Investing in Switzerland: Ten questions

Investing in the Swiss market. Answers to the most pressing questions.

The new year offers an opportunity to look at your own investments. This is particularly important after a stressful year like 2022: Negative interest rates are history, inflation is back, and war is raging in Europe. What's next? There are more variables than constants. This makes it all the more important to answer some questions about investing that investors may have always wanted to ask.

1. Why can’t I simply hold my assets in cash?

Cash is a poor choice as a long-term store of value. Why? Because inflation reduces the purchasing power of money over time. For example, a person buying a basket of goods that used to cost 100 Swiss francs in 1900 would have to find 1,200 Swiss francs today. Roughly 90 per cent of the value of cash has been eaten up by inflation.

If that 100 Swiss francs had been invested back then, the picture would be much more positive. Even putting that money into Swiss federal bonds would have paid off: An investment of 100 Swiss francs in 1900 would have yielded around 1,200 Swiss francs after accounting for inflation. The best option would have been to invest the money in the Swiss Market Index at the time. Thanks to the appreciating value and dividends, an investor would have seen an increase in purchasing power of over 25,000 Swiss francs, despite inflation.

Investments: Inflation reduces purchasing power

Investments: Inflation erodes the purchasing power of cash over time

Purchasing power of CHF 100 after a period of 1 to 20 years at inflation rates of 1%, 2% and 5%
Source: Credit Suisse

For illustrative purposes only

2. Is the era of negative interest rates over?

Interest rates have risen rapidly since the beginning of 2022. For example, the federal government currently has to pay around 1.3 per cent to borrow money for 10 years, whereas in 2021 it was still able to do so at an average rate of -0.25 per cent. This increase can be attributed to a rise in inflation, which has reached levels not seen in decades – and not just in Switzerland.

On the one hand, lenders are demanding a high premium on their invested capital as compensation for the risk of devaluation caused by inflation. On the other hand, central banks, including the Swiss National Bank (SNB), are trying to slow the rise in inflation by rapidly raising key interest rates. For example, the SNB has successively raised its key interest rate from -0.75 per cent in the first quarter of 2022 to 1.00 per cent in December 2022. Further rate hikes are likely to follow. As a result, interest rates remain positive. Following in the SNB’s footsteps, commercial banks have also done away with negative interest rates. For savers, however, the situation has deteriorated for the time being given the high level of inflation. That is because “real” interest rates, i.e. the rate of interest earned minus inflation, are currently still deep inside negative territory.

Negative interest rates remain

After adjusting for inflation, interest rates remain well below zero

Interest rates in % p.a.
Last data point: November 2022
Sources: Refinitiv Datastream, Credit Suisse
Historical performance indications and financial market scenarios are not reliable indicators of future performance.

3. Given rising interest rates, does it once again make sense to buy bonds denominated in Swiss francs?

In Switzerland, the rise in interest rates over the course of 2022 was more moderate than in other countries, but still represented a definitive development that brought to an end the long period of negative rates. As a result, the outlook for returns even on Swiss Confederation bonds has improved, particularly for long-term investors who base their investments on the yield to maturity. Accordingly, bonds are once again generating a steady positive return for a portfolio.

The financial market correction in 2022 has also led to a widening of credit spreads, i.e. investors are now being compensated more generously for the credit risk they assume. Interest rate market volatility is likely to remain relatively high in the near term, and in a market environment where the economy is losing steam, detailed credit analysis and knowledge of the risks of individual bond issuers are more important than ever.

4. Is buying your own home worthwhile from an investment perspective? When is renting advantageous compared to buying, and vice versa?

Since the spring of 2022, buyers have had to pay more for a condominium than for a comparable rental apartment for the first time in 13 years. Due to the increase in mortgage interest rates in particular, owners had to pay a premium of 27 per cent in the second quarter of 2022. The calculation of this premium takes into account not just the interest charges but also the cost of maintenance or the short-term illiquidity of the property, as well as profit potential thanks to long-term appreciation in value.

In many areas in Switzerland, it may no longer make financial sense to buy an apartment for the purpose of renting it out once all the associated costs are taken into account. From an investment perspective, therefore, buying residential property is hardly worthwhile at the moment. That is nothing new, however. Prior to 2009 too, an ownership premium typically had to be paid.

5. Does real estate yield more than a balanced portfolio, and how much of a difference do investment timing and the holding period make?

Let’s compare a portfolio consisting of 60 per cent Swiss equities and 40 per cent liquid global bonds with listed Swiss real estate funds. Across all entry points and holding periods since 1999, real estate funds have achieved an excess return compared to the model portfolio in 84 per cent of cases. The return tends to increase as the holding period increases.

The outperformance of the funds was particularly pronounced when market entry was timed prior to a major stock market correction. For example, real estate funds achieved an excess return of 19.6% in 2002 at the time of the dot-com bubble; during the 2008 global financial crisis, the figure was even higher at 23.1%. The downside of the low volatility of real estate securities is that they tend to have relatively lower returns in years in which equities do particularly well, such as 2005 or 2013, or in years with strong interest rate increases, such as 2000.

With the interest rate hikes in 2022 the chances of property values appreciating have declined, and more attention is once again being paid to the income streams from the investment. However, the downturn in the market environment is likely to have already been largely priced into exchange-traded real estate investments.

6. What proportion of the Swiss equity market relates to commercial activity abroad?

The Swiss equity market has a significant “foreign” component. The 40 leading listed Swiss companies that make up the internationally comparable MSCI Switzerland Index generate more than 90 per cent of their revenue abroad. The US alone accounts for 30 per cent of all revenues, according to estimates by data provider FactSet. China also plays a significant role for listed Swiss companies, accounting for 6.8 per cent of revenue, a higher share than the domestic market with 6.7 per cent. Breaking the figures down by region, 38.5 per cent of revenue is generated on the American continent, followed by Europe with 35.2 per cent and Asia-Pacific with 22.1 per cent. In other words, investing in the Swiss market inherently entails global diversification to a certain extent. It also means a significant degree of correlation between the Swiss equity market and its counterparts in the US and Europe.

The US accounts for the largest share of Swiss companies' revenues

Nearly a third of corporate revenues are generated in the US

Share of revenues derived from the eight most important countries for listed in Swiss companies (MSCI Switzerland)
Last data point: 31.1.2022

Source: FactSet, Credit Suisse

7. Does it make sense for Swiss investors to invest in foreign equities?

Yes, Swiss investors should also be invested in foreign equities. A key argument for that is diversification. The Swiss equity market is dominated by companies active in sectors such as healthcare – particularly the pharmaceutical industry – and consumer staples (food). “Swiss-only” investors therefore have disproportionate exposure to fluctuations in these sectors. By contrast, the percentage of technology companies in the Swiss equity market is relatively small. In years of strong growth in the technology sector, the Swiss equity index therefore underperforms the global equity market significantly. That proved to be the case in both 2016 and 2020, for example.

A globally diversified equity portfolio can also serve as a risk hedge in the event of Switzerland and its companies experiencing a severe crisis. Investing in foreign equities also gives investors greater exposure to the growth of emerging markets, such as countries in Asia that are enjoying stronger growth than the global economy. That is why Swiss investors should also be invested in foreign equities. Regardless of that, it can also make sense to maintain a home bias.

8. What proportion of Swiss equities should a “balanced” Swiss investor hold?

For a balanced investment portfolio in Swiss francs, we recommend a 50 per cent equity component. A good third of that should be invested in Swiss equities. We therefore advise Swiss investors to exhibit a “home bias,” i.e. an above-average focus on the home market. At first glance, that may seem surprising based on our long-term return expectations. For the Swiss market, we anticipate an average return of 6.1 per cent for the next five years, which is less than for developed nations or emerging market equities. However, this analysis of returns does not account for the fact that the interest rate level in Switzerland is generally lower and therefore the risk premium on Swiss equities is higher in relative terms.

Swiss equities are also attractive based on risk considerations. Thanks to their defensive characteristics, the expected volatility is comparatively low, namely 15.2 per cent, which is significantly less than we expect in the way of fluctuations for the stock markets of other developed nations with 18.2 per cent. In the past, a relatively high percentage of domestic stocks has also been profitable due to the appreciation of the Swiss franc. The cumulative performance of Swiss equities minus a global equity index is positive and the currency contribution has more than offset the slightly weaker performance of domestic equities.

9. Does it make sense to invest in sustainable Swiss investments (ESG investments)?

Investing in companies that are leaders in the areas of environmental, social, and governance (ESG) compared to their industry peers is one way of steering the world in a more desirable direction. What’s more, investors who take this investment route have not experienced any declines in the performance of their portfolios in the past. On the contrary – the value of the MSCI Switzerland ESG Leader Index, which includes the leading Swiss companies when ranked on the basis of ESG criteria, has almost tripled over the past ten years, while the general MSCI Switzerland Index has not quite doubled. However, an excess return of that magnitude was not guaranteed and cannot be guaranteed in the future either. But investing based on ESG criteria typically reduces the risk to portfolios, which can be explained in part by the fact that ESG screening generally identifies certain quality characteristics that are reflected in higher dividends, as well as lower profit volatility and price volatility.

Investing: Gross return of the MSCI Switzerland ESG Leaders Index

Sustainability has not translated into lower returns in the last 10 years

Gross return on the MSCI Switzerland ESG Leaders Index and MSCI Switzerland in CHF
Last data point: 9.1.2023
Source: MSCI, Credit Suisse
Historical performances indications and financial market scenarios are not reliable indicators of future performance.

10. Does it make sense to invest in gold as a Swiss investor?

Investing in gold is primarily about diversification. Historically, there has been a positive correlation between gold and bonds and a weak one with equities. That means it might make sense to add a measured dose of gold to portfolios with significant equity risk. In particular, that goes for investors who do business in US dollars and emerging-market currencies and who could be exposed to long-term devaluation risk in their own currency. Investors who use the Swiss franc have slightly less need to take action since the franc itself offers “safe haven” characteristics similar to those provided by gold.

Gold can also be used as a hedge against inflation. Broadly diversified commodity baskets that also contain gold have historically offered better protection than mere gold investments for that purpose. Gold works especially when inflation is in danger of, or already is, spiraling out of control which can trigger depreciation and credit fears. To contain that risk, central banks are frantically turning the interest rate screw. That has had a negative impact on gold’s performance in recent quarters. After all, gold itself does not pay interest, so other investments become more attractive in relative terms as interest rates climb. The environment ought to improve in 2023, at least slightly, however. The reason is that, although central banks are unlikely to begin lowering interest rates again, they are at least not expected to tighten rates any further. Meanwhile, the uncertain geopolitical situation could continue to attract a certain amount of investor interest.

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