2015. This is partly due to increased confidence in the euro-area economy and the Trump administration’s stuttering policy plans, as well as the SNB buying up foreign exchange reserves in a bid to boost the low Swiss inflation rate.
European equities also rallied: the Euro Stoxx 50 surged 15% in the first 10 months of this year, which, combined with the buoyant euro, would have returned an impressive 25% for Swiss investors in the index. But the rising euro is beginning to dampen exports beyond the eurozone, which have been falling since March.
|Global Bond - CHF Hedged||3.502bn|
|Global Equity - Currency Hedged||3.37bn|
|USD Corporate Bond||2.49bn|
|Global Emerging Markets Bond - Local Currency||2.28bn|
*Other Bond includes flexible, alternative and long/short bond strategies.
Shying away from Swiss equities
Swiss investors moved a net CHF 890 million into large-cap eurozone equities in the first three quarters of the year. However, this has been more than surpassed by the CHF 2.4 billion net outflows from European large-cap blend equities, which include Swiss and UK equities.
Continued uncertainty surrounding the Brexit negotiations has left foreign businesses wavering and the future direction of the UK economy up in the air. As Swiss investors decreased their exposure to UK equities with a switch from Europe to eurozone, they also withdrew a net CHF 2.3 billion from large-cap Swiss equities.
The sell-off in Swiss equities extended globally too, as those international Swiss companies earning revenues abroad came under pressure from the depressed US dollar. At the same time, Swiss investors saw the soaring euro as too good an opportunity to miss, pulling a net total of CHF 1.5 billion from large-cap blend global equities and pouring a staggering CHF 3.2 billion into currency-hedged equivalents.
|Switzerland Large-Cap Equity||-3.27bn|
|Europe Large-Cap Blend Equity||-2.45bn|
|Global Large-Cap Blend Equity||-1.87bn|
|US Large-Cap Blend Equity||-1.61bn|
|EUR Money Market - Short Term||
What does next year hold?
The equity market rally saw the MSCI World TR rise by almost 25% over the 12 months to the end of October, with minimal volatility to boot. Investors are naturally wary of a stock market correction at these high valuations, so comprehensive asset allocation analysis is key.
Japanese and Chinese equities are likely to maintain their rally into next year. Shinzo Abe’s overwhelming victory in October’s snap elections and President Xi’s vow to take China into a ‘new era’ are both promising factors for stability in Asia.
On the yield front, property is a viable option for circumnavigating the low interest rate environment. Indeed, Swiss investors piled CHF 2 billion into indirect Swiss property in the first three quarters of the year. However, the UBS Swiss Real Estate Bubble index has suggested that the Swiss real estate market is overheating, so investors would be wise to look further afield.
Flows data provided by Swiss Fund Data from Swiss and foreign investors using Swiss distribution channels to the end of October 2017.
This article first appeared in Citywire Switzerland's 2017 End of Year Special.