by Emmeran Eder, Euro on Sunday
fAlmost all countries are currently groaning under high inflation. But there are exceptions. This includes Switzerland. The inflation rate there was only 2.9 percent in the past twelve months. The country borders on France, Italy, Germany and Austria, where inflation rates are unanimously around eight percent.
Nevertheless, the Swiss central bank (SNB) recently surprisingly increased its key interest rate by 0.5 percentage points, ahead of the ECB. This is no coincidence, the National Bank has always acted strategically with foresight. A comparison with Austria shows that the inflation rate rose by 0.2 percent on average between 2006 and 2021, while in Austria it rose by two percent. “It would be negligent not to take inflationary developments into account,” says SNB boss Thomas Jordan. He promised further rate hikes. “Price stability is absolutely key for us,” he says.
But there are other reasons from which the Confederates benefit. On the one hand, there is the strong franc, which makes imports cheaper. It recently rose against the euro, the currency of its most important trading partner. In this way, the price increases of imported products are cushioned.
State interferes with prices
On the other hand, Switzerland itself ensures price stability. The country has the largest share of government-set prices in Europe – about a quarter. The state knows that every increase in prices encourages other economic actors to do the same. So he tries not to turn the price screw too often.
In addition, the federal government was more cautious with aid and economic stimulus programs during the Corona crisis and pumped less money into the market. In addition, the lockdowns were not as restrictive as in many other European countries.
Another important point is that the Confederates are less dependent on Russian gas and oil than, say, Germany or Austria. About 75 percent of electricity and energy comes from hydroelectric, geothermal and nuclear power. As a result, fluctuations in oil and gas prices affect the country less. Despite all these advantages, the Zurich Cantonal Bank expects inflation to rise by four percent by the end of the year. Because even Switzerland is not on the island of the blessed. But chief economist David Marmet says: “From today’s perspective, we can rule out reaching levels of eight or more percent.”
A comparatively low level of inflation is also good for the Swiss economy. Nevertheless, the economic research center of the Swiss Federal Institute of Technology (KOF), which is important in Switzerland, recently lowered its forecasts. Instead of three percent, only 2.8 percent GDP growth is expected for 2022. For the next year, the downgrade from two to 1.3 percent was greater. The Ukraine war and the sanctions against Russia also affect the Confederates, as Switzerland is an important hub in international commodity trading. At five percent, its GDP share is not marginal. Since Russia was one of Switzerland’s top trading partners in this segment, that’s 0.5 percent of GDP lost as a result of the sanctions against Russia.
Tourism picks up again
The advantage of the Swiss economy is that it has a very broad base and is therefore better able to cushion crises than many other countries. In addition to industry, services and tourism, the food sector, luxury and watch manufacturers, the banking and financial sector as well as the pharmaceutical and health sectors are important economic sectors. The pillars of the economy are the steadily growing industry and the normalization of the service sector after the Corona period. This also includes the recovering tourism. The high dependence on China could become a problem. With a volume of 33 billion francs in goods trade, the country was the third largest trading partner after Germany and the USA in 2021. Above all, the exports of the watch and mechanical engineering sector depend on China.
The diversification of the economy is also reflected in the leading index SMI 20, which includes the 20 top companies in Switzerland. Healthcare and finance dominate the barometer with a 54 percent share, ahead of industry, basic materials and the food sector. Technology and IT are hardly represented. Although the index has lost almost 20 percent since the top at the beginning of the year, the 2022 P/E ratio of 15.4 is above that of the DAX and Euro Stoxx 50. But that is traditionally the case. The Swiss stock exchange is suitable for investors who are looking for a defensive equity investment with a strong currency, an independent central bank and an adaptable economy.
There is a trading ban for Swiss shares in the EU. However, German investors can still purchase shares via the Zurich Stock Exchange or direct trading (OTC).
INVESTOR INFO
The 30 largest Swiss stocks are included in the SLI index, which the iShares ETF references. These include Novartis, Nestlé, Roche, Zurich Insurance, UBS, Richemont and Alcon. The high proportion of pharmaceutical and food manufacturers and the low weight of tech stocks make the Swiss stock market less susceptible to cyclical fluctuations.
The share of the Swiss luxury goods group, which includes brands such as Cartier and Montblanc, was recently punished despite good figures. Reason: The expectations of the analysts were even higher. The company is suffering from the lockdowns in China, as around 30 percent of its sales are generated there. With the gradual opening of China, business there should be better again. In addition, luxury goods groups can easily pass on price increases to customers.
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