Thinking long-term
T&V Letter Q3 2023
Successful investing requires patience, especially when markets fluctuate between recovery and uncertainty. Interest rates, inflation, and geopolitical risks shaped the third quarter, while the strong Swiss franc additionally influenced international investments. This is precisely why a long-term perspective remains crucial.
Insight
Long-term investment success does not come from avoiding every fluctuation, but from patience during difficult phases.
One of the biggest challenges when trying to focus on long-term goals as an investor is the emotional roller coaster of short-term thinking.
In bad years, when everything is going down, you wish you had taken less risk. In good years, when everything is rising, you wish you had taken more risk.
Long-term returns are the only thing that matters. To be successful in the long term, you have to endure a series of short-term emotions. Short-term returns can play tricks on an investor. A single year's returns can leave an investor feeling positive or negative, but they have a limited impact on long-term results as long as you don't put the entire portfolio at risk.
Sometimes everything works, sometimes nothing works. There will always be something to worry about, regardless of market performance. After the bad year of 2022, it was easy to fear that the downward spiral would continue. This year got off to a brilliant start. However, fears of rising inflation rates or interest rates once again, as well as geopolitical uncertainties, have recently put a heavy strain on the markets over the summer.
People tend to focus on quick results, but true wisdom in investing only comes when you understand that only the long-term perspective really matters.
NEWSLETTER
Dear Reader
Around 570 days ago, the American Federal Reserve began a rate hike cycle the likes of which modern investors have never seen before. The end of this hike cycle is now in sight, yet uncertainty is still palpable on the stock markets.
The exchange rate development of the Swiss franc is remarkable
"Unfortunately", the CHF is once again outperforming (almost) all currencies this year. This is advantageous when spending vacations abroad – but unfortunately disadvantageous when investing in foreign currencies.
The steady upward trend of the franc reflects the favorable economic conditions in Switzerland, the increase in productivity, but also the fact that the franc is in demand internationally as a safe haven. The "Safe Haven" status has accompanied the Swiss currency for decades. The "Safe Haven surges" occur regularly as a result of financial crises or political events. Switzerland enjoys this status due to both political and economic stability as well as extremely solid public finances. This stability is regularly confirmed by international rating agencies. Just recently, S&P once again rated Switzerland's creditworthiness with the top grade "AAA". S&P particularly praised the country's strong economic resilience. Countries that are regularly rated poorly by rating agencies have - unsurprisingly - weak currencies. The Argentine peso (minus 99 percent) and the Turkish lira (minus 97 percent) have performed by far the worst in exchange rate terms to the franc since 2007. The Russian ruble lost 80 percent. The losses of the British pound and the Norwegian and Swedish kronor are also extremely considerable. This is somewhat surprising, as these two Scandinavian countries also always receive top ratings from rating agencies. However, other criteria also play a role, which is why Switzerland differs from other countries and their currencies, such as inflation: The nominal exchange rate development can probably be attributed to the different inflation preferences and thus the lower inflation rates in Switzerland.
However, strong currencies can also damage an economic area, as they make products manufactured domestically more expensive abroad, potentially threatening an export-reliant economy like Switzerland. The SNB therefore bought foreign currencies amounting to around 500 billion francs starting in 2007 in order to weaken the appreciation of the franc. However, the effect of the interventions always evaporated quickly in the foreign exchange markets - and the fact that the SNB massively inflated its balance sheet with the foreign currency purchases caused and still causes heated debates in politics. It should not be forgotten that the SNB's intervention limited exchange rate volatility and thus helped the Swiss economy adjust gradually and not abruptly to a higher exchange rate level. The losses of orders and jobs were also minimized as a result.
No trigger for a weaker franc in sight
Switzerland's last major economic crisis was 15 years ago. And when it comes to the key figures of inflation or unemployment, Switzerland remained partly well below the comparison figures of other major economies even before 2008. The positive overall picture persists: for instance, inflation in Switzerland peaked at 3.4% at the beginning of 2023. In the USA, inflation reached over 9%, and in the Eurozone it was even over 10%.
Switzerland benefits from its strong franc. This is particularly noticeable in the current situation, where the strong franc keeps import prices low. The SNB is one of the few central banks that has already managed to bring inflation rates back into its target range.
For the economy, a strong franc is generally manageable, as the lower inflation means that cost increases are also lower. It becomes difficult during very rapid and very strong appreciations, because then the normal adjustment processes are too slow.
We see no reason for a weaker Swiss currency and expect the Swiss franc to remain strong in the future. The main argument in favor of this is Switzerland's lower inflation rate, averaging 1-2 percent over the years, compared to other countries.
Generally speaking: the starting position with the framework conditions in Switzerland is simply better compared to other countries.
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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