Investors Grow More Confident Fed Will Pull Off a Soft Landing
Mutual funds and hedge funds are putting money in stocks that would benefit from slowing inflation, falling rates
3 min
A few months ago, Wall Street rebuffed the idea that the Federal Reserve would be able to pull off a soft landing.
Now, a growing crowd is betting on exactly that happening.
Mutual funds and hedge funds managing roughly $4.8 trillion in assets have been putting money into stocks that stand to benefit from inflation cooling, interest rates going down and the U.S. economy avoiding a recession, according to an analysis by Goldman Sachs Group Inc.
The investors have larger-than-average positions in shares of industrial, materials and energy companies, Goldman’s analysis found. All three groups tend to be sensitive to changes in the economy, meaning investors’ bets should eventually pay off if the U.S. can avoid a deep and prolonged downturn, or a “hard landing.”
Recent data have offered investors some hope for that scenario. The labour market has remained strong, with the unemployment rate clocking in at a historically low 3.7% last month. Consumer spending is up. And there are signs that inflation is easing. Consumer prices rose 7.7% last month, a brisk clip but nevertheless the smallest year-over-year gain since January.
It is looking increasingly likely that the U.S. will be spared “the typical scar tissue of a steep economic downturn,” Katie Nixon, chief investment officer for Northern Trust Wealth Management, said in written comments.
The debate still rages on Wall Street, of course, and other investors say a deeper recession could be looming.
There are additional challenges remaining—one of them being a red-hot labour market. In a speech last month, Federal Reserve Chair Jerome Powell implied that wages are still growing too quickly to allow inflation to return to the central bank’s 2% target.
Investors might get some clarity on both inflation and the Fed’s thinking in coming days.
The Labor Department will release its November reading for the consumer-price index Tuesday. The report will offer the Fed its last look at inflation before it announces its final interest-rate decision of the year on Wednesday.
The central bank is widely expected to raise rates by half a percentage point. That would mark its smallest rate increase since March, when it began tightening monetary policy once again. But a surprisingly strong inflation reading could throw into question the Fed’s plans to slow its pace of interest-rate increases in 2023. Stocks fell Friday and suffered weekly losses after data showed producer prices rose more than expected in November.
“Everybody is going to be looking at the direction of that CPI number,” said Brian Overby, senior markets strategist at Ally. “As long as we’re going in the right direction, it doesn’t even have to be a big number to the downside.”
History doesn’t favour the Fed. Data from the central bank show the economy fell into recession nine of the past 12 times the Fed tightened monetary policy.
A downturn would likely put more pressure on an already beaten-down market.
Stocks are up significantly from their October lows. Butthe S&P 500 is still down 17% for the year, on course for its worst annual performance since the 2008 financial crisis.
The stock market has typically fallen roughly 30% in recessions going back to 1929, according to Dow Jones Market Data.
Still, analysts and economists at a number of firms, including Goldman Sachs, BMO Wealth Management and Credit Suisse Group AG, are predicting the economy will be able to avoid a hard landing next year.
“The most significant challenges to consumer spending are most likely in the past,” Goldman economist Joseph Briggs wrote in a note. The bank expects inflation to continue moderating next year, but the unemployment rate rising only to around 4.1% from the current 3.7%.
Whether there winds up being a recession or not, many say they are in agreement on one thing: Markets are likely to remain volatile for some time.
“2022 wasn’t a picnic, but it was clear that [the Fed] had to tighten policy,” said Christopher Smart, chief global strategist at Barings and head of the Barings Investment Institute.
The Fed’s path over the coming months—and consequently, the markets’ outlook—looks less straightforward, Mr. Smart said.
He added that, in the near term, he is recommending that clients hold on to extra cash to navigate swings in the markets.
“It depends on how low inflation will go and how long it will take to get there. And that determines what kind of potential damage will come along the way,” Mr. Smart said.
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The government in Switzerland has waived residency requirements in a handful of locations, including one that’s growing fast.
3 min
While golden visa schemes proliferate, Switzerland remains famously protective about buying property in the country.
Rules known as Lex Koller, introduced in 1983, prohibit foreigners from buying homes in cities like Geneva and Zurich. And in the few locations where foreigners can buy, purchase permits come with rules around size and occupancy.
But non-Swiss buyers who have coveted an Alpine home now have a pathway to ownership, and it’s likely to come with financial upside. The Swiss government has waived residency requirements in a handful of locations where developers have negotiated exemptions in exchange for billions of dollars of investment in construction and improvements.
Andermatt, a village 4,715 feet above sea level in the centre of the Swiss Alps, is the largest municipality to open up to foreign buyers.
Its main investor, Egyptian magnate Samih Sawiris, “believed Andermatt could become a full-town redevelopment when he first visited in 2005, but the key was to offer real estate to people outside of Switzerland,” said Russell Collins, chief commercial officer of Andermatt-Swiss Alps, Sawiris’s development company.
“We became the only large-scale real estate development in Switzerland with an exemption from the Lex Koller regulations.”
In the ensuing decades, Andermatt has become a major draw for high-net-worth buyers from around the world, said Alex Koch de Gooreynd, a partner at Knight Frank in London and head of its Swiss residential sales team.
“What the Andermatt-Swiss Alps guys have done is incredible,” he said. “It’s an impressive resort, and there is still a good 10 years’ worth of construction to come. The future of the resort is very good.”
Andermatt’s profile got another boost from the 2022 acquisition of its ski and resort operations by Vail Resorts, which runs 41 ski destinations worldwide.
“Vail has committed to 150 million Swiss francs (US$175 million) in investments, which is another game-changer,” de Gooreynd said.
“If you’d asked me about Andermatt 10 years ago, I would have said the ski areas weren’t good enough of a draw.”
Along with the five-star Chedi Andermatt hotel and residences, which opened in 2013, residential offerings include the Gotthard Residences at the Radisson Blu hotel; at least six branded residences are planned to open by 2030, according to Jeremy Rollason, director for France, Switzerland, and Austria at Savills Ski.
“Most of these are niche, boutique buildings with anywhere from eight to 14 units, and they’re releasing them selectively to create interest and demand, which has been a very successful approach,” he said.
“Andermatt is an emerging destination, and an intelligent buy. Many buyers haven’t heard of it, but it’s about building a brand to the level of Verbier, Courchevel or Gstaad.”
The Alpinist, Andermatt’s third hotel residence, is slated to open in 2027; with 164 apartments, the five-star project will be run by Andermatt-Swiss Alps, according to Collins.
Other developments include Tova, an 18-unit project designed by Norwegian architects Snohetta, and La Foret, an 18-apartment building conceived by Swiss architects Brandenberger Kloter.
Prices in Andermatt’s new buildings range from around 1.35 million francs for a one-bedroom apartment to as much as 3.5 million francs for a two-bedroom unit, according to Astrid Josuran, an agent with Zurich Sotheby’s International Realty.
Penthouses with four or more bedrooms average 5 million-6 million francs. “Property values have been increasing steadily, with an average annual growth rate of 7.7% in the last 10 years,” she said.
“New developments will continue for the next 10 years, after which supply will be limited.”
Foreign buyers can obtain mortgages from Swiss banks, where current rates hover around 1.5% “and are declining,” Josuran said.
Compared to other countries with Alpine resorts, Switzerland also offers tax advantages, said Rollason of Savills. “France has a wealth tax on property wealth, which can become quite penal if you own $4 million or $5 million worth of property,” he said.
Andermatt’s high-end lifestyle has enhanced its appeal, said Collins of Andermatt-Swiss Alps.
“We have three Michelin-starred restaurants, and we want to create a culinary hub here,” he said. “We’ve redeveloped the main shopping promenade, Furkagasse, with 20 new retail and culinary outlets.
And there is a unique international community developing. While half our owners are Swiss, we have British, Italian and German buyers, and we are seeing inquiries from the U.S.”
But Andermatt is not the only Swiss location to cut red tape for foreign buyers.
The much smaller Samnaun resort, between Davos and Innsbruck, Austria, “is zoned so we can sell to foreigners,” said Thomas Joyce of Alpine property specialist Pure International.
“It’s high-altitude, with good restaurants and offers low property taxes of the Graubunden canton where it’s located.”
At the Edge, a new 22-apartment project by a Dutch developer, prices range from 12,000-13,500 francs per square metre, he said.
As Andermatt’s stature grows, this is a strategic time for foreigners to invest, said Josuran of Sotheby’s.
“It might be under the radar now, but it’s rapidly growing, and already among Switzerland’s most attractive ski locations,” she said. “Now’s the time to buy, before it reaches the status of a St. Moritz or Zermatt.”
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