Swiss exports look resilient to Trump’s tariffs

How vulnerable is Switzerland’s export-oriented economy to shifting US trade policy? The country has responded to weaker demand from China and Europe by exporting more to the US. Now, the threat of US tariffs may impact key sectors such as pharmaceuticals, machinery, and watches. We look at the resilience of Switzerland’s globalised economy, and where we see portfolio opportunities in its low interest rate environment.

A buoyant US economy has helped cushion slower growth from Switzerland’s nearest neighbours. In 2020, the US overtook a stagnating Germany to become Switzerland’s biggest export market by value. In gross domestic product (GDP) terms, Switzerland is also the most dependent European economy on US exports. In the four quarters through to June 2024, the country exported an average equivalent of 6.7% of its GDP to the US.

But as the Trump administration’s ‘America first’ policy translates into import tariffs, this greater dependence on the US economy may prove a double-edged sword.

Switzerland may have room to pursue a compromise. Swiss-US trade agreements provide a framework for export-oriented Swiss companies to engage more broadly in deals trading lower tariffs for foreign direct investment (FDI). Switzerland is already the US’s seventh-largest foreign investor, directly supporting half a million American jobs, the Swiss Federal Department of Foreign Affairs reported in August 2024. The Trump administration is trying to encourage foreign firms to set up US production facilities as a means of avoiding its tariffs. Many of Switzerland’s companies have already increased their US-based manufacturing. Others discontinued or halted deliveries from China to the US during President Trump’s first term as tariffs, carried through the Biden administration, undermined any cost advantages.

There are other reasons to be optimistic. President Trump’s apparently ‘transactional’ approach to tariffs may limit their eventual impact, especially on finished products where American consumers would notice direct changes in prices. In addition, Swiss exports to the US are typically high value added, less price sensitive goods, such as pharmaceuticals, precision machinery, or luxury goods, meaning that moderate tariffs should not dramatically disturb US demand for Swiss exports.

We have every expectation that Switzerland’s economic expansion can continue

As a result, we have every expectation that Switzerland’s economic expansion can continue, with real gross domestic product (GDP) growth of just over 1% in 2025. Domestic developments look broadly positive, as investment in the economy continues, while consumption is benefitting from falling rental inflation thanks to lower mortgage rates and rising real incomes, supported by a still-tight labour market. Finally, a recent breakthrough in negotiations with the European Union opens a path for a more stable economic relationship between Switzerland and its largest trade partner for the years ahead.

Negative rates?

The Covid pandemic recovery kicked the US economy out of the slow growth, low inflation and low rate cycle that followed the Great Financial Crisis. Could Switzerland be falling back into inertia, after its brief, post-pandemic escape?

Swiss inflation is certainly falling much faster than markets had expected, thanks to a decline in energy prices and the strength of the Swiss franc, which has reduced the cost of imported goods. Consumer Price Inflation in the alpine economy fell from 0.6% in December 2024 to 0.4% last month (compared with the Swiss National Bank’s 0-2% inflation target). In December last year, the SNB made a 50 basis point cut, taking its key policy rate to 0.5%, in a move designed to keep pace with the European Central Bank’s more frequent meetings.

Could a return to negative rates be the next phase of monetary policy? We do not believe so

We expect Swiss inflation to remain low, averaging around 0.7% in 2025. The SNB may be forced to cut closer to zero, including at its next rate-setting meeting in March. The central bank still has some room to make larger currency market interventions, although that looks unlikely before mid-2025. But once that door is re-opened, could a return to negative rates be the next phase of monetary policy?

We do not believe so, at least for now. The SNB does not appear alarmed about the strength of the franc and will likely want to exhaust its monetary policy tools before resorting to negative rates. Once rates are even closer to zero, it can then expand its balance sheet to slow the appreciation of the Swiss franc and limit imported deflation. Given that we expect the ECB to end its cutting cycle with interest rates above 1% in the euro area, we think this looks very different to the post-2008 economic environment that pushed the SNB to resort to deeply negative interest rates (see chart 1).

Swiss franc neutrality

On a one-year horizon, we expect the US dollar-Swiss franc to remain stable within a range of 0.88 – 0.92. In contrast, and over the same timeframe, we expect the Swiss franc to strengthen against the euro to 0.86 (from today’s 0.95). This is for structural reasons; a large Swiss trade surplus with the euro area means that Swiss exporters buy more francs, creating a natural appreciation pressure (see chart 2).

SNB currency market interventions have historically tended to slow the Swiss franc’s strengthening against the European common currency. But with the franc’s real exchange rate lower thanks to an appreciating US dollar, SNB currency market intervention looks less urgent. If the US imposes tariffs on Swiss exports, the dollar may further strengthen against the Swiss franc. However, we would expect this to be short lived.

Switzerland’s ‘neutral’ interest rate is just 0.5%, we estimate, far below other markets

Adding yield to Swiss-based portfolios

Switzerland will remain an economic exception with structurally lower interest rates over other developed markets. Its ‘neutral’ interest rate (the level that neither stimulates nor slows the economy) is just 0.5%, we estimate, far below other markets. For Swiss investors, that makes generating portfolio returns with Swiss sovereign or even corporate bonds a real challenge.

In addition, this low inflation, low-but-solid growth, and relatively strong fiscal environment makes Switzerland a natural haven for financial investments, maintaining pressure on yields.

Swiss-franc denominated bonds, against market expectations, outperformed in 2024. In the event that benchmark rates do fall further, can they continue to deliver? If the SNB’s terminal benchmark rate reaches zero, we expect Swiss government bonds to deliver a total return close to 1.3%. Meanwhile a comparable European government bond is likely to outperform, since we expect the ECB’s terminal rate to reach 1.25% by the end of 2025.

In corporate bonds, we also expect euro-denominated bonds to outperform their Swiss-franc equivalents. We also prefer European bonds hedged in francs, given the high cost of hedging US-dollar bonds, and the subsequent impact on performance in Swiss-francs.

Exposure to Swiss real estate can provide an alternative source of income over time

In Switzerland’s rate environment, exposure to Swiss real estate can provide an alternative source of income over time. From an investor’s perspective, the sector is supported by low vacancy rates, strong demand and rising rental values, reinforced by fundamentals. The yield gap and current real estate valuations point to an expected excess return from real estate investments that is more than 2.5% higher than investment grade Swiss fixed income.

Swiss equities delivered very strong performance in January. We hold Swiss stocks at strategic levels in our multi-asset portfolios. Valuations are neutral at the moment, in line with their long term averages, and the market is concentrated in a handful of sectors such as consumer staples or healthcare, where fundamental trends are improving.

Overall, navigating market volatility over time requires a high degree of diversity in regional investments.