Each investment cycle has its specific characteristics. While the last cycle from 2002 to 2008 was marked by strong, globally synchronous growth, the pace of economic recovery since the financial crisis of 2008 has been below average. Indeed, the key theme of the current business cycle remains slow growth, driven in part by weakening demographics (aging populations) and, more importantly, by slow productivity gains. The latter is a global phenomenon, with only a few countries – such as Spain and India, which have deregulated their economies – bucking the trend. Without break-through innovation or large-scale reforms on the horizon, economic growth will remain lower than in the past.
The growth potential is a key driver of interest rates.
If growth potential remains at the current level in the long run, which is our baseline scenario, interest rates will remain at a structurally lower level for an extended period, even though yields are positive even in a slow-growth world (which argues for positive yields in Switzerland and the euro area in the medium term). As far as equities are concerned, dividend- and free-cash-flow-yields provide attractive base returns even when growth (economies, earnings) is lower than in the past.
We are convinced that a portfolio of corporate bonds and high-quality equity investments – i.e. shares of companies with a solid market position, strong margins and low levels of debt – can achieve positive returns in the years ahead.