ZEW-CS Financial Market Test Switzerland - Economic Expectations Continue to Deteriorate

CH Indicator of Economic Sentiment

The Financial Market Test Switzerland, carried out by the Centre for European Economic Research (ZEW) in cooperation with Credit Suisse, continues to deteriorate noticeably in July. The balance of the ZEW-CS indicator of economic expectations for Switzerland declines from -63.8 to the -76.9 points. The analysts also expressed a less positive view of the current economic situation, so the balance of indicators recedes from 53.2 to the 41.0 mark. On the other hand, inflation expectations have diminished somewhat: only a minority of respondents (35.9 percent) expects inflation rates to climb on a six-month horizon. The balance for short-term interest rate expectations remains in positive territory, although the majority of survey participants now anticipates that rates will remain unchanged. Within the scope of this month’s "special question," the financial experts were asked to convey their assessment regarding the effects of high inflation rates on the Swiss stock market. The analysts predict that the Swiss Market Index (SMI) will outperform the MSCI World Index amid times of high inflation and recommend investing in companies in the pharmaceuticals and food sectors.

The results of this month’s survey conducted in conjunction with the Financial Market Test Switzerland once again paint a negative picture of economic momentum in the medium term. More than three-fourths of the financial market experts forecast a deteriorating economic situation in Switzerland on a six-month horizon. Consequently, the corresponding indicator for economic expectations declined noticeably by 13.1 points to the -76.9 mark. The assessments of the current economic situation also reveal a downward trend, although still wavering at a high level. Only 41 percent of respondents still view the prevailing economic environment as "good," while the remaining analysts regard the climate as "normal". As a result, the relevant indicator dropped by 12.2 points to the 41.0 level.

Switzerland is also battling high inflation rates due to increasing energy prices. Survey results reveal that 35.9 percent of participants believe that inflation rates will climb even further, while 30.8 percent of the analysts see no change on the inflation front in the coming six months. The corresponding balance of indicators for the inflation rate thus fell sharply by 14.4 points to the 2.6 threshold.

Despite the trend towards rising prices, only 28.2 percent of the financial market specialists anticipate that short-term interest rates will increase (down 27.1 percentage points versus the previous month). In contrast, two-thirds of respondents foresee no change in short-term interest rate levels. Overall, the relevant indicator plunged markedly by 25.8 points to the 23.1 mark. Regarding long-term interest rates, slightly more experts (46.2 percent) see a pick-up than in the previous month’s survey. However, 41 percent of the participants see no change in long-term rates as the most likely scenario. In the wake of the recent interest rate hike by the European Central Bank (ECB) to the 4.25 percent level, most of the analysts (59 percent) expect no change in the short-term interest rate differential between Switzerland and the Eurozone: But 28.2 percent of the experts predict that the interest rate spread will narrow.

On the heels of some turbulent months on the global stock markets, the Swiss Market Index (SMI) has recorded a renewed steep downward trend since mid-May. Nevertheless, nearly two-thirds of the financial market experts expect the Swiss stock market to stage a recovery in the coming six months. On the other hand, 18.9 percent of the analysts continue to anticipate that share prices will retreat. Overall, the corresponding indicator rose by 8.9 points to the 45.9 level. The Swiss franc exchange rate has been holding steady against the euro for several months. Accordingly, the majority of survey participants (61.5 percent) foresees no changes in the exchange rate in a six-month timeframe. But 35.9 percent of the respondents predict that the Swiss currency will gain ground against the euro.

Turning to oil prices, a significant percentage of the analysts (60.5 percent) expect to see a decline. The price of oil has been continually hitting new record highs for months. However, merely 10.5 percent of respondents believe that the surge in oil prices will prevail. Gold prices too have followed a similar trend historically. But 40.5 percent of survey participants expressed the view that the price of gold will continue to climb. In contrast, almost one-third of the experts expect decreasing gold prices. Regarding the corporate earnings picture in Switzerland, 69.4 percent of the financial market specialists agree that the situation will worsen. One-fourth of the respondents forecast no change in the outlook for company earnings. The lion’s share of the analysts (83.3 percent) predicts that profit margins will shrink, while none of the experts anticipates a recovery. Hence, the relevant indicator sank by 12.8 points to reach -83.3. Roughly three-fourths of the participants (73.3 percent) expect the unemployment rate in Switzerland to increase in the medium term. Not a single analyst predicts that the jobless rate will shrink, however. And around one in four of the respondents expect no change here.

This month’s "special question" addresses the effects of high inflation rates on the Swiss stock market. The responses reveal that 48 percent of the analysts predict that the Swiss Market Index (SMI) will outperform the MSCI World Index amid times of high inflation, while just a minority of 22 percent of the experts believe that the SMI will turn in an underperformance. In addition, 33 percent of the respondents anticipate that pharmaceuticals companies will outperform other sectors on a 12-month horizon due to high inflation rates. Additional sectors that will likely outperform the rest include the food, telecommunications, chemicals and construction materials industries.

The survey process and methodology

The ZEW has conducted a similar monthly survey for Germany since 1991. The aim of the Swiss survey is to develop indicators both for Switzerland's general economic climate as well as for the Swiss services sector.

Specifically, survey participants are asked to give their medium-term expectations for important international financial markets as regards the development of the economy, the inflation rate, short- and longer-term interest rates, equity prices and exchange rates. In addition, the financial experts are also asked to assess the earnings situation of companies in the following Swiss services sectors: banks, insurance, consumer/retail, telecoms and services as a whole.

The results represent the net difference between the percentage of positive and negative responses. Figures in parentheses show the changes for each indicator compared to the previous month.

Contact

Dr. Gunnar Lang, Phone: +49/621/1235-372, E-mail: lang@zew.de

Marcel Thieliant (Credit Suisse), Phone: +41/44/3320969, E-Mail: marcel.thieliant@credit-suisse.com