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Active Thinking: What the Swiss interest rate cut could mean

GAM Investments’ Daniel Häuselmann discusses the Swiss National Bank's recent interest rate cut, its likely impact on the Swiss franc and the implications for Swiss equities.

03 July 2024

The Swiss National Bank’s (SNB) second interest rate cut this year, responding to the decline in inflation and signalling its readiness to intervene in the currency market to curb the franc's appreciation, places it at the forefront of rate cuts among developed nations. Despite this recent cut, the Bank of England and the Federal Reserve maintain their policy rates at their highest levels in over a decade.

The SNB's quarter-point rate cut to 1.25% on 20 June 2024 prompted a decrease in the franc's value. Future rate decisions remain uncertain, though the SNB has slightly revised its inflation forecast downward. Switzerland has largely evaded the severe inflationary spike experienced across Europe in recent years. The country's inflation rate stabilised at 1.4% in May, following a slight increase in April. The SNB now projects this rate to be the average for the entirety of 2024.

Impact of the Swiss franc on Swiss equities

The strength of the Swiss franc is a pivotal factor for Swiss equities. Despite the franc's appreciation over the past year, we have seen some respite as it has slightly depreciated. In the long run, it does not matter much to Swiss companies. Swiss companies are resilient and can withstand currency fluctuations due to lower inflation rates in Switzerland, which tends to result in only modest wage increases. In the short term, however, a sharp appreciation of the Swiss franc can be challenging, as it requires companies to generate more revenue for growth, exerting some pressure on them.

Over the last two to three years, the performance of Swiss equities in franc terms has been somewhat subdued, influenced by the currency and the fact most Swiss companies conduct their business internationally. However, this also drives these companies to enhance efficiency and develop growth plans to offset the currency impact. To increase dividends in Swiss francs, they must compensate for these fluctuations.

Currently, the Swiss franc does not appear as robust, partly due to the SNB’s more aggressive stance on interest rates compared to other central banks. Coupled with the lowest inflation rates globally, a stable or slightly depreciated Swiss franc could aid companies in improving their earnings in the short term.

The potential for interest rate cuts has a minimal impact on most of the Swiss companies we favour, as they operate with low levels of debt and are self-financing. While some banks may be affected due to their reliance on savings interest margins, the overall influence on Swiss equities is minimal. Low interest rates generally support higher market valuations, as investors are willing to pay more in a low-interest environment.

Structural growth opportunities for Swiss companies

For international investors, investing in Swiss companies offers a unique opportunity. As we pointed out in a previous article, by investing in a diverse portfolio of globally competitive businesses quoted in a robust currency, investors gain exposure to leading companies. A lot of these Swiss companies are market leaders, ranked either first or second in their respective fields. This provides international investors with diversification that contrasts with investments in the US mega caps. We believe the result can be an attractive return on investment from these strong, competitive Swiss entities, which remains a compelling proposition for international investors seeking variety in their portfolios.

Although purchasing managers’ indices (PMIs) are currently subdued, we are optimistic that an economic upturn will strengthen Swiss equities, especially the small and mid caps, and improve their outlook. The true opportunity for growth is contingent upon the onset of a new business cycle driving earnings growth. Our projections indicate that towards the end of 2024, or possibly into 2025, as the economy recovers, we will see an uptick in earnings. This anticipated recovery is expected to be a significant catalyst for Swiss companies, presenting an attractive investment landscape.

Furthermore, many of the Swiss companies we favour are benefiting from various structural growth trends, such as digitalisation, energy transition or advances in medical technology. For example, Ypsomed, is capitalising on the development of new drugs and strategic market positioning. Landis+Gyr is gradually adapting to the structural shifts in energy infrastructure, and semiconductor suppliers are poised to gain from the semiconductor industry’s rebound in the second half of the year, with a more pronounced impact in 2025. Over the last two years, the maturation of new technologies has paved the way for new applications. It is becoming apparent that high-performance computing will give the entire industry a boost, laying the basis for many new applications that are likely to emerge in the coming years. Additionally, the energy transition is set to revitalise business for some traditional Swiss industrial companies. These companies are experiencing dynamic growth, propelled by structural growth trends, despite the broader context of subdued economic growth.

Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.

The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of the markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

Daniel Haeuselmann

Head of Swiss Equities
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