Market Insights – 28th October 2019

The SNB’s negative interest rate policy is facing mounting criticism. What was initially considered a temporary emergency measure seems to be here to stay. It’s been nearly five years since the SNB first brought in negative rates in order to take some of the upward pressure off the franc and protect the Swiss economy. The SNB certainly made the right decision back then. But the aim was to weather the storm created by the Eurozone debt crisis and then bring things back to normal once the eurozone economy was faring better. So when it looked like the ECB might start normalising its monetary policy, there was hope that the SNB would soon reverse its unorthodox policy.

But those hopes have now been dashed. Major central banks are currently introducing further stimulus measures, cutting rates and injecting more money into the economy, through initiatives such as the ECB’s asset purchase programme. So the return to positive interest rates has been put on the backburner indefinitely in Switzerland.

The manufacturing sector is happy with the status quo, as it prevents the Swiss franc from gaining too much ground, but Swiss banks are not so thrilled. They are the ones suffering the most, since negative interest rates are hard to pass on to clients. But it’s pension savings that have taken the biggest hit, as pension funds are finding it hard to cope with negative rates. Recent stock-market gains have helped to conceal the problem. Yet the business cycle is ageing, and the global economic climate will eventually run out of steam.

A less buoyant stock market will bring into sharp focus the problem of the third contributor – the financial markets – struggling to support future pensions going forward. The issue of whether to make long-lasting reforms to the occupational pension system will then be raised, especially since the system faces bigger challenges than the paltry returns likely to be generated on the financial markets in the future.

Those challenges include demographic trends, as birth rates are falling and people are living longer. In the meantime, the SNB would be wise to give pension funds a helping hand. With the central bank set to post record results in 2019, the time is right for it to think about safeguarding Swiss pension funds against the side effects of its monetary policy.

This time last year, investors were worried about the US economy slipping into recession, and stock markets were hit by plummeting investor confidence, making Q4 2018 one of the worst ever for US equities. The prospects are much better this year, and indexes are nearing all-time highs. We therefore think that the stage is set for a year-end rally.

Economic fundamentals could pick up in the coming months. This is certainly what companies expect to happen, especially those in the most cyclical sectors of the economy. The corporate earnings published in recent weeks are encouraging, with more than 80% of companies beating the consensus. More importantly, US managers expect economic growth to stabilise or even pick up in 2020. The action taken by the US Federal Reserve, which will cut rates again this week, is crucial for this uptick in growth. The manufacturing indicators to be published at the end of the week could well reveal the first signs of a recovery.

If, as we expect, geopolitical tensions ease – especially those relating to the US-China trade spat – stock-market indexes could hit new highs in the coming weeks and wrong-foot more sceptical investors.