The Swiss outperformer

The Swiss economy has shown remarkable resilience since the recent energy shock. We expect Swiss GDP to expand by 1.0% in 2023. Weakening global demand will be a challenge for some Swiss manufacturers and recent business surveys are consistent with a slowdown in economic activity in the coming quarters. Nonetheless, pharma and chemicals, which account for 50% of total Swiss goods exports, are less sensitive to exchange-rate and global growth fluctuations and a strong Swiss franc. In addition, a robust labour market and rising real wages should continue to support household consumption. 

The dip in headline inflation below 2% in June means the Swiss National Bank (SNB) is the first major central bank to reach its inflation target. But inflation is set to reaccelerate in the coming months and we expect headline inflation to average 2.3% in Switzerland this year. Recent downside surprises in Swiss consumer inflation (now below 2%) may not change the Swiss National Bank’s (SNB) concerns about the outlook very much. The central bank increased its policy rate by 25bp at its June meeting and raised its annual average inflation forecasts for 2024 and 2025 to 2.2%. We expect a final rate hike of 25bp in September, bringing the policy rate to 2.0%.

More muted inflationary pressures in Switzerland than elsewhere probably go a long way to explaining the strong performance of the 10-year Swiss government bond year-to-date. Despite continued hawkish rhetoric coming from the SNB, Swiss 10-year bonds recorded a total return of 6.8% (in CHF) in H1. We expect 10-year Swiss yields to move slightly up (from 0.93% on 30 June to 1.10% by year’s end) given our expectation for a further hike in the SNB’s policy rate. As such, we have downgraded our stance on Swiss government bonds from neutral to underweight and favour short-term investment-grade corporate bonds in Swiss francs. With real rates positive, IG bonds in Swiss francs are finally offering some interesting potential for investors. Although yields on domestic and foreign IG bonds have each fallen since the beginning of the year, yields on foreign bonds denominated in francs remain well above those offered by their domestic Swiss peers.