Like most major central banks, the Swiss National Bank (SNB) will probably loosen its monetary policy in the months ahead. However, it’s likely to remain cautious in early 2024. Inflation may be lower than in the US and elsewhere in Europe, but it could well edge up as a result of rising electricity prices and rents and the VAT hike. The SNB has continued to shrink its balance sheet, which suggests that it’s prepared to let the franc rise further in order to keep a lid on imported inflation. The franc ended last year on a very strong upward trend, particularly against the US dollar and the euro. And we can’t rule out the possibility of the euro weakening further. The psychological threshold of EUR 0.90 could even be reached in the short to medium term. Once inflation has absorbed this seasonal rebound in the spring, the SNB might be more willing to respond to the plight of Switzerland’s exporters.
2023 was a stellar year for stock markets in industrialised countries, yet Swiss equities lagged far behind. Switzerland’s two domestic indexes, the SMI and SPI, gained 4% and 6%, respectively, paling in comparison to their European and US peers.
The defensive nature of Swiss companies was one of the main stumbling blocks last year, as volatility was relatively low and investors’ risk appetite grew stronger as the year wore on. Growth stocks, which fared particularly well, play only a small role in Swiss equity indexes. Problems specific to a number of Swiss blue chips, including Roche and Nestlé, did not help matters.
That said, the Swiss economy still boasts solid fundamentals. GDP growth is poised to bounce back this year, thanks in part to very firm consumer spending. The economy’s structural characteristics are another plus in the current environment: a high level of immigration, extremely low unemployment and inflation already well below 2% are all factors that will support economic output and purchasing power.
In the end, an investor’s positioning within the Swiss equity segment will be key when it comes to outperforming the index in 2024 – as it was in 2023. The franc’s recent behaviour is instructive: while the franc continues to gain strength, the SNB still refuses to loosen its monetary policy even though inflation is under control. The fact that the franc gained 9% on average against the US dollar last year and over 6% against the euro is a worry for Swiss exporters. The current inflation differential, in Switzerland’s favour, has mitigated the impact of the strong franc on the competitiveness of Swiss companies. Yet the impact on margins could be devastating for companies that export their goods and services to the rest of Europe or to the US and whose costs are largely CHF-denominated. As things now stand, small caps could be the first to fall victim to the rising franc.
We have opted to boost our exposure to Swiss equities given the potential for a rise in volatility in the first quarter and the excessive levels of optimism in the rest of Europe and the US. For the reasons mentioned above, at this point in the year we are bullish on large caps, starting with those that underperformed substantially last year.
The eurozone’s main stock market index gained considerable ground last week, spurred by strong earnings figures from blue chips such as LVMH, ASML and SAP. The index is now at a 23-year high.