Patience is Required
T&V Letter Q1 2024
Whether it is the real estate market, Swiss equities, or interest rates: many developments do not happen suddenly, but rather gradually. Homeownership is becoming more expensive, the SMI is waiting for stronger heavyweights, and the turnaround in interest rates is starting at different speeds. Especially in phases like these, a calm, long-term perspective remains crucial.
Insight
The dream of owning a home remains highly desirable, but is becoming increasingly challenging due to rising prices and higher financing hurdles.
The dream of owning a home is becoming increasingly unattainable for many. Over the last five years, prices for single-family homes in the Canton of Zurich have risen by 25%, putting the dream of home ownership out of reach for many. This trend was documented by the Zürcher Kantonalbank (ZKB) in its study "Immobilien aktuell", in which over 100,000 properties were analyzed. Prices have risen sharply, particularly in expensive municipalities such as the city of Zurich – there by 35% to an average of 2.7 million francs per single-family home.
The financial barriers to purchasing a home have risen significantly, with prospective buyers now requiring substantially more assets and income to meet financing criteria. According to ZKB, no easing of price increases is in sight; a further increase in property prices of 3% each is expected in 2024 and 2025.
The situation for tenants is also worsening. In the Canton of Zurich, the demand for housing is rising due to the influx of new residents, while the supply remains limited due to stagnant construction activity. For the current year, ZKB expects asking rents in the Canton of Zurich to rise by another 4.5%. Across Switzerland, the rent increase is unlikely to be much lower at 4 percent.
We would be pleased to assist you with your property acquisition and its financing.
NEWSLETTER
Dear Reader
The Swiss Market Index (SMI) has been lagging significantly behind its competitors, the EuroStoxx 50 Index and the S&P 500 Index, for quite some time now. A closer look at the price performance of the individual SMI titles shows that the problem this year lies in the same place as last year: a large part of the SMI's relatively mediocre performance this year is attributable to the two heavyweights Roche and Nestlé. These account for more than 30 percent of the weighting in the SMI.
The excessive strength of the franc in recent years has not been very beneficial for companies based here. When revenues earned abroad become worth less and less in francs, it squeezes profit margins. Consequently, since the beginning of 2021, earnings per share for companies in the Euro Stoxx have risen by almost 30 percent, while companies represented in the SMI recorded virtually no growth. However, the tide seems to have turned since the start of the year: the CHF depreciated by ~7% against the USD and by ~5% against the EUR in the first quarter. This could trigger a new earnings cycle, as the pendulum is now swinging to the other side: revenues earned abroad are worth more in francs and should therefore provide a tailwind for profit margins.
We must remain patient
In a long-term comparison, the SMI is convincing. In CHF, the SMI has generated an annualized return of 4.30 percent on a total return basis since 1999, the S&P 500 4.54 percent and the Euro Stoxx 50 a meager 1.39 percent. To this extent, it remains to be stated that Swiss equities deserve a high weighting in every portfolio due to the strong home currency. However, for the most important Swiss leading index, the SMI, to return to its old peak form in comparison, signicantly better performances from the heavyweights Nestlé, Novartis and Roche are required.
How do things style on the interest rate fronts?
Switzerland seems to be the island of the blessed. Inflation is decreasing across the board. In March, inflation in Switzerland fell to 1% and has thus been back below the National Bank's target for 10 months. Inflation has therefore once again decreased more sharply than predicted by most experts. A year ago, in March 2023, inflation was still just under 3%. The downward reversal is particularly clear in the case of food products. The VAT increase from 2024 from 7.7 to 8.1% (standard rate) has not yet had a negative impact on the trend in consumer prices.
With its surprisingly early interest rate cut from 1.75 to 1.50 percent, the Swiss National Bank (SNB) correctly anticipated the decline on the inflation front. Due to the encouraging dynamics of the inflation rate in Switzerland, further key interest rate cuts have become even more likely.
In the US, inflation data has unfortunately been less dynamic than in Switzerland so far. Inflation has moved sideways above 3% in recent months. The American economy and its labor market continue to move with a lot of momentum. Therefore, an interest rate cut is not urgent and the US Federal Reserve is taking its time until the clouds over inflation clear.
Inflation in the eurozone weakened again in March. The annual rate fell from 2.6 to 2.4%, moving closer to the European Central Bank's (ECB) inflation target of two percent. The decline in inflation points to a high probability of an ECB interest rate cut in June.
As always, we thank you for the trust you have placed in us!
*This communication is for informational purposes only and does not constitute a personal recommendation or an independent financial analysis.
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