The stock market is more likely to go up – despite Brexit. Daniel Kalt, Chief Economist of UBS Switzerland, explains why.
by Reto Wäckerli
30 Aug 2016
Mr. Kalt, were the concerns expressed immediately after the referendum on United Kingdom membership in the European Union exaggerated?
The situation actually appears to be less severe than initially feared. The swings on the global financial markets were not dramatic. Investors obviously assume that Brexit will not derail the global economy. Nevertheless, there is a lot of uncertainty in Europe. This could cause companies to invest less. That’s why we have reduced our GDP growth forecast for Switzerland slightly: for 2016 from 1.0 to 0.9 percent and for 2017 from 1.5 to 1.3 percent.
That means you expect less growth than the federal government experts.
We are indeed somewhat more pessimistic. Given the franc shock, the Swiss economy has recently developed phenomenally. This was due to the strength of the domestic economy. But we are now seeing some of the growth drivers weaken: Immigration is developing less dynamically, the construction boom is coming to an end and companies are investing in a more restrained fashion.
On the other hand, the aftermath of the franc shock of early 2015 is likely to subside. When will we have completely overcome it?
Adapting to the overvaluation of the Swiss franc is a gradual process. Export-oriented companies are still running cost-cutting programs and relocating jobs abroad. We expect this process to continue until the middle of 2017 or the beginning of 2018.
But new trouble is looming. In the course of Brexit and possibly in the wake of the US elections there could be some restrictions in free trade. What are the consequences for the Swiss economy?
Those kinds of processes aren’t immediate either. If a US president Donald Trump actually were to put up trade barriers, the full effect would only be felt after five to ten years. In general, a shift away from globalization would be very damaging for the global economy – and especially for Switzerland as a small, open economy. A look at the history books demonstrates this well: The world economic crisis of the 1930s was so profound not least because of escalating protectionism. Our prosperity is based on an open, globalized economy!
The Swiss equity market has been listing on the minus side since the beginning of the year. How big are chances that the SMI will return to the plus side by the end of the year?
There is some hope. We expect prices to more likely increase for the next three to six months. We’ll see whether it is enough for the SMI to reach an overall plus for the year.
Where does this optimism come from?
Despite all the political crises, the global economy is performing well. In emerging markets, which were partly in a recession, we can see stabilization. The US economy is solid. In Europe the only thing we have is the uncertainty surrounding Brexit.
Which investments do you advise for investors who have a moderate risk appetite?
Diversification is and remains important. It is crucial to not only focus on one region and one asset class. For example, if you put everything into the Swiss stock market at the beginning of this year, you’d now be in the minus range. At the same time, however, the US indices are trading near all-time highs. For individual stocks, we recommend high-dividend yield stocks and as a trend mid caps rather than blue chips. We consider the sectors of information technology, healthcare and energy to be attractive. Besides shares, investments in corporate bonds are worth considering.
And what should investors stay away from?
As always: If you don’t understand it, you should keep your fingers off of it. I would say steer clear of consumer staples, raw materials and telecommunications. Apart from that we recommend investors only take currency risks very deliberately and if they do, they should hedge them. The fluctuations are simply too large and unpredictable.
The five most important tips for investors
Diversify. Many investors say “Better one good stock that a hundred bad ones.” That sounds reasonable – but it’s wrong. It is more profitable to invest in many different assets and to spread the risks. For instance, this is easy to do with investment funds.
Take stock of your situation. The longer your investment horizon, the more risk you can take. Suppose an investment is in the minus range. It is possible for it to recover in the next 20 years. The only question is: Are you able and willing to wait so long?
Look reality in the eye. The financial markets are always good for a surprise. Always inquire about the risks an investment involves. And think beforehand: “What will I do if my investment loses value unexpectedly?”
Pull the plug in time. “Better a terrible end than unending terror,” applies to investing as well. Set bottom limits for your investments. If an investment falls beneath the limit, a sale is in order. This will allow you to limit losses.
Think long term. What investment performed best in the past year? As interesting as this question may be – it is hardly relevant for the future. If anything, time series and business cycles extending over several years are more informative than short-term yield comparisons.