SNB outlook: open for more easing
The SNB is aiming for a neutral monetary policy that prevents the CHF from strengthening. A downwardly revised inflation forecast and appreciation pressures on the currency put another rate cut on the agenda for the next meeting in September.
Together with currency interventions, this has strengthened confidence in our forecast of a weaker CHF in the coming months.
The SNB has cut its key interest rate for the second time in a row and expects inflation to settle at 1%. We think that further easing is on the agenda. Following the SNB’s decision last week to cut the policy rate to 1.25%, we have brought forward our forecast for a further rate cut to the next meeting in September of this year. The SNB seems to be aiming for a neutral stance and sees the current policy stance as not expansionary. The best estimate of a neutral stance is currently a policy rate of 1%, consisting of 1% inflation and 0% real interest. This estimate for a neutral or natural real rate was put forward by SNB President Jordan. The resulting nominal neutral rate is in line with financial market expectations.
At 1.4%, Swiss inflation is well within the 0% – 2% target range, and the updated inflation forecast under current policy conditions points to a further decline from here to 1% in 2026. This is slightly lower than the previous projection. More importantly, the SNB has emphasised its willingness to intervene in foreign exchange markets against a strengthening CHF.
The CHF has recently strengthened on the back of heightened political uncertainty in France and the eurozone and has the potential to push Swiss inflation even lower than the SNB projects. Another cut in the policy rate at the next policy meeting would make foreign exchange interventions against the CHF more efficient, helping to prevent Swiss inflation from moving too low. A further rate cut by the SNB at the next meeting and the willingness to intervene in foreign exchange markets increase our confidence in our forecast of a weaker CHF in the coming months.
Swiss equities: Catching up
Swiss equities have been catching up with other developed markets over the past two months. Within the Swiss equity market, we recommend increasing exposure to the mid-cap segment given its higher cyclicality.
The Swiss equity market had a rough time in the first months of 2024, underperforming most of its peers. Both the high exposure to defensive segments, which have lagged so far this year, and the low exposure to beneficiaries of artificial intelligence were to blame. Moreover, idiosyncratic issues at two of the three largest companies within the Swiss Market Index also did not help. However, since the start of Q2, Swiss equities have seen a catch-up rally, outperforming both US and European equities on a currency-adjusted basis.
Going forward, we stick to our view that Swiss equities deserve a strategic allocation in an equity portfolio. The equity market scores highest in terms of quality balance sheet characteristics and stability of earnings growth, which have historically resulted in superior returns for shareholders. In addition, our economists expect the Swiss franc to weaken against the euro and the US dollar, which should give a further boost to Swiss equities given that the majority of revenue share is generated outside of Switzerland.
What does this mean for investors?
Within the Swiss equity market, we recommend increasing exposure to the mid-cap segment, which should benefit from the expected upturn in global growth momentum from H2 2024 onwards given its high degree of cyclicality. Compared to their peers in Europe and the US, Swiss mid-caps tend to have more solid balance sheets characteristics and they have delivered higher earnings growth rates over the past ten years. Ultimately, Switzerland’s high level of innovation provides a fertile ground for high-quality businesses to emerge and grow, leading to solid and sustainable returns for shareholders.