The franc being a safe haven, its appreciation in the event of a rise in risk aversion in the euro zone would cause a lot of problems for the SNB.
The result of the European elections marked a turn to the right, with an increase in far-right parties, particularly in France where the subsequent dissolution of the National Assembly caused surprise. The markets experienced turbulent sessions last week, with a marked decline in banking stocks, a widening of the rate differential between French and German sovereign debt, and a decline in the euro against the dollar.
The markets are agitated in the face of a possible populist breakthrough which would last a long time and which could revive fears of fragmentation of the euro zone, or even Frexit. The expansionist budgetary program of the far right in France also causes fears of uncontrolled slippage of public finances. At the level of the euro zone, public debt has experienced ups and downs but is, at the end of 2023, exactly at the level of 2012. Germany has been a very good student, its public debt has increased from 80% of GDP in the summer of 2012 to 63% at the end of 2023. But the public debt of France and Spain has increased by 20 and 30 points of GDP respectively (to almost 110% now). Among the major European countries, Italy was a little more moderate, with its public debt increasing from 127 to 137% of GDP.
We must keep in mind that the populist experience in Italy or the Netherlands did not have negative implications on the markets.
From our point of view, the uncertainty should last a few weeks, but it is possible that the far right will not be able to form a majority. And in the event that a far-right government is confirmed, there is a good chance that it will seek to buy itself a form of respectability in view of the 2027 presidential elections, which would reassure the markets. Finally, without entering into societal or political debates, we must keep in mind that the populist experience in Italy or the Netherlands has not had negative implications on the markets. The rate differential between Italy and Germany has narrowed significantly since Giorgia Meloni came to power. But the risk of a populist tidal wave in France, and a very negative reaction from the markets, cannot be excluded. It is therefore important to be vigilant.
From the investor’s point of view, it is a question of determining a contingency plan to protect portfolios if the situation deteriorates: being ready to reduce sensitivity to financials, the euro or French and Italian sovereign debt , which would probably suffer from a contagion effect. In the phases of instability that we have experienced over the last twenty years, it goes without saying that market balances can be altered in a fraction of a second. And the implications for Switzerland are significant.
The franc being a safe haven, its appreciation in the event of a rise in risk aversion in the euro zone would cause a lot of problems for the SNB. The latter would be forced to intervene in the foreign exchange market to contain the rise in the CHF, which, in turn, would push inflation down. For exporters, a strong appreciation of the CHF would hamper their competitiveness. Also, the rise in risk aversion in the euro zone would generate strong demand for Swiss sovereign debt, which currently maintains the best rating (Aaa). This would have a lowering effect on rates which would penalize savers.
Finally, from an equity point of view, the Swiss market is defensive and is attractive from this point of view. The basic consumer sector (Nestlé) and Pharma weigh heavily in the SMI and seem attractive to us beyond the eurozone subject. We recently raised our recommendation on pharma, the results season having reserved some good surprises which should last over time. We have been positive on the consumer staples sector for some time.
To conclude, we must prepare for a few hectic weeks depending on the results of the polls in France. Despite the challenges this would pose, notably the potential for appreciation of the CHF, the Swiss stock and bond market would be a winner given its low risk profile. Apart from considerations about the legislative elections in France and the impact on Euro financial assets, the Swiss equity market and its defensive values also seem attractive to us.
