Mr. Duval, our export economy and our tourism industry are suffering from the abandonment of the minimum euro exchange rate. What is your take on Swiss equities?
Before the franc soared, the analysts’ consensus forecast anticipated Swiss companies’ profits would increase this year by 10 to 12 percent. But the strong franc represents a major challenge for companies that have high export ratios. Nevertheless, Swiss companies remain competitive. Many are global leaders in market niches. In the past, they have demonstrated time and again that they are extremely innovative and can adapt well. The medium- and long-term prospects for Swiss equities therefore remain quite good. Growth in corporate earnings should make it possible to achieve returns of 5 to 10 percent. Compared to other asset classes, that is a good value.
How are Swiss bonds performing?
The National Bank’s introduction of negative interest rates produced high gains for bonds. But the future returns on bonds are expected to be very weak or even negative. The imminent flooding of the financial markets with the euro by the European Central Bank could push the franc interest rate curve into negative territory for a longer period.
So you should steer clear of bonds?
No. When things get turbulent in equity markets, bonds contribute to the stability of a portfolio. Any alternatives to bonds, such as hedge funds, would either increase risk or reduce liquidity. One thing is crucial for us as fund managers: we must keep calm and disciplined and invest according to our investment strategy. Because in the long term, two fundamental principles are essential for success – diversification and risk management.
The economic outlook for Switzerland is gloomy. Nevertheless, UBS Suisse Funds continue to enjoy great popularity. Why is that?
Worldwide, the environment for riskier asset classes such as equities remains intact. The special thing about Swiss companies is that they operate globally and generate large parts of their sales in Europe, the US and emerging markets. In Europe, companies benefit from the European Central Bank’s bond purchase program which will continue to drag the euro downwards. And interest rates remain historically low, which provides companies with favorable financing. The US has already gained momentum. The low price of oil is stimulating the economy. Currently, we have a slight overweighting of European and US equities in UBS Suisse Funds. Swiss companies are also benefiting from global economic developments – and UBS Suisse Funds along with them.
Is it conceivable to increase the amount of real estate in the funds because interest rates are so low?
At the moment we will not increase the share of real estate, although it has contributed significantly to returns since the beginning of the year. The returns in our Swiss Real Estate Fund are attractive compared with the returns on Swiss bonds, which are being reduced to virtually nothing. Listed real estate funds have increased rapidly in value in recent years. Meanwhile, their markups (premium) seem quite high to us. In early January, the average premium of the SXI Real Estate Index was around 30 percent, compared with the historical average of 20 percent. Since then, the premium has increased again. This increase in price can be accounted for by fundamental figures as well as the fact that some investors are investing in real estate funds instead of bonds. But it is important to distinguish between residential and commercial real estate. Residential property is still in high demand. In commercial real estate, such as offices, there is a high vacancy rate – and premiums are correspondingly lower.
For you as a fund manager, times have been challenging since the beginning of the year. How do you deal with that?
My profession fascinates me. But I need something to balance it out. Work-life balance is very important to me. My wife and my children help me a lot to keep me from getting out of balance.