Interest rates on the rise, money becoming more expensive

Investment Policy, June 2022

Interest rates on the rise, money becoming more expensive

The US Federal Reserve (Fed) is sticking to its restrictive course and even moved to tighten it recently with a significant interest rate hike of 0.50%. In doing so, it has demonstrated that fighting inflation is more important to it than economic stability. The Fed is thus accepting an economic slowdown, as it views the US labour market as solid at present. It is not only the battle with the coronavirus that is hitting economic developments in China, while sanctions arising from the Ukraine conflict and supply bottlenecks are weighing on the European economy. We therefore continue to favour defensive investments with quality characteristics such as stable profitability as well as value stocks with below-average valuations. While we remain underweight equities, we are overweight Swiss equities within the countries and regions.

The global economy is showing increasing signs of a clear slowdown in growth. In the US, for example, this is being heralded by a decline in consumer sentiment. There has also been a deterioration in the corporate financial environment, triggered by a rise in refinancing costs for companies. In China, the lacking efficacy of Chinese vaccines against the Omicron variant of the coronavirus means that the country’s stringent COVID-19 restrictions are being maintained for longer than the market expected. This is placing a strain on the world’s second largest economy. Indirectly, however, this is also negatively impacting the outlook of many global firms that are dependent on supplier components produced in China or have a considerable share of their customers in the Middle Kingdom. Alongside the supply problems from China, global inflation risks are also continuing to rise. This is not only true for headline inflation, but also for core inflation excluding energy and food. In the Eurozone, core inflation is now three times higher than the long-term average, suggesting that interest rate hikes will be seen here before the year is out.


As we stated in our outlook from 1 February 2022, which closed by advising investors to “fasten their seatbelts”, the global equity markets are exposed to a difficult environment. More expensive or insufficiently available supply components as well as rising wage, raw material and transport costs are threatening to hit historically high profit margins. In the US, in particular, refinancing costs are also on the increase in line with the higher market interest rates. Over on the other side of the pond, these costs have even doubled since last November when measured against corporate bond yields. Rising global inflation rates are leading to a more aggressive stance from the central banks, as demonstrated by the marked interest rate hike of 0.50% by the Fed. As already observed in previous cycles, rising inflation and higher interest rates lead to falling valuations. What global companies, and especially those in the US, communicate with respect to their business performance is thus now becoming especially important. Due to the particularly high inflation in the US and the greater risk of an economic slowdown in the Eurozone, we therefore continue to favour the Swiss equity market. Emerging market equities are currently suffering from the more pronounced than expected economic slowdown in China.

While we currently remain underweight equities, we are overweight Swiss equities within the countries and regions.

Gérard Piasko, Chief Investment Officer


The rise in market interest rates and bond yields in recent times has been extremely rapid by historical standards: German bond yields have increased by around 1.5% since the fourth quarter, while in Switzerland the rise in yields has been slightly less. In some Eurozone countries, including Italy, this rise in bond yields has been even more marked, which is not helpful for the economic development of the Eurozone as a whole. In the US, the Fed has increased key interest rates by 0.50%, representing the biggest hike in 20 years, a move justified by historically high inflation. As the Fed also wants to reduce its balance sheet from June, less demand for government bonds is to be expected. With the European Central Bank (ECB) set to reduce its bond purchases in the summer, there will also be reduced demand for bonds here. We thus remain tactically underweight bonds. Core inflation, which is much too high by long-term standards, together with lower demand from the central banks, is currently driving government bond prices lower. Due to their lower cyclical sensitivity, we prefer “investment grade” to “high yield” in the corporate bonds space.


The US dollar is currently enjoying a phase of strength for two reasons: On the one hand, the Fed is adopting a more aggressive or restrictive approach to its monetary policy. On the other, the interest rate differential has clearly shifted in favour of the greenback so far this year, as the ECB has not yet moved to raise rates. Overall, US interest rates have risen compared to those of many countries, which has strengthened the US dollar against the euro, the Swiss franc and the Japanese yen. Against the Swiss franc, the US dollar has moved away from the low levels observed in 2020/2021 and returned to the zone around parity (i.e. close to 1.00) observed in 2018/2019. The relationship between the Swiss franc and the euro could be influenced by the further course of the Ukraine conflict. An escalation would likely strengthen the Swiss franc. However, statements made by the ECB pointing to interest rate hikes in the Eurozone as early as this summer could once again stabilise the euro somewhat.


The surprisingly marked outbreak of the Omicron variant of the coronavirus in China has forced the Chinese government to implement more stringent coronavirus measures due to the less effective vaccines it has at its disposal. This is leading to a clear weakening in economic growth. As China is a major consumer of various industrial metals, short-term demand is therefore declining at present, with this being especially true in the case of copper. This is leading to a not very frequently observed situation in which energy commodities are trending upwards, while metals are undergoing a correction. In the long term, these industrial metals could recover as soon as global demand picks up again.

Gérard Piasko

Gérard Piasko

Gérard Piasko is Chief Investment Officer and head of the investment committee of private bank Maerki Baumann & Co. AG. Before he was for many years Chief Investment Officer of Julius Baer, Sal. Oppenheim and Deutsche Bank.

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Editorial deadline: 18 May 2022

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