DFO Reflections — Q2 2023

With few exceptions, global financial markets continued to develop very favourably in the second quarter, which is positively reflected in the portfolios of our clients. Above all, the strong rise of the Nasdaq 100 index by more than 30 % makes many investors‘ hearts beat faster. After the index experienced a bear market last year, in which it was sold off, mainly due to its high valuation in times of rising interest rates, it now recorded a bull run that has already made up for all the losses of 2022.

The reason for the strong rise is mainly to be seen in the fact that the valuations at the beginning of the year were very attractive.
In addition, we can witness an ‚Artificial Intelligence (AI) Euphoria‘, in which especially the large Nasdaq 100 index components (Alphabet, Microsoft, Meta, Nvidia, etc.) are seen as big winners. There is immense demand for these shares, which has made their valuation considerably more expensive again. We would therefore be surprised if the Nasdaq 100 continues at the same pace in the coming months. However, this does not mean that long-term investors should say goodbye to their Nasdaq 100 investments.

The recent development of the Nasdaq 100 index is a good example of the fact that it makes no sense to try to forecast financial markets in the short term. Last year, the index was sold off because of rising interest rates, even though the index constituents were recognised as highly profitable companies. Now the same shares are being bought at almost any price, despite high interest rates, just because the view of financial market participants has changed.

Even if financial markets can move erratically in the short term, in the long-term share prices always follow company profits (or lack thereof). This realisation is very reassuring, since it is relatively easy to identify investment components that invest primarily or exclusively in very profitable companies.

While the Nasdaq 100 Index has shown an outstanding performance, our favourite ‘quality factor managers’ (BNY, Threadneedle Global Focus, Amundi Polen and Fundsmith) were also able outperform global equity indices in the second quarter.But even the standard indices of the MSCI and FTSE families were able to post impressive double-digit gains and are pleasing their investors in 2023. Only indices that invest in developing countries show uninspiring single-digit gains or losses. This is mainly due to the ongoing poor performance of the Chinese stock market. In contrast, Indian and Vietnamese shares performed quite well in the second quarter.

Indices that emphasise the so-called ‚value and size factors‘ (e.g. Dimensional) also have a good year, but cannot match the results of our building blocks that emphasise the ‚quality factor‘ in 2023.

Even though global central banks continued to raise their reference rates throughout the first half, we can see in global rate markets that long-dated government bonds have probably already passed their interest rate peaks. Only interest rates for short and medium-term maturities are still quite volatile, as it is unclear to what extent the central banks still need to raise their reference rates. It is widely assumed that we are already close to the end of the global hiking cycle. However, central bank rates will only fall again, once inflation rates have clearly reached their target corridor of 2 – 3 % p. a.

Since we are back to an environment of meaningfully positive interest rates, we have intensified our efforts to find investment components that have practically no default risk and are safer than regular bank and time deposits. This is mainly because the recent banking crisis in America and Switzerland has made it very clear that savings deposits are really only safe if the respective government or central bank issues a corresponding guarantee.

Our new safety/deposit building blocks P5, P6 and P7 are as
a solution for cash that cannot be considered for a long-term strategy but should nevertheless enjoy a certain amount of interest income. Their current interest rate path is between 5.5 and 6.00 % p. a., far above the widely held savings and time deposits. Furthermore, they are ring-fenced assets and would not be part of the bank‘s liquidation assets in the unlikely event of our partner banks becoming insolvent.