“Mighty mouse”
On a map of the world, Switzerland is barely more than a dot. And yet this “midget” manages to pack a powerful punch. Not only does it boast many world-leading positions in a range of industries, such as food and pharmaceuticals, but the Swiss National Bank also knows how to impose itself on the international stage. The SNB was, for instance, the first major central bank to change its interest rate cycle at the end of March, much to everyone's surprise, when the monetary authorities led by outgoing president Thomas Jordan cut the base rate by 0.25 percentage points to 1.50%. In doing so the SNB underlined its pioneering role, having supplied the template for the first rate hike in June 2022.
Price stability
While the ECB may since have followed suit, the Swiss National Bank is still ahead: at its latest meeting in June, the SNB opened the money tap further and took a 2-1 lead. This was made possible by the favourable trend in prices. In May inflation stood at 1.4% by comparison with the same month the previous year, putting it well below the 2% upper limit set by the central bank for price stability. According to forecasts, inflationary pressures are also set to continue easing. The SNB expects inflation this year to reach 1.4%, and the monetary watchdog has even scaled back its target for 2025 from 1.2% to 1.1%. Nevertheless, it also anticipates economic growth to slow to around 1.0%, which could result in a further cut in interest rates before the end of this year.
Further in arrears
The looser monetary policy is probably also the reason why the Swiss equity market was able to make up considerable ground on the eurozone in the second quarter, with the SMI advancing 2.4% against a 3.5% decline in the EURO STOXX 50. Looking at the picture over the first six months, however, the stock market is repeating the pattern from 2023. Having risen 7.8%, domestic blue chip stocks lag the EURO STOXX 50 by just under one percentage point, and are actually some 7 percentage points behind the S&P 500 or Nikkei 225. The race to catch up, then, is still very leisurely. Whether the SMI can maintain this run in the second half of the year is uncertain. For one thing, the markets are likely to focus next on the eagerly awaited first cut in interest rates in the USA in September, while for another optimism about the future of many major Swiss groups is still limited.
Elections as an uncertainty factor
The second half of the year will also be dominated by political uncertainties, however. First off are the elections in France. According to initial surveys, the populist right-wing Rassemblement National of Marine Le Pen is well in front. Among other things, it would like to reduce the retirement age and introduce an exemption from income tax for young workers, which could lead to additional spending of EURbn 100 a year. Such a budgetary policy would not fail to have an impact on financial markets. The same is true for the USA, where citizens will go to the polls in November, choosing – again – between the current president, Joe Biden, and his predecessor, Donald Trump. The two camps are very far apart in terms of their political and economic approaches. Although there is considerable nervousness in the run-up to the elections, going to the polls often has a more positive than negative effect on Wall Street: in 20 of 24 election years since 1928 the S&P 500 has closed with a gain.