Swiss Equities Would Fall If Interest Rates Rose Sharply
The central banks are raising interest rates only with extreme caution. A sharp rise in inflation is not foreseeable. What would happen, though, if the Swiss National Bank were to raise interest rates far more sharply? What would this mean for Swiss equities and bonds?
The interest rates in Switzerland are strongly influenced by the interest rate trend and economic performance abroad. A rise in interest rates only affecting Switzerland is therefore a very unlikely scenario. In order nevertheless to illustrate how the securities in a typical Swiss portfolio would develop in the event of a sharp rise in interest rates, let us place ourselves in a world of strong economic growth over the next five years causing central banks across the globe to tighten their monetary policy. In such an environment the Swiss National Bank would gradually hike its base rate by around two percentage points, significantly more than in our baseline scenario.
Swiss Equities Benefit Less from Rising Interest Rates Than Do Foreign Equities
Despite the increased interest rates, the franc would devalue sharply in a scenario of strong growth owing to the decreasing need for a “safe haven”. The highest returns would be generated by foreign and more cyclical equities, which according to estimates would be two percentage points higher per year in a strong growth environment than in the baseline scenario. For Swiss equities this difference would only amount to one percentage point.
Return on Bonds Falls As Interest Rates Rise
A tarnished picture emerges for bond yields from such a rise in interest rates. Only Eurozone government bonds would generate a higher return in the scenario with a marked rise in interest rates than in the baseline scenario, as the higher coupons would more than compensate the price losses.
However, Swiss Confederation bonds would be particularly negatively affected. Swiss real estate funds would perform similarly to equities in the scenario of rising interest rates. However, real estate direct investments would only gain little value compared with the baseline scenario despite the higher economic growth.
Foreign equities thus appear particularly attractive in an environment of higher growth and higher interest rates, not least due to the expected depreciation of the franc.