From euphoric to anxious and back

Current financial market reports make investors either euphoric or anxious.
Where does the journey go from here? We don’t know!

Last week the DAX Index lost 3,3 % and closed below the important 12.000 point support line. Except the US equity markets more or less all other indices performed negative this year.

Although the move in US-markets is delighting investors one can see by taking a closer look, that the whole move is based on the performance of technology companies. Corresponding to a Bloomberg report FAANMG stocks (Facebook, Amazon, Apple, Netflix, Microsoft and Alphabet (Google)) count for 38 % of S&P500 positive Index move.

A closer look at interest rates shows, that the 10-year US treasury bond started this year with a yield of 2,46 %, rising in May to 3,11 % and yields right now slightly below 3 %. This trend led to steep corrections in bond prices. The overall market is responding to generally positive labour market and economic figures, low inflation and satisfying economic growth.  All factors which support a positive trend in equity markets. Why do these divergences on international level occur? On the one hand Europe and Asia are showing negative performance, China even in double digit figures. On the other hand US markets are positive. 10-year government bonds in Europe are showing extremely low rates. Germany +0,39 % p.a., Austria 0,61 % p.a., France 0,72 % p.a., Spain 1,46 % p.a. and even Greece pays only 4,28 % p.a. while US treasuries show a yield of 2,94 % p.a. Money market yields in Europe are more or less zero while in the US the next rate increase in September is expected to come with 100 % certainty and even the next hike in December is expected to come with a 77 % probability.

Our Strategic Income Fund as an income oriented investment is right now defensifely invested in the money market. Thus we avoid any risk of rate increase in bonds and participate from higher short term rates what makes the USD share class quite attractive. The EUR share classes suffer a bit from the increasing interest rate spread between the USD and the EUR, what makes currency hedging a bit more expensive. However, we avoid the currency risk and participate in the performance of the US income market.

The performance of minus 1,78 % YtD of the share class USD-I is quite satisfying and we can wait relaxed what comes next. As soon as our indicators show us a buy signal, we will participate in the next rising trend without suffering from a possible correction before. These are exactly the times, when our defensive strategy shows its strength what makes this investment strategy a perfect fit for every income oriented portfolio, giving at the same time a high grade of security.