The attractiveness of liquid investments over the next 10 years

Executive Summary:

In the latest survey of major international fund managers conducted by the renowned US bank Bank of America, it emerged that US equities are seen by most (27%) as the most attractive liquid asset class in 2025 and that the US information technology (IT) stock index NASDAQ 100 is seen as the most promising among the stock indices (29% of fund managers share this opinion). Should we overweight these assets?

The current optimism of many equity fund managers and US equity strategists is demonstrably not a reliable indicator of good returns in the future. The high valuation, particularly in the IT sector, means that price gains are likely to be rather weak in the longer term; other sectors such as healthcare or consumer staples, on the other hand, are very suitable for significant additions to an equity-oriented wealth , even from a risk perspective, given high expected returns, especially as these sectors are particularly less at risk in a recession that may well occur soon. The same applies to gold. Government bonds will increasingly lose their risk-reducing properties, but are currently still suitable as a minor addition.

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To answer this question, we must first look at the accuracy of short-term stock market forecasts. The above-mentioned survey also determined the average cash ratio of fund managers. At 3.9%, this is at its lowest level for 15 years and has rarely fallen below this level before (chart 1). It expresses a high level of optimism, as only those who hold little cash in their fund assets can benefit greatly from rising prices. However, since 2002 it has been shown that share prices have only performed below average in the 12 months following the optimistic attitude of fund managers. Chart 2 shows that in the months with a cash ratio of less than 5% and an average price gain of 5.5%, there were 26 cases of double-digit price losses. In contrast, after cash ratios of over 5%, which indicate increased pessimism, there was only one case of double-digit price losses with an average price gain of 11.8%. The current positive sentiment among fund managers is therefore more of a contra-indicator.

This should also apply to the positive attitude of professionals towards IT shares mentioned in the introduction.

In October 2022, Jamie Dimon, head of the renowned US bank JP Morgan, expected the US economy to slide into a recession next year, which would trigger a panic on the credit markets and cause US share prices to fall by a further 20% (source: www.finesw.ch from 11.10.2022). The mood was generally very pessimistic. Since then, the gross profits of IT companies have risen by +23%, which is certainly more than the other stock market submarkets shown in chart 3. However, share prices in the IT sector have risen by 75% more than their gross profits (chart 4). In the US equity market as a whole, whose moderate earnings growth was barely higher than in Europe or the healthcare sector (chart 3), share prices also rose 43% faster than earnings (chart 4). Accordingly, the vast majority of the price gains in IT stocks, but also in US stocks as a whole, have been "hot air" since the fall of 2022 (chart 5). However, neither FINVIA nor other market participants recognized the emergence of this bubble. For the US equity market, we are well placed to assess the accuracy of investment strategists over the last 26 years for 1-year periods. In a survey of US equity strategists conducted by the US financial information provider Bloomberg at the end of each year since 1999, pessimism has never been as pronounced as at the end of 2022, when even the respected bank CEO Jamie Dimon expected major problems. For the first and only time to date, equity strategists expected the US S&P 500 equity index to fall slightly by 1.3% (chart 6); in fact, the year 2023 ended with a gain of 24.2% (chart 7). The forecast performance for 2024 was hardly any better. The forecast of +2.4% was still very cautious in view of the high equity valuation, but was once again well below the actual gain of over 23%. A statistical analysis of the forecast accuracy showed that there is no correlation at all between the forecasts and the actual annual share price changes (see the capital market outlook from December 2024, which you can find here ). Accordingly, the average expected price gains of 7.5% on the US equity market for 2025 (chart 6, dark bar on the far right) should not be given too much credence.

The particularly positive attitude of fund managers towards US and IT equities is possibly based on a look in the rear-view mirror. Over the past 30 years, IT equities have performed particularly well compared to other sectors of the global equity market as well as gold and German government bonds, even though the annual fluctuation (volatility) has been extremely high during this period (chart 8). Compared with other regions and countries, the US equity market was the best performer, partly because the annual fluctuations were not particularly high (chart 9).

However, if you not only look in the rear-view mirror, but also occasionally look ahead through the windshield, which is generally recommended, at least when driving, the picture looks somewhat different. For the asset classes and sectors in chart 8, FINVIA's expected returns for the next 10 years to 2035 (between 3% p.a. for German government bonds and around 10% p.a. for gold and healthcare stocks, chart 10) are somewhat lower than historical returns, which were around 2 percentage points higher. However, the expected return for the IT sector is tipping below the zero line; the reason for this is the inflation of share prices, which is not justified by a corresponding improvement in fundamentals (see charts 3 to 5). The underlying euphoria surrounding the topic of artificial intelligence (AI) was dampened for the first time a few days ago. The Chinese start-up DeepSeek has developed an AI program that has performed just as well in a series of tests as the flagship program of the well-known AI company OpenAI. However, DeepSeek does not have access to the latest Nvidia chips due to sanctions imposed by the US government and yet managed to get by with an outlay of just USD 6 million for training the AI program. DeepSeek can therefore offer the use of its program for only 3% of the price OpenAI charges (source: BCA, 27.1.2025). AI is therefore also available outside the USA and even without super-expensive Nvidia chips. AI will be a highly competitive offering; the network effect of many profitable internet business models, which consists of using an offering because others also use it (e.g. Microsoft, Facebook, ...), does not exist with AI. The high valuation in this sector is therefore not justified.

The expected future returns for the regions and countries are also slightly lower than before - but much lower for the US equity market (chart 11, see also further details in the capital market outlook from December 2024, which you can find here ).

However, the attractiveness of an asset class is not only determined by the expected future return, but also by a number of other characteristics. In principle, investments with low volatility are preferable to others if the expected return is not too low. For this reason, low-volatility German government bonds are not very attractive despite their particularly low volatility (chart 10). Overall, however, the addition of some sectors as well as gold and German government bonds to a wealth invested predominantly in equities and private equity funds is suitable, as the volatility of consumer staples stocks, power utilities and healthcare stocks is also lower than that of the least volatile region, namely the European equity market (chart 11).

The quality of the forecast model also plays a significant role in the attractiveness of an asset class. This measures whether the ratio of share price gains (in the following 10 years) to the gross profits, dividends and book values of the companies in a stock market in recent decades has been in a stable relationship with future earnings in the following 10 years. As in the previous charts, the further to the top left an asset class is positioned in the respective chart, the more attractive it is. Among the sectors, the healthcare industry is the clear winner in terms of forecast accuracy (chart 12). This can also be a disadvantage if it is high for asset classes with low expected returns (IT, USA, charts 12, 13).

The next criterion examined is the correlation of an asset class to a mixed liquid portfolio consisting of 60% equities and 40% gold and German government bonds. Asset classes with a low correlation - shown on the left in the two charts below - often move in a different direction to the other asset classes and therefore have a particularly risk-reducing effect on a portfolio consisting predominantly of equities. In addition to German government bonds and gold, energy, consumer staples and healthcare stocks also have a positive impact (chart 14). By contrast, the addition of countries or regions has only a very limited risk-reducing effect, as all equity markets very often move in the same direction (chart 15).

Finally, we examine the susceptibility of investment vehicles to recessions in the USA. We currently attach above-average importance to this characteristic, as the recession risks, which were considered to be very high everywhere in the fall of 2022, are currently underestimated. The geniuses Donald Trump and Elon Musk are more likely to cause chaos than a boom in the US, Europe is in trouble and the mood in China is not improving either (China's purchasing managers' indices for industry and services fell again in January 2025, source: Trading Economics, 27.1.2025). In any case, the Leading Economic Indicators of the US research house The Conference Board have been declining sharply in the world's three major economic regions for several years and also in December 2024 (charts 16 to 18).

German government bonds and gold do not suffer any significant price declines even in US recessions and prove to be the best risk reducers. Healthcare and consumer staples stocks are also very little susceptible to declines in earnings due to economic difficulties (chart 16). Among the regions, Switzerland shows the highest stability, but this is only sufficient for just below-average cyclical vulnerability (chart 17); the sectors mentioned are significantly more resilient.

Overall, gold and, among the sectors, healthcare stocks and consumer staples stocks stand out positively. These have above-average forecasting and quality characteristics (volatility, correlation and cyclicality), but also attractive earnings expectations (chart 21). German government bonds are suitable as an admixture due to their still strongly risk-reducing character, but no longer as a long-term investment. There are no clear favorites among the regions (chart 22).

The question now arises as to how stable these characteristics are. For most regions, countries and sectors, there is no reason to expect a lasting change in these characteristics. For example, the high correlations between regions and countries are likely to continue to exist in the future and healthcare stocks are unlikely to have any problems during recessions, as healthcare services are largely covered by health insurance funds and people are generally likely to save in this area last as incomes fall. However, government bonds could deteriorate over the next few years.

The reason for this is the gradual decline in global economic growth since the 1970s, which has been significant since 2005, particularly in the industrialized countries (chart 23), which have unfortunately also seen their public debt explode from 60% to over 110% since 2005 (chart 24). The financial crisis from 2008 in particular, but also the coronavirus crisis, required exceptionally high levels of financial support from governments to overcome. As growth conditions are not improving internationally due to weak demographics and productivity development (for the long-term negative trends in population development and productivity per worker, see the capital market outlook from November 2023, which you can find here ), the additional burdens resulting from the new geopolitical conflicts are a huge problem for governments whose tax revenues are barely growing. The first clear doubt about the creditworthiness of a particularly important state, namely the USA, became apparent in February 2022, directly after the Russian army invaded Ukraine. Until then, the gold price had only risen for many years when the yield on inflation-linked US government bonds had fallen (blue line in chart 25 - shown inversely (right-hand scale) - rising), i.e. from 2007 to November 2012 and from December 2018 to August 2020. From February 2022, the yield on inflation-linked US bonds then rose massively from -0.72% to +2.51% in October 2023, without the gold price suffering as a result. After that, the yield remained above 2% with minor fluctuations, but the gold price has risen sharply since then. An inflation-linked US government bond with an annual interest rate of 2% and full government-guaranteed inflation protection is strong competition for gold bullion, which yields no interest and only roughly tracks the US consumer price index over the long term with high relative fluctuations.

Nevertheless, since 2022 many investors have favored interest-free gold bullion, which cannot go bankrupt and cannot be inflated away (the incipient creditworthiness problems of highly indebted countries are shown in chart 26). So here we have the first break in a correlation linked to the shrinking creditworthiness of one of the world's best debtors (the US).

Even if interest rates on government bonds rise or prices fall for reasons other than the declining creditworthiness of governments, they will gradually lose their status as a strong risk reducer. Charts 27 and 28 show the correlation between share prices and interest rates for 10-year government bonds in the USA and Germany. In the sections colored green, the correlations were positive. This means that interest rates and share prices rose or fell at the same time. As falling interest rates cause government bond prices to rise, this significantly reduces the risk of a portfolio consisting of shares and bonds, because in times of falling share prices, government bonds also deliver price gains in addition to interest rates if the correlation is positive. If there is a negative correlation, equities and government bonds fall at the same time; the risk reduction through the addition of government bonds is smaller. This has been the case again in Germany (chart 28) since 2022 (as well as in Europe as a whole) and in the US since the financial crisis (chart 27). After the collapse of the LTCM hedge fund, which was very large at the time with total assets of over USD 100 billion, in the fall of 1998, the US central bank had to help wind up the fund by cutting interest rates several times. Since then, however, fundamental confidence in long-term growth in corporate profits had been shaken; falling interest rates were interpreted as a sign that some investors were fleeing to the bonds of countries that still had relatively low levels of debt in 1998 for safety reasons (Figure 24: Example of the USA) and were not prepared to wait for the stimulating effect of falling interest rates. When the US central bank, in cooperation with the US government, quickly and massively provided large sums of money to stabilize the banking system in the USA after the Lehman bankruptcy in September 2008, confidence soon returned. Falling interest rates were once again seen as an early indicator of an imminent economic recovery and drove share prices up again, as had been the case for decades before 1998. In the eurozone, the restoration of confidence took much longer, as the European Central Bank, under the influence of the German Bundesbank, refrained from providing massive support comparable to that in the USA, e.g. printing money, and only introduced similar measures during the euro crisis from 2011 onwards. With the rapid and consistent intervention by central banks and governments everywhere during the coronavirus crisis from 2020, confidence was then restored in the eurozone too, so that the normal negative correlation emerged again. In future crises, we can expect central banks to intervene again everywhere; in the US, this may even be enforced. Trump said: "If I disagree (on interest rates), I will make it known," said the President. When asked if (Federal Reserve Chairman) Powell would listen to him, Trump simply replied: "Yes". Powell only said: "No" to the same question. When asked if Trump had the power to fire or demote him, Powell replied almost as briefly: "Not allowed by law." (Source: Business Insider, 28.1.2025).

However, the setting of interest rates by politicians harbors enormous risks for the stability of the value of money.

Conclusion

We have good reasons not to share the current euphoria regarding the IT sector. Generally speaking, optimistic sentiment among equity fund managers, as evidenced by the low cash ratios in their funds, is followed by below-average returns over the next 12 months. The 12-month forecasts for the US equity market have also not been reliable overall for 26 years. In addition to the excessive valuation of IT stocks, the weak development of leading economic indicators is currently being overlooked. A portfolio that is predominantly invested in business, i.e. in equities and private equity, should therefore currently include significant proportions of lower-risk and less cyclical forms of investment such as government bonds, gold, healthcare stocks or consumer staples. However, the risk-reducing nature of government bonds must be closely monitored.

Consequences for the portfolio

• Equities: We remain underweight equities in our strategy portfolio, favoring sectors such as healthcare and consumer staples, from which we expect higher returns. These sectors are also characterized by their defensive nature, which makes them less susceptible to economic setbacks.
• Bonds: Bonds also remain underweighted. For German government bonds in particular, we are not forecasting any real profit after interest and taxes if our expectation that inflation will exceed the target of 2% in the coming years materializes.
• Gold: Gold retains a significant share in our portfolio. The reasons for this are the continued high yield expectations, its risk-reducing properties in the portfolio context and its resistance to inflation, as gold cannot be multiplied at will and therefore retains its real value well.
• Liquidity: We are currently overweighting government bonds with a short residual term. Due to the flat yield curve, no yield losses are expected here in the short term compared to long-term government bonds. At the same time, we are increasing our room for maneuver in the event of market volatility.
• Private equity: Private equity funds remain an attractive investment option. We continue to expect high yield premiums from funds launched in phases of weakening equity markets.

Finally, our key statements from the January 2022 Capital Market Outlook, which you can find here here:

Three years ago, we analyzed the effects of the coronavirus crisis and found that inflation rates were expected to rise further, which then occurred in the course of 2022. Our expectation that interest rates could only partially follow the rise in inflation due to the high level of government debt worldwide also proved to be correct. On the other hand, we did not realize that the rise in interest rates would affect the stock markets in the short term, but also real estate, as happened in the course of 2022; however, in January 2022 we did not yet know anything about the start of the war in Ukraine 4 weeks later. At least on the stock markets, the price losses were not sustained, as can be seen from the record high stock indices in many countries.

You can also download the capital market outlook here.