June general market comments

“Positively Inclined” – Wax Tailor, 2007.

June 2025 has delivered a market performance worthy of Wax Tailor’s “Positively Inclined” (thanks Mr Aznavour for the beat…): uplifting, resilient, and forward-looking. Trade progress, central bank support, and AI-driven innovation provide a strong backbeat, but inflation, fiscal concerns, and geopolitical risks keep a lid on the upside. June has been full of headlines triggering both optimism and pessimism; as tariffs risk stabilized, entered the short-lived war between Israel and Iran that could have seriously derailed the forward march markets tried to maintain after a very good month of May, while European Nato members bended to Mr Trump’s demands for higher military spending across the Old Continent.

Equity markets shrug off the threats and focused on the positives; the MSCI World added 4.2%, the S&P 500 5%, Emerging Markets 5.6% but Europe stalled (-1.3%) in the context of a pretty strong euro (or a very weak dollar); in a quite unusual mode, currency markets did not react as one could have expected when Israel started to bomb Iran, in other words the dollar stayed unscathed, and even ended the month down 3.7% versus the euro (and now down 13.7% year to date!).

If yields differential can sometimes provide clues about currencies moves, it doesn’t seem to play out this year as US 10 year at 4.24% offer roughly 170 basis points more yield than the German 10 year Bund. Yet this spread has narrowed year to date (60 bps), but does that justify the dismal performance of the dollar? Probably not. Sticky twin deficits, huge debt and Trump’s aggressive stance towards the Fed probably had their toll, more than anything else, on the dollar.

Middle-East tensions boosted Oil, which rose 7.1% in June, but Gold barely reacted (+0.4%), while risk-prone attitude from investors was reflected in the outperformance from Growth versus Value (+4.9% vs +3.5%) and a new bout of Mag-7 dominance, the very good month for credit (+1.2% for the Itraxx Crossover) and the Bitcoin, which rose 2.6%; the latter has also been buoyed by the Genius Act (17th of June: bipartisan bill poised to create the first comprehensive federal framework for stablecoin regulation).

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

China’s growth 2025: The dragon awakens

Hedge funds are betting on AI, tech and local consumption to tap into China’s renewed growth.

A renewed sense of optimism among fund managers

Is 2025 finally the turning point for Chinese markets? After several years of painful adjustments, positive signals are starting to align. In Hong Kong, hedge fund managers are becoming increasingly constructive. During a recent trip to Asia, we met with over thirty managers focused on Chinese markets and they all shared a similar view: both top-down and bottom-up conditions are improving.

Strong earnings rebound in Chinese companies

What’s driving this shift? A clear policy pivot from Beijing in September 2024 marked the start of stronger support for the economy and markets. The result: a robust earnings rebound in Q1 2025. BYD reported a 98% increase in EPS, SMIC posted +162% growth in net income and Xiaomi +64%. In a market where corporate earnings serve as a proxy for the macro picture, these numbers speak volumes.

Domestic consumption remains a key challenge

The key domestic driver remains consumption, still below its pre-COVID potential. The government is trying to boost demand with widespread discounts, reaching up to 20% on certain goods. Yet, with employment still under pressure, a sustained rebound in consumption will be hard to achieve without a recovery in the job market.

Real estate: confidence returns, slowly

The real estate sector, long the epicenter of the crisis, appears to have bottomed out. In cities like Shanghai, some new developments are seeing price increases of up to 10%. Some funds are taking this opportunity to re-enter the space via property management companies, seen as more resilient and better positioned to benefit from China’s new housing quality standards.

Sector rotation toward the domestic market

In response to this changing landscape, portfolios are shifting. The dominant trend is clear: a gradual exit from export-driven names and a renewed focus on domestic demand beneficiaries. Consumption, technology (particularly TMT), industrials and AI are leading this sector rotation.

AI in China: ambition, capital, and sovereignty

China’s technological acceleration is striking. AI has become a strategic national priority. Alibaba announced a USD 53 billion investment in AI and cloud and Tencent is following a similar path. The push for tech sovereignty is also visible in the semiconductor sector, where managers are identifying opportunities across the value chain, from chipmakers to materials and equipment providers.

Tech and EVs at the forefront

Digital giants like JD.com, Pinduoduo and Meituan remain core holdings, benefiting from China’s market depth, rapid digitalization and the government’s renewed support for private platforms. The EV sector, driven by players like BYD, NIO and Xiaomi, is thriving at the intersection of China’s climate goals and rising consumer appetite for premium products.

Hedge Funds adapting to volatility

Lastly, Hong Kong-based hedge funds are increasingly using derivatives to manage exposure and volatility. After diversifying into other Asian markets and the US, many are now reallocating substantially back into China. The underlying belief: despite ongoing uncertainties, China’s fundamentals are once again turning attractive.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

May general market comments

“If you don’t give a doggone about it” – James Brown, 1977.

As is often the case, the market tried to frustrate the majority and please the minority. After a turbulent April and amid the Q1 earnings season, it would have been tempting to reduce risk and heed the old adage, “Sell in May and go away”. What a mistake that would have been! At the beginning of May, the right decision for risk assets was to “not give a doggone about it”, as James Brown would say. These assets performed strongly (more on this later). This reversal was triggered by the satisfactory results reported by most companies so far, but also by recurring jitters around tariffs and hopes for a less radical stance from the White House.

In this context, the MSCI World added 5.69% in May, the tech-heavy Nasdaq leading the charge with a whopping 9.04% return; the European Stoxx 600 fared well (+4.02%), like the MSCI Emerging Markets and the Japanese Topix respectively up 4.00% and 5.03%. Interestingly, all major indices are now in positive territory on a year to date basis (S&P, Stoxx, Nasdaq 100, Emerging Markets, Topix), barring the Chinese CSI300 (down 2.41%). This spectacular rally in equities logically favoured Growth versus Value: the MSCI World Growth soared by 8.58%, versus “only” +2.71% for the MSCI World Value. Even more interesting, if you didn’t give a doggone about tariffs when the mess started, you would be up 18.7% since the 8th of April by simply holding the MSCI World!

In fixed income, fates diverged between Government and credit: the former had a so-so month with yields on the rise, 24 basis points for the 10 year US and 6 basis points for the 10 year Bund, but the latter performed extremely well, in line with risk assets in general, highlighted by the Itraxx Crossover adding 2.80%, just for the month of May.
Finally, another sign that investors embraced a risk-on attitude is the very strong returns recorded by both Oil (+4.43%) and the Bitcoin (+10.84%).

How things play out from now on remains a big question mark: US markets are still expensive, and the economy has little chances to shoot up to the upside, while geopolitics remain shaky.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Chart of the Month – Rotations

Rotations

I personally love skiing.

Like all ski addicts, I know what rotation means:

Feet and knees trigger a change in orientation.
Edge grip
The upper body stays in front of the slope and does not rotate.
The turn is controlled and mastered.
Conclusion: rotation is necessary, good and helps

Like all equity portfolio managers, I know what rotation means:

Growth outperforms Value, or Value outperforms Growth, in this secular opposition between styles.
This happens whatever the direction of the market.
A portfolio can suffer or profit from rotations.
It is awfully difficult to time the market, and, on top of that, to time rotations.
Conclusion: rotation is potentially dangerous

It’s easy to see that in skiing you are the source of the rotation, whereas in equity investing you are subject to it.

The Chart of the Month is divided in two parts:

The upper part shows the performance of the MSCI World Net Total Return in euros since 2017. It has more than doubled.
The orange line in the lower part displays the relative performance of the MSCI World Growth versus the rest of the market. It has bettered the MSCI World by more than 20%, but how volatile this has been! And the blue line represents the relative performance of our equity flagship DGC Stock Selection, which has done better than both the MSCI World and the MSCI World Growth over the period.

Investors have a natural tendency to try to time the market; this is very frequently a failure. Looking at all the rotations highlighted in the Chart of the Month, they also have to cope with styles, adding another risk of failure.

We believe at NS Partners that we offer a comprehensive and reasonable equity exposure with a blended global equity fund with no style bias, as shown by the blue line in the chart of the month. As you can see, our DGC Stock Selection fund has been able to deliver an appreciable outperformance, without having been biased towards Growth or Value, but by applying a disciplined approach in terms of valuations and quality.

History tells us that long periods of outperformance from one style versus another tend to correct, but the timing is uncertain. We expect many more rotations in the future.

Like an advanced skier who will always keep his shoulders in front of the slope to make sure he controls his trajectory while rotating his feet and knees, our fund will continue to focus on quality and valuations, whatever the sector, in order to smooth out style rotations and, hopefully, deliver superior performance for investors going forward.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group

July General Market Comments

«The Magnificent Seven» – The Clash, 1980

“Gimme Honda, gimme Sony, so cheap and, real phony” goes Joe Strummer in this legendary song from the Clash. We could transpose this into “Gimme Tesla, gimme Meta” today, as those two stocks stand among the magnificent seven performers of 2023 so far (with Alphabet, Microsoft, Amazon, Apple and Nvidia); the difference is that they don’t seem phony, and, for most of them, they’re far from being “so cheap”. In fact, these seven companies contributed to more than 55% of the performance of the S&P500 this year, which means that we could easily talk about a S&P 7 versus a S&P 493.

July 2023 has been a good month, again, for all risk assets: the MSCI World added 3.3%, the S&P500 3.1%, the Stoxx 600 2% (but the euro rose 0.9% versus the greenback), the Topix 1.5% (the Yen being up 1.5% versus the dollar after the change of tone from the BoJ regarding its yield curve control), and finally Emerging Markets caught up with a 5.8% return.

Styles reverted a smidgen on a global basis, with the MSCI World Value advancing more than the MSCI World Growth (3.7% versus 2.9%). One can still feel flummoxed when looking at the performance gap between both indices this year, Growth being up 30.2% versus a meagre 6.3% for Value. All hopes of a return to the mean between styles have been dwarfed in 2023.

July has also been very profitable for Credit, again, as the Itraxx Crossover added 1.5%, for Commodities (Gold up 2.4%, Oil 15.8%), which finally leaves Government Bonds as the only outliers with rising yields overall: +12 bps for the US 10 year, +10 for Bunds and +21 for JGBs.

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

April General Market Comments

“Jump around” – House of Pain, 1992.

Should we “Jump Around” as the classic House of Pain’s song recommends? Perhaps, because looking at most financial markets’ year to date returns gives many reasons to jump around, especially in the highly uncertain economic and geopolitical environment investors have to face in 2023; even more if we go back at the end of 2022 when the investment community looked forlorn after such a poor year.

At the end of April 2023, the MSCI World is up 8.96%, the S&P500 8.59%, the MSCI Europe 10.08% and the Topix 8.76% (the only laggard in equities being the MSCI Emerging Markets but it’s still up 2.16% year to date); Credit also glows, with the Itraxx Crossover up 4.79% for the year so far; Government bonds have their say, with US 10 year yields down 45 basis points in 2023, German 10 year 26 bps and Italian 10 year 70 bps. What about Commodities? It’s not as straightforward: some rise, like Gold (+9.1% year to date), some fall, like Oil (down 4.34%).

With these numbers we can draw a logical chain of events: economic activity is expected to slow down, hence a probable peak in Central Banks’ hawkishness quite soon, with long term yields coming down. The latter have a huge impact on valuations, which, unsurprisingly, are on the rise again; to wit, the more expensive MSCI World Growth humiliates the cheaper MSCI World Value in 2023 so far (+16.58% for the former, +1.94% for the latter). Slowing economic activity and lower yields favours Gold, at the expense of Oil, which explains the opposite fate of the two commodities.

Finally, the market seems to selectively worry about a possible banking crisis in the US and its ripple effects across the globe. Financials underperform but don’t collapse overall.

“Jump up, jump up and get down” says the song; we hope markets don’t drive us down too much anytime soon!

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

À vendre : marché désorienté, désabusé, mais pas défait

Les incursions en territoire inconnu et la fin d’une période glorieuse désorientent les marchés globaux

J’ai débuté ma carrière en 1993 sur les marchés de taux. Ceux-ci sont rapidement devenus particulièrement difficiles, avec le mémorable krach obligataire de 1994 qui a fait subir de lourdes pertes aux porteurs de titres à longues échéances. Mais très vite, les rendements obligataires ont repris leur baisse historique jusqu’à la fin de la décennie 2010, en parallèle avec des pressions déflationnistes continues. Durant cette longue période, jamais la hausse des prix à la consommation américains (CPI) n’a dépassé la barre des 7%. Mais le dernier chiffre du CPI place désormais l’inflation US à 8.5%, un niveau inédit depuis 1982 ! Cet exemple d’incursion en territoire inconnu n’est pas le seul aujourd’hui et explique une bonne partie des tourments que les investisseurs ressentent.

Des obligations plus si sûres que ça

Qui pouvait imaginer qu’on pouvait perdre autant d’argent en investissant dans des emprunts d’Etat de qualité supérieure, liquides et en monnaies fortes ? En effet, depuis 2 à 3 ans, les dégâts sont parfois considérables. À titre d’exemple, l’emprunt de la Confédération Suisse 4% 2049 a perdu le tiers de sa valeur nominale. Il s’agit pourtant d’une obligation de la plus haute qualité (AAA), liquide et libellée dans une monnaie particulièrement forte, le franc suisse…

Par ailleurs, alors que, dans les portefeuilles diversifiés, ces titres à longue duration avaient souvent servi de contrepoids lors de baisses des marchés actions, tel n’est plus le cas aujourd’hui. Bref, rien n’est plus comme avant… Il faut dire que les banquiers centraux, et en premier lieu la Fed, nous avaient donné de mauvaises habitudes. Depuis la crise LTCM en 1998, la Fed a presque systématiquement adopté une politique expansionniste, dans des proportions parfois outrageuses dès qu’un danger se profilait. Et bien souvent, les autres grandes banques centrales suivaient. Pour beaucoup, le stoïcisme de Mr Powell est une surprise aujourd’hui. Nous sommes entrés en territoire inconnu.

Les matières premières reviennent en première ligne

Les matières premières, ces vieilles reliques de l’ancienne économie qu’on pouvait croire obsolètes à l’heure de la réalité virtuelle, nous rappellent actuellement de façon violente que leur nom n’est pas dû au hasard et que leurs fluctuations et leur disponibilité peuvent avoir une importance critique. Brutalement, pour des raisons diverses, l’ère de l’abondance et de l’accessibilité immédiate des ressources énergétiques, minières et agricoles paraît menacée, avec pour effet évident une hausse des cours et, dans certains cas, un stress quant aux approvisionnements. Et leurs producteurs, même s’ils sont parfois limités par des problèmes de chaînes d’approvisionnement et de logistique, se retrouvent favorisés, un phénomène assez nouveau. Bref, nous nous retrouvons une fois de plus en territoire inconnu.

Le prix, cet élément qu’on avait un peu oublié

Tout est lié : les matières premières, l’inflation, les banques centrales et les taux d’intérêt. L’une des conséquences indirectes de ces paramètres, c’est le retour d’un facteur primordial dans l’investissement : le prix… Non pas le prix absolu, mais la valeur mesurée en termes de cherté ou d’abordabilité. Car des taux d’intérêts plus élevés font mécaniquement baisser la valeur des flux lointains par effet d’actualisation, et pénalisent ainsi les valorisations des actifs les plus chers.

Une des conséquences de la politique toujours plus accommodante des banques centrales a été d’occulter l’importance des valorisations. Ce phénomène a atteint son paroxysme avec les niveaux inouïs atteints par de nombreuses poches spéculatives des marchés financiers, comme les cryptomonnaies, les startups ou jeunes entreprises prometteuses mais non-profitables rangées sous divers sobriquets tels que Moonshot, Spacs, Meme, etc. Sans avoir atteint ces extrêmes, la quasi-totalité de la classe d’actifs « Growth Stocks » était ainsi devenue chère, et donc susceptible de souffrir en cas de normalisation des taux d’intérêt. C’est ce qui s’est passé depuis le quatrième trimestre 2021. Alors que les titres de croissance avaient connu une période de surperformance très soutenue au cours des 15 dernières années, ce cycle est aujourd’hui remis en cause et nous nous retrouvons ainsi une fois de plus en territoire inconnu.

Le terrain accidenté de la gestion « value »

Les longues phases de surperformance du « Growth », à l’image de celle que nous venons de connaître, sont relativement confortables : au-delà des performances attractives, la détention de belles valeurs de croissance bien connues est rassurante. Les sociétés génèrent des hausses de profits régulières, présentent des bilans très sains, et, dans la majorité des cas, ne sont pas sujettes à des à-coups violents dans la marche de leurs affaires. A l’inverse, les phases de surperformance des titres « Value », comme c’est le cas depuis la fin de l’année dernière, sont tout sauf confortables. En effet, de par la nature de leurs activités, la plupart des entreprises du domaine « Value » subissent beaucoup de volatilité dans leurs coûts d’approvisionnement, leurs prix de vente, le coût de leur dette, etc. De fait, les variations boursières des titres « Value » et cycliques sont bien souvent nettement plus chaotiques que celles de leurs homologues « Growth » et défensifs. Cette gestion est d’autant plus complexe que ce changement de leadership constitue une situation inédite pour de nombreux investisseurs, qui n’ont souvent connu que les dernières 15 années de surperformance des titres de croissance.

La bonne surprise des grandes actions internationales

Faute de feuille de route fiable, l’investisseur, tel le voyageur des temps anciens explorant une « terra incognita », risque de s’égarer dans des déserts inhospitaliers. Heureusement, des oasis fertiles et accueillantes offrent un abri réconfortant : les « grandes valeurs internationales ». En effet, cette classe d’actifs dispose d’un avantage concurrentiel de taille : n’étant pas contrainte géographiquement ou sectoriellement, elle fait l’objet d’un recyclage dynamique et permanent. Les leaders changent, disparaissent et réapparaissent selon les moments. C’est très différent de ce qui se passe dans un marché cloisonné, que cela soit relatif à une région, un pays, un secteur ou un style, et c’est pourquoi les grands indices globaux montrent des courbes flatteuses sur le long terme. Et c’est donc une raison d’espérer, car les corrections observées à ce jour sont significatives, même si nous ne sommes pas à des niveaux de valorisations dégradées. De plus en plus de poches de valeur apparaissent, à l’inverse de ces dernières années durant lesquelles c’étaient plutôt des zones de surévaluation et de spéculation de plus en plus nombreuses qui voyaient le jour. Et si nous nous trouvons peut-être là aussi en territoire inconnu, cette fois-ci c’est pour le bien !

For sale: a disorientated, disillusioned but undefeated market

Forays into hitherto unknown territory and the end of a golden age have left global markets disorientated

I started my career in 1993, working in fixed-income markets. These soon turned particularly sour, as the great bond massacre of 1994 brought heavy losses for anyone caught holding long-term debt. But rapidly, bond yields moved back into their historical downtrend and maintained it until the end of the 2010s, against a backdrop of relentless deflationary pressure. Throughout this long period, the US consumer price index (CPI) never got higher than 7%. But the latest CPI puts US inflation at 8.5%, a level unseen since 1982. This is just one example of numbers moving into unknown territory and this phenomenon accounts for much of the nail-biting going on among investors at the moment.

Bonds no longer look all that safe

Who would have thought you could lose so much money on top-rated, liquid, sovereign bonds in strong currencies? In the last two or three years, however, losses have sometimes been severe. For instance, the Swiss Confederation 2049 4% bond has lost a third of its face value. This, for a triple-A rated bond that is liquid and denominated in the mighty Swiss franc…

What is more, while diversified portfolios have often used these long-duration securities as a counterweight during equity bear markets, this is not the case today. Basically, everything has changed… Admittedly, central banks, with the Fed to the fore, led us into some bad habits. Since the 1998 LTCM crisis, the Fed has almost systematically adopted an expansionist policy, in some cases to an outrageous extent when danger loomed. And all too often the other big central banks followed suit. For many, Mr Powell’s current stoicism is a surprise. We are in unknown territory.

Commodities matter again

Commodities, the relics of an ancient economy that seemed obsolete in the age of virtual reality, are violently reminding us that what they actually are is raw materials and that their price fluctuations and availability can be critically important. Suddenly, for a number of reasons, the time of plenty, with instant access to energy, mining and agricultural resources, seems to be under threat, with the obvious effect of a rise in prices and, in some cases, a squeeze on supply. And producers, although sometimes hampered by supply chain and logistics problems, find themselves suddenly in favour, a fairly novel situation. Once again, we find ourselves in unknown territory.

Price, the forgotten factor

Everything is inter-related: commodities, inflation, central banks and interest rates. One indirect consequence of their interplay is the return of a basic factor in investment: price… Not absolute price, but value gauged by how expensive or affordable an asset is. Higher interest rates automatically reduce the value of future financial flows through the discounting effect and therefore undermine the highest-priced assets.

One consequence of the ever more accommodative stance of central banks has been to mask the importance of value. This effect reached its apotheosis in the record prices for many speculative niches of the financial markets, such as crypto-currencies, start-ups or young, promising but unprofitable companies going by names such as Moonshot, Spacs, Meme, etc. Without reaching such extremes, almost all the Growth stocks became overvalued and hence vulnerable to a renormalisation of interest rates. This is what has been happening since the fourth quarter of 2021. While growth stocks had consistently outperformed for the past 15 years, this cycle is now in doubt and we find ourselves once again in unknown territory.

The uneven ground of “value” investing

Long periods where “growth” stocks outperform, such as the one we have just lived through, are relatively comfortable: besides returning attractive performance, holding nice familiar growth stocks is reassuring. Companies generate regular profit growth, post healthy balance sheets, and, in most cases, escape violent shocks in their business markets. In contrast, periods when “value” stocks are outperforming, such as we have seen since the turn of the year, are anything but comfortable. By the nature of their businesses, most companies in the “value” universe face plenty of volatility in supply costs, selling prices, cost of debt, etc. In fact, the market variations of cyclical “value” stocks are often far more chaotic than those of their defensive “growth” peers. This investment approach is made all the more complex as many investors have never before seen such a reversal of performance, having only entered the markets over the last 15 years, to see growth stocks outperform.

The welcome surprise of major international stocks

With no reliable road map, investors, like ancient travellers exploring a “terra incognita”, risk losing their way in the unwelcoming deserts. Fortunately, there are some welcoming, fertile, oases where they can shelter: “major international stocks”. This asset class enjoys the competitive advantage of scale: with no geographical or sector constraints, such firms are continuously and dynamically being recycled. The leaders change, disappear and reappear from one moment to another. It is very different from what happens in a closed market, whether a region, country, sector or style, and it is why the big global indices show flattering curves over the long term. And it is therefore a source of hope. The corrections we are now seeing are significant, even if markets have not yet seriously downgraded values. Increasingly, we are seeing areas of value pop up, unlike in recent years when we have seen, instead, one area of overvaluation and speculation after another. True, this is yet another foray into unknown territory, but this time it is a good thing.

May General Market Comments

“Take the money and run”– The Steve Miller Band, 1976.

Are market participants in a “Take the money and run” mood in 2022? Perhaps, because on top of being extremely difficult this year, broad financial markets have shown high levels of volatility, which have been blatant in up moves like in down moves. May was the perfect illustration of this, and not only for Equities: the MSCI World did a round trip from -6.8% to + 8.1% to end up the month down a meagre 0.16%, US 10-year yields went from 2.91% to 3.20% and then all the way down to 2.7% and finished at 2.86%, WTI began at $105, travelled down to $98 and up to $ 118… well, you see the picture: sudden and significant gyrations, greed and fear in action at the same time.

This makes investors’ life uneasy. Temptation is high to take quick profits when there are some, and to sell rapidly on the downside in order to limit losses. Whatever the direction markets are headed to, people tend to take the money and run, even at a loss.

Sentiment is quite logically mixed: between rising Commodity prices and inflationary pressures, hawkish Central Banks, fears of a serious slowdown, not to say a recession, and geopolitical tensions, all financial markets are complicated. Will corporate earnings be jeopardized? Will interest rates stop climbing? When will Commodity markets start to ease? Why does Gold perform so poorly in such an environment?

After mid-May’s carnage, there’s some satisfaction to see muted drawdowns for equity markets, thanks to a strong rally in the second half of the month: the S&P 500 even gained 1 basis point, the Nasdaq abandoned 1.65%, the MSCI Europe 1.48%, but both the Japanese Topix and the MSCI Emerging Markets were up (+0.69% and +0.14% respectively). Value still prevailed and added 1.73% while Growth lost 2.39%. Yields moved up in Europe (+18 bps for the 10-year Bund and +34 bps for the Italian 10-year BTP) but slightly fell in the US (-10 bps for the US 10-year Treasury). Credit was mostly flat, Gold fell 3.14% and Commodities were up 2.68%, once again driven by Oil (+9.53% for the WTI).

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

April General Market Comments

“Been dazed and confused, for so long, it’s not true” – a tribute to the mighty Led Zeppelin

Yes, it has been dazed and confused for investors, and it has been so for quite a long time now.

Russia-Ukraine war has not helped, but this alone can’t explain the very complicated market conditions we’re facing this year. Commodity prices had started to rise significantly before the conflict began, like interest rates and inflation, but this did not prevent equity markets from posting spectacular returns in 2021. So what’s the problem this year, notwithstanding this war (and without minimizing or underestimating its impact)? Perhaps the message from many Central Banks is what frightens investors the most: we’ve been used to having this kind of FED/ECB “put” each time things turned sour for so long, that their hawkish message today triggers discomfort and a feeling of entering unchartered territories.

At some point, Led Zeppelin’s song goes “lots of people talk, and few of them know”, which seems to echo these days’ fuss: Growth addicts tell you that IT stocks are a screaming buy, while Value disciples explain to you that it’s only the beginning of a long cycle for Cyclicals; Gold bugs urge you to go full blast on the shiny stuff and fixed-income optimists consider that today’s yields are attractive; but what happens if inflation fades away? Gold falls and bonds perform? And if inflation shoots up? So does Gold, and bonds collapse? Perma-bears maintain their prediction of an Armageddon, but Perma-bulls want you to increase risk.

As we’re in the middle of decisive earnings reports from a lot of companies, skies could clear up, or not: it will be extremely interesting to focus on the outlook, with many unknowns which have to be addressed: China lockdowns, supply chain, costs inflation and pricing power, Russia-Ukraine consequences, production bottlenecks and final demand.

April was painful; it has been a volatile and negative month. The S&P 500 lost 8.8%, the MSCI World 8.4%, the Nasdaq 100 cratered 13.4%; Europe fared relatively well (-1.1% for the MSCI Europe), but the Euro fell 4.9% versus the dollar. In the same vein, the Topix only receded by 2.4%, but the JPY sank 6.7% versus the dollar.

As credit had a very bad month, like Government bonds, like equities and like most currencies (barring the dollar), the only bright spot was Commodities with Oil rising again (+4.4%) and the Broad Commodity Index adding 4.4% as well, but it’s not supposed to help equities. Even Gold retreated by 2.1%. Dazed and confused, indeed. Hopefully not for too long.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group