Quarterly Investment Review – Q4 2024

We don’t have inflation because the people are living too well. We have inflation because the government is living too well.

Ronald Reagan

All Government spending is taxation

Elon Musk

We all know what we need to do as politicians, we just don’t know how to get elected after we have done it.

Jean Claude Juncker

Quarterly Investment Review – Q4 2024

2024 saw the financial trends of 2023 extended. Equity markets produced strong returns, led by the US indices, with most of these returns generated by the giant technology companies. Performance was particularly strong after the victory of President Trump in the US Presidential election in early November. Most other markets in Europe and the Emerging world were more subdued. The US bond market suffered an unprecedented fourth year of decline. The US dollar remained strong against most of its international rivals, and gold had a strong return. Most remarkable was bitcoin which rose 120% during 2024.

The last quarter was dominated by the US election and Trump’s comprehensive victory. Unusually for a Republican candidate, he won the popular vote, as well as making a clean sweep of Congress, giving him a strong mandate to implement his policy platform. The result was a vote for less Government, and markets celebrated the promise of deregulation and lower taxes. The expected boost to growth is supportive of equities. So far markets have been unconcerned by the less market-friendly protectionist threats of the incoming Administration, such as the promise to curb immigration and impose draconian tariffs on foreign goods, both of which could increase prices. It is hard to say the extent to which these measures will be implemented. Judging by his first term Trump is more fluid in his policy making than other Presidents, and he will start this Administration with a different set of circumstances to his previous one.

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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

Quarterly Investment Review – Q3 2024

Markets rose during the third quarter as most Central Banks started to ease policy by cutting interest rates, causing the yield on the US 10-year bond to fall from 4.40% to 3.78%. Stock markets moved up in tandem with the rate cuts, but this masked significant gyrations in early August. The combination of falling US interest rates and rising Japanese rates caused the yen to rise dramatically, and the Japanese market crashed 22% in three days. The VIX index, which measures volatility, reached its third highest ever reading. Most of these moves occurred within a few hours on the 5th and 6th August in thin trading, and the recovery was equally abrupt. By the end of the month the Japanese index had recovered everything when measured in dollars. However, the size of the moves indicates the potential vulnerability of markets even with relatively minor disruptions.

The rise in Japanese interest rates marks the end of the last source of free money in global markets. Since 2008 global Central Banks have kept interest rates close to zero and provided plentiful liquidity. The inflationary burst in 2022/23 brought this to an end and led most banks to raise interest rates and rein in liquidity, except in Japan. Japan was more reluctant to normalise its policy because it has spent the last thirty years escaping from a debt and deflationary bust caused by one of the largest property and stock market bubbles in history that peaked in 1989. It cut interest rates to zero in 1997, and from 2013 adopted an aggressive printing policy. As a result, Japanese money was pressured into seeking returns elsewhere, and Japanese liquidity has flooded world markets. These flows have supported asset prices but may start to retreat. Meanwhile the summer saw other developments. There were increasing signs that the US economy was less strong than previously thought with a record revision of US jobs numbers, and China’s economy has continued to disappoint. There were also signs that the dominance of the massive technology companies may be starting to wane. These three areas have been the major supports to the bull market in the last decade, so if they are deteriorating it will have significant implications for investors.

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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

Quarterly Investment Review – Q2 2024

“Americans prefer strong and wrong to weak and right.” Warren Buffett

The second quarter was an unsettled one. The bond market rose modestly. In April the technology sector fell sharply before rallying strongly over the rest of the quarter. Most of the rest of the market did the exact opposite. In a year full of elections, the Indian result surprised with Prime Minister Modi experiencing a setback. In the European parliamentary elections, the parties with more nationalist tendencies did well, and in France this triggered a further election to take place in early July. As we enter the third quarter the US Presidential elections in November will start to dominate headlines in what looks a close race between two ageing and uninspiring candidates. Political uncertainty looks set to continue.

Election years tend to witness heavy spending because democratically elected Governments choose fiscal misbehaviour over unpopularity every time. There has been a relentless deterioration in western Government finances. US Federal spending increased 22% year over year to May and is up 55% since 2019 while the population has grown only 2%. The Federal debt has risen from 30% of GDP to 120% since the late 1970’s. As interest rates rise the government is being hurt as much as anyone. US Government debt now stands at $34.7 trillion and is increasing at a rate of $1 trillion every 100 days. If it had to pay 4.5% (the current two-year rate) on all of that, then that implies $1.56 trillion of interest payments annually. This sum is equivalent to the GDP of countries like Australia or South Korea. US economic growth has been exceptional over the last five years, adding approximately $6 trillion of GDP, but how much of this growth is due to fiscal spending?

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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

Quarterly Investment Review – Q4 2023

“The Middle East region is quieter today than it has been for two decades.” James Sullivan, US National Secretary Adviser, 29.9.2023

“The Western World faces the greatest number and most complex array of threats since the end of the Cold War.” General Petraeus, 21.10.23

“The stock market is a device for transferring money from the impatient to the patient.” Warren Buffett

2023 was a year in which investors were continually wrong footed. Surging inflation and sharply rising interest rates meant that the banking crisis in March caught them unawares, as bond prices plunged. The reassertion of higher rates as economic growth continued to be strong, despite interest rates reaching a twenty year high, caught them off guard again. In equity markets performance was dominated by a handful of immensely powerful US technology companies benefiting from an explosion of interest in Artificial Intelligence. Apart from these companies, the stock market’s performance was muted. By year end the performance of US 10-year bonds was flat ex the coupon payment, registering a third consecutive disappointing year. The S&P 500 was up 24.2%, though much of this rise was accounted for by the mega tech companies’ stellar performance. The equal weighted S&P index was up 11%.

After a forty-year bull market bonds have been struggling. When interest rates reached all-time lows, the temptation for any type of borrower to take on debt led to an orgy of debt issuance. Yet despite higher borrowing costs debt has continued to accumulate. In 2023 the US Government issued its second largest amount ever. Incredibly this borrowing occurred during a year of reasonable growth, which begs the question of what borrowing would reach if the economy fell into recession and required government support. The annual rate of US Government borrowing is now running at approximately $2 trillion, piling on top of a total of about $33 trillion. The annual interest bill is now close to $1 trillion per year and rising. The $2 trillion of new debt, together with $7.6 trillion that matures in 2024 that will need to be rolled over, is now incurring an interest rate of over 4%, compared to the current average of 2.78%. The market seems to be floundering as it digests these giant flows. The further complication is that large-scale buyers such as the wealthy Middle East oil nations and China have become less willing to buy American debt, leaving the market rate being set by more price sensitive investors such as fund managers.

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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

Quarterly Investment Review – Q3 2023

“The market is still dominated by investors that either will not (index funds), cannot (untrained novice investors) or chose to not (valuation indifferent prof. investors) have valuation as a cornerstone of their investment process.” David Einhorn

After the turbulence in the Spring when several banks collapsed, including Credit Suisse, equity markets recovered steadily helped by easier liquidity conditions, resilient economic data, a perceived peak in inflation and reasonable profit growth. By the end of September, the S&P500 was up 11% and the MSCI World Index was up 9.6%. However, these returns are misleading. The strong performance has been generated almost entirely by seven stocks (Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia). These stocks are up on average 91% and excluding them the indices are only modestly positive. The size of these companies is astonishing. Collectively their market cap equals about 40% of US GDP or 10% of global GDP. Apple and Microsoft’s market cap would place them in the top ten of the world’s largest countries by GDP. For example, Apple’s market cap reached $3 trillion, comparable to the GDP of India, the UK or France. Nonetheless with the market recovering so strongly since the Spring risk assets are now more sensitive to downside surprises and more caution is warranted. In particular, if the view that inflation is settling back down to pre-Covid levels is undermined, then both bond and equity markets would react poorly. Inflation has fallen due to lower commodity prices and supply chains stabilising, but a further fall is more likely to be caused by lower demand thus eroding company profits. At the end of the quarter the oil price started rising, and along with some large wage increase settlements, inflation may stay higher for longer. If this continues there is likely to be more pressure on the highly valued areas in the market, including the mega cap stocks.

Since early 2022 the world has undergone one of the sharpest interest rate rises in history. Following a long period of near zero rates, they have risen, in the case of the US, by 5.25% since March last year. Higher rates raise several concerns. The lagged effects of significant interest rate rises will burden the economy because of the higher financing costs. Many mortgage holders, businesses and investment funds took advantage of the cheap financing available when interest rates were low, and are now facing the reality of much higher rates as their loans are renewed.

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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

Informe de inversión trimestral – 2T 2023

2023 ha resultado ser un entorno incómodo para los inversores. A principios de año se esperaba que la inflación se invirtiera, pero la solidez del empleo lo ha impedido. A continuación, la crisis de los bancos regionales estadounidenses hizo que las expectativas de tipos de interés dieran marcha atrás. Desde entonces, la persistente fortaleza de la economía, las fuertes presiones inflacionistas y el breve pánico suscitado por el techo de la deuda estadounidense han obligado a los tipos de interés a volver a subir. Tras las brutales pérdidas de los bonos el año pasado, el resultado a mediados de año es sólo una pequeña recuperación. Esta incertidumbre ha mermado de confianza a los mercados de renta variable, provocando una divergencia extrema de resultados entre los valores tecnológicos de gran capitalización y todo lo demás. El mejor ejemplo de esta divergencia es Estados Unidos, donde el Dow ha registrado un rendimiento del 3,8% en lo que va de año, mientras que el índice tecnológico de gran capitalización, el Nasdaq 100, ha ganado un 38,7%. El rendimiento del S&P500, del 15,9%, se debió casi exclusivamente a siete valores: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta y Facebook. La mayoría de estos valores son beneficiarios de la IA (Inteligencia Artificial), y el resto del mercado apenas se ha movido. Así pues, la historia del año ha sido que los nerviosos inversores, inseguros de la dirección de la inflación, los tipos de interés y el crecimiento, se han agrupado en el único ámbito que ha ofrecido certidumbre, empujando los precios de las acciones de estas empresas a un nivel que parece ampliado. Ha sido un entorno difícil para una estrategia diversificada.

Esta tensión en los mercados ha sido provocada por la inflación y la consiguiente subida de los tipos de interés. Tras más de una década de tipos de interés cercanos a cero, cuando la Reserva Federal los subió 500 puntos básicos en catorce meses, tenía que haber algunas bajas.

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Los resultados pasados no implican resultados futuros. Las opiniones, estrategias e instrumentos financieros que se describen en el presente documento pueden no ser convenientes para todos los inversores. Las opiniones expresadas son sólo las del momento en la(s) fecha(s) que aparece(n) en este material. Las referencias a índices de mercado o compuestos, índices de referencia u otras medidas de resultados relativos de los mercados durante un período específico sólo se proveen a título informativo. NS Partners no garantiza ni es responsable de la exactitud o la integridad de las informaciones (datos financieros de mercado, precios de bolsa, resultados de investigación u otros instrumentos financieros) que se mencionan en este documento. El presente documento no constituye una oferta ni solicitud a ninguna persona ni jurisdicción donde tal oferta o solicitud no esté autorizada ni a ninguna persona a quien sería ilegal hacer dicha oferta o solicitud. Toda referencia en este documento a instrumentos específicos o a emisores sólo tiene una finalidad ilustrativa y no debe ser interpretada como una recomendación para la compra o venta de dicho instrumento. Las referencias en este documento a fondos de inversión se aplican a fondos que no han sido registrados por la Finma y que por lo tanto no pueden ser distribuidos en o desde suiza excepto a ciertas categorías de inversores. Algunas de las empresas del grupo NS Partners o sus clientes pueden tener posiciones en los instrumentos financieros de alguno de los emisores mencionados en este documento, o ser asesor de uno de ellos. Hay información adicional disponible a solicitud. © Grupo NS Partners

Quarterly Investment Review – Q2 2023

2023 has proved an awkward environment for investors. At the start of the year it was hoped that inflation would roll over, but strong employment has stymied that. Then the banking crisis in US regional banks sent interest rate expectations into reverse. Since then the continued strength of the economy, stubborn inflation pressures, and a brief panic over the US debt ceiling, have forced interest rates back up. After the brutal losses in bonds last year the result at mid-year is only a small recovery. This uncertainty left equity markets drained of confidence, leading to an extreme divergence of performance between the mega cap technology stocks and everything else. This divergence is best demonstrated in the US where the Dow has recorded a year to date performance of 3.8%, while the large cap tech index, the Nasdaq 100, gained 38.7%. The performance of the S&P500 of 15.9% was accounted for almost entirely by just seven stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Facebook. Most of these stocks are beneficiaries of AI (Artificial Intelligence), and the rest of the market has barely moved. So, the tale of the year has been that jittery investors, unsure of the direction of inflation, interest rates and growth, have herded into the one area that has offered certainty pushing these companies’ share prices to a level that looks extended. It has been a difficult environment for a diversified strategy.

This tension in markets has been triggered by inflation and the accompanying rise in interest rates. Following more than a decade of near zero interest rates, when the Federal Reserve raised them by 500 basis points in fourteen months, there were bound to be some casualties. The most speculative companies, that require frequent capital raisings to keep going, are in serious trouble. But the tightening of liquidity is putting strain on much larger borrowers.

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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

Informe de inversión trimestral – 1T 2023

“Es como ver a un burro loco dando vueltas en un campo, rebotando en todas las vallas”.

Bank of America sobre los mercados en 2023.

El primer trimestre fue agitado. Tras la experiencia extremadamente difícil tanto para la renta fija como para la variable en 2022, los mercados comenzaron 2023 con paso firme. Como señal de la normalización de los tipos de interés, el 4 de enero, por primera vez desde 2010, desapareció el índice Bloomberg de valores de rendimiento negativo. Habían alcanzado un máximo de 18,38 billones de dólares en diciembre de 2020. Durante enero y febrero, el mercado fluctuó entre la preocupación que el endurecimiento drástico de la liquidez el año pasado condujera a una recesión y el anuncio de unos buenos resultados económicos. Sin embargo, en marzo estalló una crisis bancaria que ha supuesto la desaparición de dos bancos estadounidenses, Silicon Valley y Signature, y de un banco suizo, Credit Suisse. Las crisis bancarias son intrínsecamente desestabilizadoras, pero ésta pone a la Reserva Federal y a otros bancos centrales en una situación especialmente difícil. Como la inflación aún no está bajo control, necesitan mantener altos los tipos de interés, pero esto ha ejercido presión sobre los puntos débiles del sistema financiero, que necesitan recortes en los tipos de interés. Un nuevo endurecimiento podría provocar más quiebras. La situación parece requerir dos respuestas opuestas de los tipos de interés, una más alta para la inflación y otra más baja para los bancos en dificultades.

Los colapsos bancarios revivieron los recuerdos de 2008, pero está claro que esta situación es diferente. La crisis de 2008 afectó a todo el sistema, mientras que hoy se centra en bancos concretos con problemas específicos. Esta crisis es menos una prueba del sistema bancario y más una prueba de cómo las autoridades gestionan el rescate. El Silicon Bank, que se centraba en préstamos a empresas tecnológicas, había invertido sus depósitos en bonos del Estado estadounidense a largo plazo. Cuando los tipos de interés subieron el año pasado, su valor cayó, y las pérdidas resultantes inquietaron a los clientes y desencadenaron una retirada masiva del banco. Lo extraordinario del colapso fue su rapidez, 42.000 millones de dólares de depósitos fueron retirados un viernes y durante el fin de semana la Reserva Federal actuó rápidamente para garantizar todos sus depósitos. Era poco probable que hubieran permitido el colapso de un banco por poseer bonos del Tesoro estadounidense, pero en la era digital los nervios se crisparon al darse cuenta que los depósitos bancarios están en un aprieto. En una crisis de confianza como ésta, los mercados tienden a buscar el punto más débil y a ponerlo a prueba, y Credit Suisse era uno de esos objetivos, ya que ha sufrido una serie de pérdidas muy mediáticas en los últimos años. Se vio obligado a fusionarse con UBS, en una acción un tanto controvertida por parte del regulador y el gobierno suizos. Esto no es lo mismo que el colapso de Lehmans. Individualmente estas situaciones no son sistémicas, pero junto con acontecimientos como la crisis de LDI en el Reino Unido el pasado mes de septiembre y la implosión de Adani en la India, drenan la confianza y suscitan preocupación sobre cuál será el próximo colapso. Sugiere que algunas partes de la estructura no están del todo bien en el sistema financiero. Esto está quedando al descubierto tras quince años de tipos de interés ultrabajos y la consiguiente mala asignación del capital. En la medida en que se están exprimiendo los excesos, es saludable, pero resulta incómodo ver cómo se revelan las tensiones, y han aumentado los temores de que la economía se dirija hacia una recesión.

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Los resultados pasados no implican resultados futuros. Las opiniones, estrategias e instrumentos financieros que se describen en el presente documento pueden no ser convenientes para todos los inversores. Las opiniones expresadas son sólo las del momento en la(s) fecha(s) que aparece(n) en este material. Las referencias a índices de mercado o compuestos, índices de referencia u otras medidas de resultados relativos de los mercados durante un período específico sólo se proveen a título informativo. NS Partners no garantiza ni es responsable de la exactitud o la integridad de las informaciones (datos financieros de mercado, precios de bolsa, resultados de investigación u otros instrumentos financieros) que se mencionan en este documento. El presente documento no constituye una oferta ni solicitud a ninguna persona ni jurisdicción donde tal oferta o solicitud no esté autorizada ni a ninguna persona a quien sería ilegal hacer dicha oferta o solicitud. Toda referencia en este documento a instrumentos específicos o a emisores sólo tiene una finalidad ilustrativa y no debe ser interpretada como una recomendación para la compra o venta de dicho instrumento. Las referencias en este documento a fondos de inversión se aplican a fondos que no han sido registrados por la Finma y que por lo tanto no pueden ser distribuidos en o desde suiza excepto a ciertas categorías de inversores. Algunas de las empresas del grupo NS Partners o sus clientes pueden tener posiciones en los instrumentos financieros de alguno de los emisores mencionados en este documento, o ser asesor de uno de ellos. Hay información adicional disponible a solicitud. © Grupo NS Partners

Quarterly Investment Review – Q1 2023

Like watching a mad donkey thrashing around in a field, bouncing off all the fences.

Bank of America on markets in 2023.

The first quarter was eventful. After the extremely difficult experience for both bonds and equities in 2022, markets started 2023 steadily. As a sign of interest rates normalising on 4^th January for the first time since 2010 the Bloomberg index of negative yielding securities disappeared. They had peaked at $18.38 trillion in December 2020. During January and February the market fluctuated between concerns that the abrupt tightening of liquidity last year would lead to a recession, and the announcement of strong corporate results. However, in March a banking crisis erupted that has seen the demise of two American banks, Silicon Valley and Signature, and one Swiss bank, Credit Suisse. Banking crises are inherently disruptive, but this one puts the Federal Reserve and other Central Banks in a particularly difficult position. With inflation not yet under control, they need to keep interest rates high but this has put pressure on the weak points of the financial system, which need interest rate cuts. Further tightening could lead to more failures. The situation seems to require two opposing interest rate responses, a higher one for inflation and a lower one for stressed banks.

The bank collapses revived memories of 2008, but it is clear that this situation is different. The 2008 crisis affected the whole system, whereas today it is focused on individual banks with specific issues. This crisis is less a test of the banking system and more a test of how the authorities handle the bail out. Silicon Bank, which focused on loans to technology companies, had invested its deposits in long dated US government bonds. As interest rates rose last year their value fell, and the resulting losses unnerved customers and triggered a bank run. The extraordinary feature of the collapse was its speed, $42 billion of deposits were withdrawn on a Friday and over the weekend the Fed moved swiftly to guarantee all its deposits. It was unlikely that they would have allowed a bank to collapse for owning US Treasury bonds, but in a digital age nerves were frayed by the realisation that bank deposits are on a hair trigger. In a confidence crisis like this markets tend to look for the weakest link and test it, and Credit Suisse was such a target, as it has suffered a series of well publicised losses in recent years. It was forced to merge with UBS, in a somewhat controversial action by the Swiss regulator and government. This is not the same as the Lehmans collapse, individually these situations are not systemic, but together with events such as the LDI crisis in the UK last September and the Adani implosion in India, they drain confidence and raise concerns about what the next collapse will be. It suggests that parts of the plumbing are not quite right in the financial system. This is being exposed after fifteen years of ultra-low interest rates and the consequent misallocation of capital. To the extent that excesses are being squeezed out it is healthy, but it is uncomfortable to see the stresses revealed, and fears have risen that the economy may be heading into recession. Another marked difference to 2008, is that today inflation is much higher, at a time when global debt has vastly increased. This debt is predicted to rise further because of increasing defence budgets, and costs associated with relocating supply chains from Asia, and the green transition. On top of that there is now a war, which threatens supply shocks from Russia and China.

The course of inflation will be the critical determinant of markets for the next year. Inflation has changed from being generated by bottle necks caused by the pandemic to being driven by wage growth. If the economy is headed for recession then it is a highly unusual one given the strength of the labour market. But inflation has also been stimulated by a relative lack of capital expenditure.

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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

Quarterly Investment Review – Q4 2022

In 2022 inflation returned with a force not seen for forty years. This was especially true in western economies where a confluence of forces, mostly Covid related, drove up prices. During 2020 and 2021 western governments provided huge monetary stimulus and organised generous relief packages to alleviate the Covid pandemic. The surge of spending in a world where many production facilities were running at low capacity, due to supply constraints caused by Covid, led to soaring price increases. This situation was exacerbated by the Russian invasion of Ukraine which led to tighter markets in oil, gas and wheat. Moreover, Covid changed the labour market, leading to labour shortages. A combination of health-related concerns and over generous welfare led in the US to the lowest worker participation rate for forty years. With nearly two jobs available for every unemployed worker wage pressure has been strong. This sharp and persistent inflation led to a belated reaction from the Federal Reserve to tighten liquidity, and both the bond market and stock market suffered sharp setbacks. In 2022 the US 10-year bond fell 14.7%, the German 10-year bond fell 18.6%, while the longer dated Austrian 2086 bond fell over 50%. In equity markets the S&P 500 index declined 19.4%, the MSCI Europe Index fell 14.9% in US dollars, and the MSCI World Index declined 17.5%. The US dollar was the strongest major currency rising by 6.2% against the euro and 12.5% against the yen. Very few asset classes managed a positive return for the year, and the largest falls were in the popular areas such as US technology stocks, the Nasdaq was down 33%. The outcome of this turmoil was an estimated $35 trillion wiped off financial wealth.

The strength of inflation caught policy makers by surprise. After a long period of keeping interest rates at close to zero, the Federal Reserve raised rates from 0.5% in April to 4.5% in December. While this is a level much lower than the rates that prevailed in the 1970’s and 1980’s the size of the debt now is far greater, so the impact is much more forceful. A 5% US interest rate today generates the same burden as a 15% rate in the 1980’s. It also marks a reversal in policy.

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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