Switzerland is of course assigned a seven star rating under our Net Foreign Asset (NFA) model, with a score of 179% of GDP. The model forecasts that it will remain a seven star country into 2020. This may not surprise anyone, what also may not surprise is that Switzerland doesn’t issue many government bonds. In fact there is virtually no government debt available and hence the current ten year bond, the 1.25% maturing in May 2026 yields -0.34% in Swiss francs, 48 bps through the ten-year German government bond denominated in euros and 84 bps through French government bond. Needless to say we doubt you will ever see us write a ticket purchasing Swiss government bonds for our funds.
In portfolio management, risk is a key element; too much risk and you end up with volatility which will concern clients and with too little risk, you tend to underperform which equally upsets investors. So where is the happy medium? We believe it is where you take adequate positions and balance a portfolio to smooth the risks whilst adding to performance over and above a given target or benchmark.
As regular readers are aware, we manage the portfolios with the Net Foreign Asset (NFA) as the first level of investment guidelines. For inclusion of any credit at first they must be domiciled in a ‘Wealthy Nation’ as defined by the NFA calculation; Saudi Arabia more than qualifies having a NFA to GDP of 178% (7 stars). Although there are concerns over the country’s forecast budget, we view the recent 2016 budget as credit positive; it is evident that policymakers have taken positive proactive steps in the face of further declining oil prices (of their own making).
Unquestionably Saudi Arabia faces a number of challenges; Christine Lagarde noted at the conclusion of her visit to Saudi Arabia that the economy “has performed strongly in recent years, but is now facing the challenge of adjusting to the sharp drop in oil prices. …. Prudent fiscal management has helped build-up substantial policy buffers over the past decade, but reforms that would put the large fiscal deficit on a firm downward path are needed. The banking sector is in a strong position to weather lower oil prices and weaker growth.”
As central banks continue to face headwinds from increasing global growth and deflationary concerns, there has been talk of the US either lowering rates even further (to negative rates) or in fact unleashing QE4. However, neither option has been mentioned by Fed members, the majority of whom have insisted that we will see a rate rise this year. With only two more meetings to go, and after the disappointing US nonfarm payroll release for September last week, a number of market makers have revised their expectations for rate “lift-off” out to 2016. The minutes from the FOMC’s meeting in September will be released later today; we expect very little in the way of change to rhetoric.