How to protect your savings against inflation in Switzerland
Switzerland is not insulated from the waves of inflation sweeping the world. Here’s how you can protect your savings.
The world is being hit by waves of inflation, with countries across the globe seeing a rise in the inflation rate in recent months.
Besides the impact of prices rising and things becoming more costly, the long-term impact of inflation is an erosion of the value of your savings.
While the rate in Switzerland is less severe, inflation in October 2021 was the highest in three years.
Here’s what you need to know about inflation in Switzerland - and how to protect your savings.
What is the global situation?
While the inflation rate in Switzerland is a concern, it is far better than in many other countries.
Inflation is particularly high in the United States, where the country reached 6.2 percent from a year ago on November 10th, which is the biggest 12-month jump since 1990.
In Europe, inflation rates cross the 2 percent mark in the summer of 2021.
In neighbouring Germany, which shares Switzerland’s pathological fear of inflation, the rate is currently at 4.3 percent.
What is the situation in Switzerland?
Switzerland’s stable and robust economy has generally been resistant to inflation, particularly when compared with other wealthy countries.
That said, inflation is on the rise - and there are fears it could get worse.
In summer, the Swiss State Secretariat for Economic Affairs warned that “a strong development in [consumer] demand could go hand in hand with capacity bottlenecks and have an inflationary effect.”
In October 2021, Switzerland’s inflation rate rose by 0.3 percent to 1.2 percent, notes the Federal Statistical Office. This is the highest figure since August 2018 and the equal highest monthly increase at any time over the past decade.
Since the end of 2020, there has been a cumulative rise in inflation of 1.6 percent.
The Swiss National Bank, which is tasked with ensuring price stability in Switzerland, seeks to ensure that inflation doesn’t rise about two percent per year.
A major consequence of higher inflation elsewhere is that the value of the franc rises.
In fact, the Swiss National Bank said in November that the rising value of the franc, rather than inflation, was at present the primary concern.
While a strong franc may be beneficial in terms of purchasing power from abroad, it can harm Swiss exports by making them more expensive to buy from abroad.
Why is inflation on the rise?
As with pretty much everything over the past two years, the pandemic is at least partially to blame.
Government spending as a consequence of the pandemic is a major factor underpinning inflationary trends, Matthias Geissbühler, economist and investment manager at Raiffeisen Switzerland, told Swiss news outlet SRF.
The shutdown of economic activity last year led to an effective freeze in prices, or in some cases a retreat. Now, as economic activity reboots, prices are beginning to catch up.
The European Central Bank (ECB) states that the current high inflation is a temporary effect of the pandemic.
Lockdowns caused bottlenecks in global supply chains, leading to an imbalance in supply and demand.
Countries have also been forced to borrow large amounts of money, with debt giving rise to larger inflation rates.
While the worldwide vaccination campaign has allowed a reopening of the economy, concerns around variants has meant that uncertainty is still prevalent in Switzerland.
Christian Gattiker, the chief strategist at Bank Julius Baer, said uncertainty made it difficult to determine the extent of the current situation.
“We have never had such inaccurate and uncertain data in the last 30 years. It is probably a historically unprecedented situation,” he told SRF.
What does this mean for Switzerland?
Fortunately for Swiss residents, inflation is comparatively minimal, with economists predicting it is unlikely to rise above the dreaded 2 percent mark anytime soon.
Economist Thomas Jordan told the NZZ the franc remains a safe haven currency and as long as it remains strong, imports will remain cheap - which removes pressure on inflation.
As Switzerland relies on imports much more than many countries, including the United States and Germany, lower costs of imports has a cooling effect on inflation.
Geissbühler says Switzerland remains “in an absolutely comfortable position” when it comes to inflation.
That said, with the ongoing impact of the pandemic uncertain, there are some tried and tested measures to avoid the negative impacts of inflation.
Switzerland’s aversion to debt is not only seen at a governmental level, with the average Swiss reluctant to spend more than they earn.
Historically, the Swiss have been willing to stash their cash in the nation’s famous banks.
However, inflationary fears and other financial trends have meant that few Swiss banks pay out any meaningful interest on savings.
In effect, this means that your money continues to lose value, as the inflation rate is higher than the interest rate.
While as we illustrated above this is less severe in Switzerland than abroad, putting your money somewhere where it loses value does not make much sense from an investment perspective.
One alternative option for investing your savings is buying gold. In times of financial uncertainty, the value of gold can rise.
A study by the Goethe University in Frankfurt concluded that gold historically offers the best value as an investment during times of inflation. Generally, investors tend to park their money in the precious metal due to the fact that it can’t be replicated, unlike money.
But investing in gold comes with ancillary costs such as storage.
Experts also warn that the price of gold is volatile. Last year it rose to a record high of over 2,000 dollars per ounce before dropping down to less than 1,800 dollars today.
“Gold is volatile – prices fluctuate over the long term in much the same way as those of stocks,” Andreas Hackethal, Professor of Finance at Goethe University Frankfurt, told the Süddeutsche Zeitung.
Securities and stockmarket
Switzerland’s reputation for stability means it is a good place to invest.
Stable investments mean you should see a strong, reliable return, although if you want volatility there are plenty of risks to be aware of.
Fortunately, technology has made it easier, with a number of apps you can use to make and monitor your investments.
The best option for regular investors - i.e. people for whom investment is not their main source of income - are investment funds.
These are managed funds which pools together money from other investors. There is little day-to-day work required from the investor, with major investment decisions made by expert fund managers.
Another option can be to go it alone and invest in stocks, which can be higher risk and will involve more work researching, but could be a greater payoff.
Large and reputable Swiss businesses are often a target for investment, including the banking and insurance sector (Credit Suisse, UBS and Zurich), along with Roche, Nestle and Glencore.
Another investment possibility which will not see your money eroded by inflation is property.
While Swiss generally prefer to rent rather than own a home for a variety of reasons - Switzerland’s the only country in Europe with a home ownership rate lower than 50 percent - property investment is still a smart strategy.
Swiss finance site Comparis notes that costs of apartments rose by up to 97 percent in Zurich from 2007 to 2018, with increases over 75 percent in several other regions.
However, according to analysis from August 2021 by Swiss financial services firm UBS, property prices in several parts of the country are at risk of overheating.
The UBS Real Estate Bubble Index said parts of Basel, Lausanne, Luzern, Nidwalden, Ticino, Vaud, Zug and Zurich all were exposed to some additional risk of overheating.
While plenty of us would like to pull off a variety of shrewd investments that meant we could quit our job tomorrow and live on a yacht, but when we’re thinking about savings and investments, the focus is generally on having a comfortable retirement.
One option in that regard is to invest in your own pension fund.
The more you contribute to your Swiss pension fund, the more you will receive in retirement.
There are three pillars to the Swiss pension system: old age, occupational and private. The one which works for you will depend on your financial circumstances.
Check out the following for more information.
What about Bitcoin?
One further option is to invest money into cryptocurrencies such as Bitcoin, which is not subject to the same inflationary pressure as national currencies.
However, while cryptocurrencies avoid inflationary pressures in the same manner as national currencies such as the Swiss franc, Switzerland’s Tagblatt notes that they “do suffer from fear of inflation from time to time and they are generally very volatile”.
As people generally do not use cryptocurrencies for daily purchases, an inflationary increase may not be felt on a day-to-day basis, but the devaluation of the currency - which is effectively what inflation is - will obviously devalue your investment.
The volatility of cryptocurrencies might also strike fears into the hearts of investors seeking stability, but may appeal to investors who feel the potential payoffs are worth the risk.
Please keep in mind that this report is intended as a guide only and should not take the place of qualified advice from a financial adviser. Got a question or think of something we should focus on? Get in touch at [email protected]