investment viewpoints

What next for the Swiss economy?

What next for the Swiss economy?
Markus Thöny - Head of Swiss Fixed Income

Markus Thöny

Head of Swiss Fixed Income
Philipp Burckhardt, CFA - Fixed Income Strategist and Portfolio Manager

Philipp Burckhardt, CFA

Fixed Income Strategist and Portfolio Manager

In the new year, the Swiss economy has been buffeted by global developments, while maintaining its own, distinct features. As such, the Swiss economy has echoed part of the deterioration seen in the Eurozone, but also showed signs of domestic resilience in the labour market.  We expect the Swiss economy to continue mirroring weak growth, but with important domestic caveats.  We are also monitoring the franc exchange rate.

Globally, central banks have adopted a more dovish stance since January. The US Federal Reserve said it will be patient and flexible regarding the path of its policy rates. On the balance sheet normalisation, the Fed will slow its tapering of Treasury securities from May, and plans to end the Treasury taper in October 2019. In the Eurozone, the European Central Bank (ECB) reduced its economic forecasts for the region, pushed forward its expected timing for rate hikes to 2020, and unveiled a fresh round of low-cost funding for banks. This means the low yield environment looks set to endure.

Meanwhile, continued uncertainty persists. While global growth is moving sideways, sentiment is nonetheless weakening and geopolitical risks are increasingly entrenched. Concerns surround the trade war between the US and China, the rise of populism generally, doubts about Italy’s economic policies, the “gilets jaunes” protests in France, and the challenges of Brexit negotiations. While we still see international growth slightly below trend, the outcome is by no means guaranteed and the timing may be uneven and volatile due to such factors – this renders the outlook challenging.

Within this context, the Swiss National Bank (SNB) has maintained an accommodative monetary policy. It keeps interest rates deeply negative, and communicates its readiness to intervene in the market to prevent the franc from appreciating. Typically, the strong franc dampens imported inflation, especially through the trade channel with the Eurozone. As such, the SNB closely tracks Eurozone developments, and has intervened in the past to ensure that any softening of the euro is not accompanied by firming of the franc.

Domestically, there are signs of a sharp softening in some Swiss indicators such as GDP, manufacturing and the KOF leading indicator. This dip mirrors that seen in the Eurozone, to some extent.  Certain other Swiss indicators, however, show a relatively robust domestic picture. For instance, the Swiss output gap has closed, and the Swiss economy is approaching full employment.

We expect economic developments in the Eurozone to guide Swiss monetary policy, especially because the strong Swiss franc dulls imported inflation. Should the ECB become even more dovish due to a slump in Eurozone growth, for example, we believe the SNB could echo with moves of its own. Still, because certain Swiss indicators show a relatively buoyant domestic picture, we caution that this domestic resilience could act as a multiplier in a potential recovery scenario. 

Our base case scenario is for the SNB to remain on hold for the time being and warn about the strong franc, especially because of the Eurozone slowdown. We are closely watching the currency as a driver for policy and expect the SNB would tolerate a limited appreciation of the Swiss franc. Further large-scale currency intervention is rather unlikely, however, as decreasing marginal benefit could shift the cost-benefit analysis of these measures, we believe. Additionally, the risk of being labelled a currency manipulator by the US Treasury at some point acts as further backstop.

Overall, we see a continuation of the dovish status quo of current negative rates in Switzerland, coupled with a readiness to intervene in currency markets.

important information.

This document has been prepared and is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393 Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for informational purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipients exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. The contents of this document are intended for persons who are sophisticated investment professionals and who are either authorised or regulated to operate in the financial markets or persons who have been vetted by LOIM as having the expertise, experience and knowledge of the investment matters set out in this document and in respect of whom LOIM has received an assurance that they are capable of making their own investment decisions and understanding the risks involved in making investments of the type included in this document or other persons that LOIM has expressly confirmed as being appropriate recipients of this document. If you are not a person falling within the above categories you are kindly asked to either return this document to LOIM or to destroy it and are expressly warned that you must not rely upon its contents or have regard to any of the matters set out in this document in relation to investment matters and must not transmit this document to any other person.
This document contains the opinions of LOIM, as at the date of issue. The information and analysis contained herein are based on sources believed to be reliable. However, LOIM does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Important information on case studies
The case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. The case studies have been selected to illustrate the investment process undertaken by the Manager in respect of a certain type of investment, but may not be representative of the Fund’s past or future portfolio of investments as a whole and it should be understood that the case studies of themselves will not be sufficient to give a clear and balanced view of the investment process undertaken by the Manager or of the composition of the investment portfolio of the Fund now or in the future.
©2019 Lombard Odier IM. All rights reserved.