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Quarterly Report Q3/2022

Review

As expected, we have had a hot summer -- and not only in terms of temperatures. After prices were once again depressed in June, the markets began a veritable recovery. However, this came to an abrupt end in July when the central banks stepped in and announced a whole series of interest rate hikes.

In the U.S., Fed Chairman Jerome Powell raised the key interest rate by 0.75 percentage points and announced that the central bank would continue to raise interest rates “until the job is done” -- even at the cost of an economic recession. Powell is a man who works by the motto “walk your talk,” and so at the end of September he followed up his words with a further interest rate hike of 0.75 percentage points.

The ECB sounded the same horn as its U.S. counterpart and raised the key interest rate by 0.75% points in a historic increase. ECB President Lagarde dictated into her notebooks to the journalists present at the subsequent press conference that further rate hikes (“…more than two, less than five…”) will follow. In doing so, the central bankers are walking a fine line between fighting inflation on the one hand and national bankruptcies of various permanently over-indebted countries on the other.

The Swiss National Bank SNB also decided to raise its key interest rate by 75 basis points, with the goal of price stability in mind. For the first time in almost eight years, the key interest rate is now back in positive territory. In addition, SNB President Thomas Jordan indicated that the bank would intervene in the foreign exchange market if the need arose.

The Bank of England (BoE) seamlessly joined the ranks with an interest rate hike of 0.5 percentage points -- the highest level since 2008. The biggest interest rate jump in September, however, was announced by the Swedish central bank Riksbank with an increase of a full 100 basis points.

England has a new king. Charles III began his term as successor to Queen Elizabeth II in an environment that could hardly be more complex: A new head of government, Liz Truss, following a mediocre Boris Johnson at the end of the day. A country struggling with a dramatic labor shortage as a result of Brexit and Corona. A health care system that has always been weak and seems to collapse on some days. A double-digit inflation rate and an energy crisis even more pronounced than in mainland Europe. A currency that has lost 16% against the U.S. dollar since the beginning of the year and more than 5% even against a euro that is anything but stable. A country that the Bank of England sees sliding into a recession that could last through all of next year. The government and the royal family alike are called upon to stabilize the sick man of Europe in intensive care as quickly as possible and then teach him to walk again.

And then there was -- albeit insignificant for the financial markets -- the death of the nevertheless so important Michael Sergeyevich Gorbachev, last president of the former USSR and “inventor” of glasnost (openness) and perestroika (restructuring). Constantly criticized in Russia, in the West he stood for the end of the Cold War and for the reunification of Germany. The sentence “He who comes too late is punished by life”, which he never uttered in this way, went down in the history books and is regularly quoted today on appropriate occasions.

Performance

Our equity fund shows a performance of -13.44% in Euro and 19.66% in Swiss Franc since the beginning of the year.
This compares to the major indices: DAX -25.01%, STOXX600 (Europe) 19.09%, S&P500 (USA) -13.71% and MSCI World (worldwide) -14.06% (all values in Euro).
Our hedging strategies once again provided a defensible -- albeit not satisfactory -- result in a very nervous and unstable market environment.

Our bond fund was dragged down in the wake of the bond crash since the beginning of the year and recorded a loss of 22.95% in the Swiss franc tranche and 23.82% in the euro tranche at the end of the quarter.
The comparable Bloomberg Barclays Global High Yield Total Return Index Value Hedged EUR stands at -17.90%.
Since the beginning of the year and especially with the start of the Ukraine war, market events have continued to be characterized by enormously widening spreads, restricted liquidity, nervous trading and general uncertainty. On the positive side, the latest interest rate hikes did not hit with the force of the first ones. Thus, the negative news from the interest rate front should be largely discounted and implied.

Current positioning

The oil stocks we acquired in the second quarter performed very well, especially at the beginning of the third quarter, although they have since retreated from their original highs due to the falling oil price. We are very satisfied with our investments in the financial sector, which benefited from rising interest rates. We continue to be confident in this sector and therefore remain loyal to the stocks we have bought.

In the industrials sector, we have reduced our exposure somewhat. Although many companies in the technology sector that appear interesting have come back a long way, we remain cautious about the segment. Various small- and mid-cap stocks also took a beating, but we remain invested here because we do not believe that the fundamental data set for the companies has fundamentally changed.

The markets continue to be extremely nervous and therefore highly volatile. For this reason, we are continuing our hedging strategies and are thus prepared for a possible further slide in prices. Overall, the cash position has increased slightly compared to the previous quarter. We clearly prefer strategic investments at the moment.

Outlook

After the summer is before the end of the year. In just three months’ time, we will be writing 2023 and looking back on a more than eventful year. What issues are we paying particular attention to in the last quarter of 2022?

Inflation is of enormous importance to all of us, being nothing more than a synonym for loss of purchasing power and devaluation of money. Whether we have already seen the peaks in the short term or still have them ahead of us is something we will leave to one side. Much more important is the medium-term assessment and we will probably find ourselves in a range of 5-6%. Realistically, this means that just to maintain the asset value, a real return of just this magnitude needs to be generated. In an environment of political tensions between China and Taiwan, uncertainties in energy supply, disrupted supply chains, Ukraine war, possible recessionary scenarios and volatile capital markets, this is definitely a challenge.

There will be no way around equities in the future. As a tangible asset, they offer a certain degree of protection against inflation. Investments with substance make a portfolio stable and crisis-proof. However, fluctuations cannot be avoided. Those who cannot live with volatility will not make money in the future. In our opinion, the above-mentioned factors will also trigger stronger movements in some cases. In these times, our task is more than ever to protect your assets from heavy losses by means of well thought-out hedging strategies, while at the same time recognizing and exploiting opportunities as they arise.

Although there has been some recovery in bonds, markets are still only at the beginning of a revaluation. The dislocations since the beginning of the year have created idiosyncratic upside potential for our Wydler Global Bond Fund. Even though risks remain with corporate bonds, whether investment grade or high yield, and the market segment is prone to fluctuations: the risk-reward profile has clearly improved for medium- and long-term investors. We still consider the combination of potential price increases and solid distribution yields to be extremely attractive. We have significantly outperformed other funds over three, five and ten years to the end of September and are confident that we can continue to do so, although we expect volatility to persist.

In our last quarterly report, we had referred to the continued weakness of the euro both against the U.S. dollar and especially against the Swiss franc. In both cases, the euro has now fallen below parity, i.e. an exchange rate of 1:1, marking the lowest level in over 20 years in the case of the dollar. Weak currencies should be perceived as a warning signal, as the foreign exchange markets are often precursors of economic developments and indicate losses of confidence in government(s), countries or economic regions at an early stage. The EU Commission’s decision to suspend EU debt rules for another year due to the Ukraine war and not to reapply the Maastricht criteria until 2024 has further eroded confidence in the euro, as this decision is widely seen as legitimizing further borrowing.

The decline of the euro means nothing other than a loss of purchasing power abroad. As a consequence, the weakness of the euro is becoming a real economic danger, the keyword being “imported inflation. This is because imports to Europe and Germany are becoming more expensive as a result of the low exchange rate, thus adding fuel to the already blazing fire as far as inflation is concerned.

At this point, the development of German TARGET2 claims is also noteworthy. While these were still below 500 billion euros in 2014, this figure has already risen to over 1.1 trillion as of July 2022. In other words, the German Bundesbank has a claim on the European Central Bank ECB of just this amount. It will come as no surprise that the state banks of Greece, Spain, Italy and even France do not carry claims against the ECB, but liabilities on their balance sheets. National economist, financial scientist and former president of the Ifo Institute for Economic Research, Hans-Werner Sinn explains in various publications that this situation was brought about by the ECB’s asset purchase program APP. Other critics also refer to this system as an infusion model and a guarantee of survival for the euro.

At this point, we repeat our recommendation to invest at least part of your assets in hard currencies such as the Swiss franc. Diversify not only in terms of investment types, regions and sectors, but also in terms of currencies. Hard currencies increase in value, especially in times of crisis, and can thus generate currency gains when the euro falls. We will be happy to explain how this mechanism works in detail.

As always, if you have any questions, please feel free to contact us at any time. We will take the time for a detailed and personal discussion in which you can bring all the issues that concern you to the table. Clarity creates security and security creates trust. With us, the spoken word counts.

Plain language is our capital!

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