Why you should rebalance your Swiss cash exposure

Dovish Swiss monetary policy looks set to continue as the Swiss central bank attempts to contain the deflationary pressures induced by the strong Swiss franc. With the era of high cash rates likely over, how could Swiss allocators position to compensate for potentially diminishing returns? 

Swiss policy easing reduces cash returns

Since December 2023, monetary policy in G10 nations has shifted towards a more dovish stance. Previously, central banks had increased interest rates in a concerted and rapid effort to counteract the inflation that arose from substantial Covid-related fiscal spending. Now, that hawkish stance is subsiding as central banks pivot to a readiness to cut rates. 

A notable aspect of this cycle is the policy loosening beginning in what might be considered an unusual location: Switzerland. The SNB led the charge in the easing cycle, making it the first major central bank to decrease rates. 

Since March 2023, investors had enjoyed positive cash rates that were relatively higher than in the past, making it more straightforward than previously to gain decent returns. The SNB has already cut rates twice since then, however, trimming nearly a third of the future expected return on cash. 

Will this trend of easier policy weighing on cash returns continue? If so, how should investors moderate the expected decline? 

We believe our All Roads multi-asset strategy could prove handy in this respect. 
 

More cuts in store?

The first question every Swiss asset allocator should ask is whether the SNB's rate cuts are likely to continue. The SNB surprised the markets by being the first central bank to cut rates in this cycle in March 2024. Investors only enjoyed one year of higher rates before the SNB executed its initial cut, even ahead of the European Central Bank (ECB). 

The easing is crucial for the Swiss economy to navigate changing currents that originated from the Federal Reserve’s (Fed) vast pivot last December. As most central banks in the developed world leaned towards cutting rates, the Swiss franc threatened to appreciate rapidly, potentially triggering deflationary forces in the near term for Switzerland. Moving swiftly and preemptively, the SNB initiated its sequence of loosening in an effort to thwart a potentially stronger franc. 

Will the SNB continue cutting rates? Figure 1 leaves little room for doubt on further dovish potential: among all our monetary policy nowcasters measuring the risk of dovish surprises (where the indicator is below 50%) or hawkish surprises (where the indicator is above 50%), Switzerland ranks the lowest. Our signals clearly point to a continuation in rate cuts, likely eroding the attractive return on short rates over the next 12 months. 

How can investors respond?

FIG 1.  Monetary policy nowcasters, 2013-2024

Source: Bloomberg, LOIM. As at July 2024. For illustrative purposes only.

What All Roads conservative aims to offer

Given the strong performance of cyclical assets in the year-to-date, some investors are leaning towards a defensive stance and appreciate the value of holding cash, either as a diversifier or as a way to meet balance-sheet obligations. However, the era of high cash rates is likely behind us now, and this trend is expected to continue into the foreseeable future.

Our All Roads suite of strategies provides a flexible vehicle that caters to multiple risk profiles. Back in the era of negative interest rates, we launched a new profile in our suite: All Roads conservative. This portfolio combines cyclical and defensive assets into a highly diversified solution that aims to generate an additional 2% return above cash for a modest amount of risk (a maximum 5% drawdown over 1-year)¹. As cash rates decline, this extra source of return could help Swiss investors to offset the decline in SNB rates and cash returns.

Figure 2 illustrates the track record of different blends of a cash index with 10% to 30% allocation to the All Roads conservative strategy. With 20% allocation to All Roads conservative, the realised return on a cash pocket shifts from being negative to zero. With 30%, that performance becomes positive. 

This cash enhancement affords Swiss investors additional time to gain further clarity about the global economy before deciding whether to allocate more aggressively to equities or bonds. All Roads conservative can also help portfolios prolong the period of higher returns obtained from cash pockets. Should the SNB cut rates to zero, the strategy could help reclaim some of the 1.5% in return that has been lost over just the past quarter.

FIG 2. Indexed performance of different mixes between a cash index and All Roads conservative

Source: Bloomberg, LOIM. For illustrative purposes only. As at July 2024. Past performance is not a guarantee of future results.
 

In Switzerland’s current economic context, Swiss allocators need to reconsider their cash exposure, as current attractive yields are likely to continue diminishing. Increasing exposure marginally to a cash-enhancing strategy, such as All Roads conservative, can help navigate the prospect of declining cash returns while waiting for higher investment conviction.

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