In contrast to the EU, the US economy is developing solidly, but could gradually lose momentum due to a weakening labor market and declining consumption. The Federal Reserve continues to face the central task of sustainably reducing inflation. The core consumer price index, which excludes food and energy costs, rose by 0.3% in April compared to the previous month, marking the slowest increase in three years. The Fed's preferred inflation indicator, the core consumer price index (PCE), cooled further in April. As a result, the US Federal Reserve has recently dampened its interest rate cut expectations more significantly. In the UK, higher than expected inflation data has dampened hopes of interest rate cuts and put Prime Minister Rishi Sunak under political pressure. The inflation rate in the last quarter was 5.2%, the lowest level since the cost of living crisis began almost three years ago, but remained at the upper end of forecasts. While the USA is experiencing robust growth, Europe is struggling with weak expansion (see FOCUS). Inflation rates in the G7 countries are falling, but unevenly. This asymmetry is exacerbated by the ageing population, which is increasingly consuming and producing less, clouding the very long-term economic outlook. In China, the government under President Xi Jinping is taking decisive steps to support the ailing real estate market. The easing of mortgage regulations and the request to local governments to purchase unsold apartments are intended to stabilize the market. China's real estate market continues to face enormous challenges, which are only partially alleviated by extensive government intervention. Consumer and investor confidence remains low, resulting in persistently low demand for new apartments. Meanwhile, despite government countermeasures, the demographic development of the Chinese population is taking on similar characteristics to those in Western countries.
The stock market environment remains positive and many stock markets have recently reached new highs. The fading hopes of interest rate cuts failed to slow the momentum. NVIDIA's quarterly figures and the company's outlook confirmed the ongoing gold-rush sentiment surrounding AI. Sales of the previously undisputed leader in high-performance GPUs grew by over 260% year-on-year. Recently, the AI hype has also spread to other sectors. The share price strength of energy suppliers, which offer stable and clean energy, is striking. The International Energy Agency (IEA) expects energy demand in the data center sector alone to double to over 1,000 TWh by 2026 - equivalent to Japan's annual electricity consumption. By 2030, AI applications are expected to account for around three to four percent of global electricity consumption.
Persistent inflation and the Fed's “higher for longer” mantra tended to exert further pressure on bond prices towards the end of the month. The broad Swiss bond index SBI AAA-BBB lost 1%. The price of silver continued to advance, gaining 19% against the USD. Energy prices (oil & gas) were weaker. The weakness of the Swiss franc is likely to be only temporary, as Switzerland's extremely solid fiscal budget by international standards will continue to favor the CHF in the medium and long term.
In our market commentaries, we have occasionally mentioned factors that could structurally increase the price level. In particular, rising government spending, which leads to rising debt, whether due to net zero efforts, demographic developments, geopolitical tensions or subsidies for the targeted promotion of the domestic economy. In the current environment, we remain committed to a broad diversification of assets. In the long term, we prefer real assets such as equities to nominal investments. Diversification across various asset classes and decorrelating strategies should provide the best possible protection for assets in volatile times. In phases of economic recovery or even a boom, on the other hand, equities are indispensable for increasing capital in the long term. Particularly from the perspective of a Swiss investor, the Swiss equity market offers a large number of interesting companies that have recently been somewhat ignored by the broader market, but generate stable cash flows, attractive dividend yields, stable growth and have healthy balance sheets. Should an economic downturn put pressure on share prices in the foreseeable future, we would decrease our bond positions in favor of equities.
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