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T&V Commentary | Q3 2023

Successful investing is for patient people

One of the biggest challenges in trying to focus on long-term goals as an investor is the emotional rollercoaster 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 going up, you wish you had taken more risk.

Long-term returns are all that matter. To be successful in the long term, you have to get through a series of short-term emotions. Short-term returns can play tricks on an investor. Returns in a single year can make an investor feel positive or negative, but they have 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 developments. After the bad year 2022, it was easy to fear that the negative spiral would continue. This year has got off to a flying start. However, fears of a renewed rise in inflation rates and interest rates, as well as geopolitical uncertainties have had a strong impact on the markets again over the summer.

People tend to focus on quick results, but the real wisdom in investing comes when you understand that only the long-term perspective is really important.

About 570 days ago, the Federal Reserve began a cycle of interest rate hikes the likes of which modern investors have never seen before. The end of the hike cycle is now in sight, but there is still a palpable sense of uncertainty on the stock markets.

The exchange rate development of the Swiss franc is remarkable

"Unfortunately", the CHF is again performing (almost) all currencies into the ground this year. This is advantageous if you spend your holidays abroad - but unfortunately disadvantageous if you invest in foreign currencies.

The steady upward trend of the franc reflects the favourable economic conditions in Switzerland, the increase in productivity but also that the franc is in demand internationally as a safe haven. Safe haven status has accompanied the Swiss currency for decades. Safe haven surges regularly occur as a result of financial crises or political events. Switzerland enjoys this status due to its political and economic stability as well as its extremely solid public finances. This stability is regularly confirmed by the international rating agencies. Only 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 the rating agencies have - unsurprisingly - weak currencies. The Argentine peso (minus 99 per cent) and the Turkish lira (minus 97 per cent), for example, have performed by far the worst in exchange rate terms against the franc since 2007. The Russian rouble lost 80 per cent. The losses of the British pound and the Norwegian and Swedish kroner are also extremely considerable. This is somewhat surprising, as these two Scandinavian countries also always receive top marks from the rating agencies. However, other criteria count as to 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 because they make domestically manufactured products more expensive abroad, which can potentially threaten an export-heavy economy like Switzerland. The SNB therefore bought foreign currencies to the tune of around CHF 500 billion from 2007 onwards in order to weaken the appreciation of the franc. However, the effect of the interventions soon fizzled out on the foreign exchange markets - and the fact that the SNB massively inflated its balance sheet with the foreign exchange purchases caused, and still causes, hot heads in politics. It should not be forgotten that the SNB's intervention limited the volatility of the exchange rate and thus helped the Swiss economy to adjust to a higher exchange rate level gradually and not in a shock. SNB's interventions have also helped to prevent sharp declines in new orders and thus kept employment stable.

No trigger for weaker franc in sight

The last major economic crisis in Switzerland was 15 years ago. And in terms of the important key figures of inflation and unemployment, Switzerland was already well below the comparative figures for other important economies before 2008. The positive overall picture holds: inflation in Switzerland peaked at 3.4% at the beginning of 2023. In the USA, inflation reached over 9% and in the euro area even over 10%.

Switzerland benefits from its strong franc. This is particularly noticeable in the current situation, in which the strong franc is keeping 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 basically bearable, since the lower inflation also means lower cost increases. It becomes difficult with very rapid and very strong revaluations, 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. This is supported above all by the lower inflation rate of 1-2 percent on average over the years in Switzerland compared to other countries.

Generally speaking, the economic framework in Switzerland is simply better than in other countries.

T&V Commentary Q3 2023
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