Back to square one – Successful investing in a negative interest rate environment

Do you remember when it was said that the negative interest rates introduced by the Swiss National Bank (SNB) in January 2015 were merely a temporary emergency measure to combat the overvaluation of the Swiss franc? The emergency measure lasted almost eight years and was only lifted when inflation rates worldwide soared in 2022 due to pandemic-related supply chain disruptions.

Michael Bolliger UBS Global Wealth Management​, Chief Investment Officer Emerging Markets

Dr. Daniel Kalt UBS Chief Economist Switzerland

Just three years later, a return to negative interest rates is looking very possible. Although the SNB “only” cut its key interest rate by 25 basis points to 0 percent at its most recent monetary policy assessment, in various interviews, policymakers have also warned of the consequences of negative rates. At the same time, it should be noted that the SNB recently revised its inflation forecasts further downward—again with the caveat that this is only a temporary adjustment and that medium-term price stability is not at risk.

Much now depends on how the external value of the Swiss franc affects monetary conditions in Switzerland. For the SNB, the EURCHF exchange rate is likely to be more decisive than the USDCHF rate. The majority of Swiss SMEs are more exposed to the euro than to the US dollar. Should EURCHF fall below 0.90, the SNB would likely move its key rate back into negative territory.

Regardless, local investors will likely have to prepare for a period of extremely low returns in the fixed income segment. Bonds in foreign currencies, especially in US dollars, do offer higher yields, but they also carry exchange rate risk, which in our view increasingly prompts investors to hedge, despite the high costs. At present, there is no indication that the Trump administration will fundamentally change its economic policy course. Another loss of confidence cannot be ruled out. The possible consequence would be a further weakening of the dollar.

Investors must therefore assess how much liquidity is actually necessary to minimize the negative costs of the low interest rate policy. They must also align expected returns within the portfolio with current risks.

Since cash yields little and inflation erodes purchasing power over the long term, investors should consider investing excess cash in yield-oriented strategies. We prefer various approaches to complement a core portfolio with equity and equity-like strategies:

Equity strategies combined with options

Swiss dividend stocks offer attractive returns: The SMI currently has an average dividend yield of 3.2% (compared to a historical average of 2.4% since 2004), which is above most CHF bond yields. Over the past 30 years, dividends have accounted for more than half of the total return of the Swiss Performance Index. Such companies generally have solid balance sheets and stable earnings, making their dividends more resilient during recessions.

Investments in dividend stocks can be made through globally or nationally diversified portfolios or funds that focus on companies with reliable dividend growth, strong dividend payers, and high-quality dividend stocks.

Structured option strategies

Structured option strategies include instruments such as reverse convertibles, which allow investors to generate returns while waiting for more attractive entry points. If the underlying asset falls below a certain threshold, investors receive the underlying asset instead of capital at maturity. This strategy is suitable for investors seeking regular income and wanting to build a defensive equity exposure. However, investors must be aware of the risks involved in such strategies, such as issuer default and limited liquidity exist.

Hedging with defensive bonds

Defensive bonds also offer interesting features for a diversified portfolio in the current environment. On the one hand, yields—especially in US dollars or selected emerging market currencies—are attractive. Many central banks also still have room to cut rates. For example, the Fed is likely to cut rates aggressively if a US recession becomes more likely. The current interest rate differential should also partially compensate local investors for any further currency losses.

Alternative investments

Many alternative investments—such as gold, hedge funds, real estate, or private market investments—offer attractive returns and serve as portfolio diversifiers. We expect continued investment in gold to drive prices higher. Our year-end forecast is USD 3,500 per ounce. Crises like the current conflict in the Middle East could also lead to a faster price increase. We have also observed that price declines in recent years have only been short-lived. Many hedge fund managers also benefit from ongoing volatility, which allows them to achieve stable, uncorrelated returns. In our view, integrating alternative investments into a portfolio is therefore essential.

Cash can provide a false sense of security in times of high volatility and uncertainty. With policy rates at zero, the opportunity cost of holding cash is especially high for Swiss investors. The approaches outlined above allow for successful optimization of an existing core portfolio without taking on significant additional risk. Those who gradually invest excess liquidity into a mix of equities, bonds, and alternative investments also reduce the risk of poor timing.

Biographies

Michael Bolliger serves as the Chief Investment Officer for Global Emerging Markets at UBS Global Wealth Management. Alongside his team, he establishes the UBS House View on emerging market asset classes, offering both tactical and strategic insights, while also overseeing detailed analyses of emerging market bonds, currencies, and equities, as well as providing thematic investment recommendations.​ He often travels to various developing nations, and he advises UBS management on the economic and political landscape in these markets.​ Prior to his tenure at UBS, Michael Bolliger was an economist at the Swiss National Bank in Zurich and the Spanish central bank in Madrid. He also served as a lecturer at the University of St. Gallen, where he taught microeconomics, mathematics, and experimental economics.​ Michael Bolliger's academic focus encompassed economics, quantitative methods, finance, and experimental economics. He earned his Ph.D. in economics from the University of Basel in 2010. Before that, he studied at the University of St. Gallen and the WITS Business School in Johannesburg, South Africa.

Daniel Kalt completed his studies in economics at the University of Zurich in 1996 and subsequently earned his doctorate in economics and econometrics at the University of Bern in 2000. He joined UBS’s research department in 1997 as an economist for the Swiss economy, where he subsequently held various management positions. In 2010, Daniel Kalt was appointed Chief Economist Switzerland. In this role, he is responsible for all research products for UBS Switzerland AG, appears as a speaker at numerous client events, and advises the executive management on economic policy matters.