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Insight
The dream of owning a house is becoming increasingly out of reach for many. In 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 development was documented by the Zürcher Kantonalbank (ZKB) in its "Immobilien aktuell" study, which analyzed over 100,000 properties. Prices have risen particularly sharply in expensive municipalities, such as the city of Zurich, where they have risen by 35% to an average of CHF 2.7 million per detached house.
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The financial hurdles to buying a home have risen significantly, with prospective buyers now needing considerably more assets and income to meet the financing criteria. According to ZKB, there is no easing of price increases in sight; a further 3% increase in real estate prices is expected in both 2024 and 2025.
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The situation for tenants is also worsening. In the canton of Zurich, demand for housing is increasing due to the influx of new residents, while supply remains limited due to stagnating construction activity. For the current year, the ZKB expects another 4.5% increase in asking rents in the canton of Zurich. Across Switzerland, the increase in rents is unlikely to be much lower at 4%.
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The Swiss Market Index (SMI) has been significantly underperforming its competitors, the EuroStoxx 50 Index and the S&P 500 Index, for some time now. A closer look at the performance of the individual SMI stocks shows that the problem this year is 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.
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The excessive strength of the Swiss franc in recent years has not been very beneficial for companies based here. When sales earned abroad become worth less and less in Swiss francs, this puts pressure on profit margins. The earnings per share of Euro Stoxx companies have risen by almost 30 percent since the beginning of 2021 while the companies represented in the SMI have recorded almost no growth. However, the tide seems to have turned since the start of the year: The CHF has depreciated against the USD by ~7% and the EUR by ~5% respectively in the first quarter. This could trigger a new earnings cycle, as the pendulum is now swinging to the other side: sales earned abroad are worth more in Swiss francs and should therefore provide a tailwind for profit margins.
We must remain patient
In a long-term comparison, however, the performance of the SMI is convincing. In CHF terms, 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 meagre 1.39 percent. It can therefore be stated that Swiss equities deserve a high weighting in every portfolio due to the strong domestic currency. However, for the most important Swiss benchmark index, the SMI, to return to its former top form, significantly better performances from the heavyweights Nestlé, Novartis and Roche are required.
What is the situation on the interest rate front?
Switzerland seems to be the island of the blessed. Inflation is falling across the board. In March, inflation in Switzerland fell to 1% and has thus been below the National Bank's target for 10 months. Inflation has therefore once again fallen more sharply than most experts had predicted. A year ago, in March 2023, inflation was still just under 3%. The downward reversal is particularly evident in the food sector. The VAT increase from 7.7% to 8.1% (standard rate) from 2024 has not yet had a negative impact on consumer prices.
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The Swiss National Bank (SNB) correctly anticipated the decline on the inflation front with its surprisingly early interest rate cut from 1.75 to 1.50 percent. The encouraging pace of inflation in Switzerland has made further interest rate cuts even more likely.
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Unfortunately, inflation data in the USA has so far been less dynamic than in Switzerland. Inflation has moved sideways above 3% in recent months. The American economy and its labor market are still going strong. There is therefore no need to cut interest rates and the US Federal Reserve is taking its time until the clouds over inflation clear.
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Inflation in the eurozone weakened again in March. The annual rate fell from 2.6% to 2.4%, bringing it closer to the European Central Bank's (ECB) inflation target of 2%. The fall in inflation indicates a high probability that the ECB will cut interest rates in June.
«Most successful investors do nothing most of the time. Do not confuse movement with action. Know when to sit and wait.»
Jim Rogers, American investor and author