KPPB Monthly Market Monitor - 06 EN by Kaiser Partner

Monthly Market Monitor

June 2025

In a Nutshell

Our view on the markets

A downgrade foretold

In May, the last of the big three US rating agencies finally also lost its patience.

Chart of the Month

Bear-market rally?

The S&P 500 index continued its upward retracement at first in May and climbed to a level of almost 6,000 points by mid-month, trading just 3% below its February all-time high at that juncture. The virtually V-shaped rally since the April low is impressive and likely caught many a bear on the wrong foot, costing them money. Investors, though, currently should avoid letting themselves get lured prematurely into a renewed state of euphoria by the recent rally – FOMO (the fear of missing out) is never a good advisor on financial markets. Instead, more time should be devoted to looking at other markets and regions because diversification actually is a good advisor.

Trump’s tariffs: A good idea?

The US president aims to accomplish quite a lot with his new tariffs regime. He wants to reindustrialize the USA, reduce the US trade deficit, and wrangle better deals with trade partners. But do tariffs make America great again? Historical evidence isn’t all that argues against that notion. Developments in recent weeks also demonstrate that there may be some catches to levying tariffs. Even the Trump administration has recognized this in the meantime. However, it is hard to backpedal, and a lot of harm has already been wrought.

Ask the experts

Should Swiss investors hedge their foreign-currency asset holdings? Does the US dollar risk losing its status as the world’s reserve currency? And are US stocks in a new bear market? You’ll find our answers to these questions in our quarterly Q&A.

Historical analogies are very popular among stock-market professionals because the future is uncertain and an all-foreseeing crystal ball hasn’t been invented yet. A chart comparing the evolution of inflation in the USA since the pandemic with the inflation rollercoaster ride in the 1970s has been making the rounds lately. In the 1970s, the US Federal Reserve prioritized economic growth over fighting inflation and lowered its policy interest rate too soon. That resulted in an unmooring of inflation expectations and a second inflation wave. Fed Chairman Jerome Powell is aware of the historical template and currently finds himself facing a tariffs shock. Retailing giant Walmart has already announced that it will pass part of the tariff costs onto consumers and isn’t alone in saying that. A stubborn central bank unwilling to bend to pressure from the US president is more probable in the months ahead than a repeating of history. However, the risk of history rhyming in the end cannot be entirely ruled out if Powell’s successor devotes himself to serving the White House and surrenders the Fed’s independence.

Macro Radar

Taking the pulse of economic activity

A downgrade foretold

In May, the last of the big three US rating agencies finally also lost its patience: Moody’s downgraded the USA’s creditworthiness from Aaa to Aa1. But in the wake of the historic downgrade by S&P Global Ratings in 2011 and the already less dramatic decision by Fitch to follow suit two years ago, this latest episode in the US federal debt saga is surprising at the most only in its timing, but not in its essence. That’s because the case is crystal clear: the USA’s public finances are extremely stretched. The annual federal budget deficit amounts to more than USD 2 trillion, and interest expenses already consume 18% of total federal tax revenue. An improvement is not in sight. On the contrary, the US president’s proposed “big, beautiful” tax bill could cause the mountain of public debt to swell to over 120% of the USA’s annual economic output by as soon as the mid-2030s. In response to the loss of triple-A status, the US Treasury secretary said that “Moody’s is a lagging indicator.” Investors also saw it that way, and the initial negative reaction by financial markets was accordingly short-lived.

Tough negotiation marathon

The USA and China agreed in May to a 90-day truce in their trade war. The somewhat surprisingly quick backpedaling by the US administration lately shows that America actually doesn’t hold all the cards after all and that the potential economic harm is serious also for the USA. The average tariff rate on imports to America is now lower than before, but is not really low, and the same goes for the risk of a recession in the USA. US consumer confidence is close to an all-time nadir, and “hard” data threaten to mirror the depressed sentiment in the weeks ahead. Meanwhile, the rise in market interest rates is placing a mounting burden on the housing sector. Since inflation looks set to get pushed upward at least in the near term, the US Federal Reserve is unlikely to hastily rush to the rescue this summer and is bound to leave its policy interest rate at a high level for the time being. The prospect of tax cuts could brighten sentiment in the weeks ahead if they ultimately make it through Congress. However, any resulting boost to economic growth would be time-lagged and merely temporary, and in any case would come at an expensive cost.

(Even) lower interest rates in sight While the interest-rate level in the USA looks set to stay elevated for the time being, further rate cuts in Europe appear to be forthcoming in the near term. Just like on the other side of the Atlantic, increased tariffs exert a braking effect on economic growth also in Europe, albeit without the side effect of higher inflation. On the contrary, in fact, a mild disinflationary effect is the likelier outcome, in part because some of the surplus goods originating from China may find their way to the old continent (at low prices). Even the hawks among European Central Bank officials have recently been hinting that a policy interest rate below 2% may be necessary before the end of this year in order to fulfill the ECB’s mandate. Even more pressure is being felt by the Swiss National Bank, partly due to the extremely strong Swiss franc. The SNB’s monetary policy assessment in June will likely already raise the question of whether Switzerland’s benchmark lending rate ought to be lowered to zero, a step that seems inevitable sooner rather than later. The touchy subject of negative interest rates also looks destined to figure more prominently in headlines again soon.

Sentiment in the dumps | US consumers are extremely unsettled US consumer confidence (University of Michigan survey) and recessions

While the interest-rate level in the USA looks set to stay elevated for the time being, further rate cuts in Europe appear to be forthcoming in the near term.

Sources: Bloomberg, Kaiser Partner Privatbank

Asset Allocation Monitor

Asset Allocation

Notes from the Investment Committee

Cash Equities

Fixed Income

Global

Sovereign bonds Switzerland

Corporate bonds Europe

Microfinance UK

Inflation-linked bonds

High-yield bonds

Emerging-market bonds

Insurance-linked bonds

Convertible bonds

Duration

Currencies

US dollar

Swiss franc

USA

Japan

Emerging markets

Alternative Assets

Gold

Hedge funds

Structured products

Private equity

Private credit

Euro Infrastructure

British pound

Equities: Bear-market rally?

• The S&P 500 index continued its upward retracement at first in May and climbed to a level of almost 6,000 points by mid-month, trading just 3% below its February all-time high at that juncture. The virtually V-shaped rally since the April low is impressive and likely caught many a bear on the wrong foot, costing them money. It was initially sparked by a slight de-escalation of the tariffs conflict (thanks to a 90-day suspension of most of the punitive tariffs). However, the rally has also been driven in no small part by very pessimistic investor sentiment, which recently has gradually evaporated after weeks of share-price advances. So, is it a bear-market rally or a new uptrend? That’s the question now facing investors. Purely by definition, a bear-market rally is still possible as long as no new high has been hit. History provides enough examples of similarly swift bear-market rallies that ultimately ended up leading to new lows.

• Regardless of the answer to the bear-market question, the US equity market is now in a very overbought condition for the near term. So, at the least, a consolidation of the recent upward impetus is likely in the offing. However, a general share-price setback of that kind could definitely turn out bigger in the end because market participants by now have priced out a large part of the risks posed by the US administration’s overly ambitious tariffs policy. The majority of

Real estate Scorecard

Macro

Monetary/fiscal policy

Corporate earnings

Valuation

Trend

Investor sentiment

them evidently think that the April low established a “Trump put” and believe that the US president will correct his policy course again in the event of major stock-price drawdowns. But Trump’s ability to personally influence stock-market movements is perhaps being overestimated. Moreover, considerable damage has already been wrought and looks set to increasingly come to light in economic data in the months ahead. On the corporate side as well, the consequences of US economic policy are bound to show up in the form of shrinking profit margins in some sectors. Investors currently should avoid letting themselves get lured prematurely into a renewed state of euphoria by the recent rally – FOMO (the fear of missing out) is never a good advisor on financial markets.

• Instead, more time should be devoted to looking at other markets and regions because diversification actually is a good advisor and has already paid off this year. European stocks have outperformed their

Regardless of the answer to the bear-market question, the US equity market is now in a very overbought condition for the near term.

In the wake of the rating downgrade by Moody’s in May, the USA now has definitively lost its status of having the highest creditworthiness.

US counterparts year-to-date, and emerging-market countries are also experiencing a revival after years of underperforming. The odds are good that this trend will continue. Cheap valuations and investors’ current low exposure aren’t the only arguments in favor of emerging markets. They may also get a tailwind in the form of EM central-bank rate cuts and from a weakening US dollar. And while one can continue to sit and puzzle over the “Trump put,” the government of China in recent months has delivered not just words, but also deeds to buttress the equity market.

Fixed income: Shrinking triple-A universe

• In the wake of the rating downgrade by Moody’s in May, the USA now has definitively lost its status of having the highest creditworthiness. The rating agency’s assessment criticizing increasingly deteriorated fiscal conditions in the USA was not new, however. So, the US bond market took note of the non-news with relative tranquility and without any major price gyrations. In fact, the recent downgrade also gave bond fund managers little reason to take action (and sell US Treasury bonds). That’s because US Treasury securities have ranked only in the double-A category in the major bond indices ever since the downgrade by Fitch in 2023. Meanwhile, the number of mutual funds that pursue a resolute triple-A mandate is small, accounting for just 0.4% of the global universe of bond funds. US pension funds and insurance companies also possess a certain degree of flexibility and are not forced to immediately sell US Treasury bonds.

• However, investors nonetheless exhibited nervousness in May in view of the prospect of a costly “big, beautiful bill” that may be sluiced through Congress soon. The proposed tax legislation would cause the US federal debt to swell by more than USD 3 trillion over the next decade to over 120% of the USA’s annual economic output. Investors’ waning appetite for US government bonds in the face of that prospect illustratively manifested itself in disappointingly weak demand at the mid-May auction of 20-year US Treasury bonds. At the same time, the yield on 30year Treasurys climbed to above 5% and closed in on the high reached in autumn 2023. The risk premium on US Treasury securities is rich at present. At the current level, Treasurys are attractive as insurance against a recession. And don’t forget that if anyone or anything is capable of forcing a course correction toward a more sustainable US fiscal policy, it’s the bond market. So, if bond yields climb higher in the near future and cross a certain pain threshold, a movement of that kind is likely to quickly correct itself on its own.

Alternative assets: Bitcoin at an all-time high

• Cryptocurrencies have had an even better run than equity markets since mid-April. The leading digital currency, Bitcoin, has gained around 50% since then and already hit a new all-time high in May. Robust net inflows poured into Bitcoin ETFs, and companies like Strategy (formerly Microstrategy) were also on the buyer side. Speculative fantasizing was additionally fueled by the prospect of new US legislation on stablecoins. Last but not least, investors appear to be viewing digital currencies as a worthy alternative to government bonds and gold due in part to the ballooning mountain of US debt and because the independence of the US Federal Reserve is increasingly being called into question. During the Bitcoin rally, gold entered a not-unexpected consolidation phase, which looks set to last a while longer. Bitcoin’s new record high might allay many a critic’s skepticism. Those who find the young asset class interesting but dread its volatility can use market-neutral strategies to profit from the market’s inefficiency.

Currencies: Persistently strong franc

• EUR/USD: The EUR/USD exchange rate embarked on an overdue technical retracement in late April, but the recent dollar strength is likely only temporary. That’s because although the US currency has an interest-rate advantage over the euro that looks set to widen further in the near future, policy developments in Washington, D.C., in recent weeks haven’t contributed to strengthening trust in the US administration and the world’s reserve currency. On the contrary, a creeping loss of confidence in the quarters ahead could drive a dismantling of the greenback’s extant overvaluation.

• GBP/USD: The British pound hit a new three-year high against the US dollar in May. Sterling’s strength was caused in no small part by stubborn inflation, which recently picked up significantly again and came in higher than analysts expected. Market participants lately have therefore been anticipating only a single quarter-point interest-rate cut now by the Bank of England over the next 12 months. So, for the time being, the pound remains not only a high-interest-rate currency, but also a politically more stable one and is likely to continue to hold up well against the US dollar.

• EUR/CHF: Volatility in the Swiss franc has abated recently, but the currency continues to hover close to its all-time high against the euro. Neither the slight easing of tensions on the trade front nor the partially surprisingly good recent economic data from the Eurozone have been able to give the euro a boost lately. Consequently, the Swiss National Bank is facing mounting pressure to loosen the interest-rate screw again in June. However, an SNB rate cut would likely bring relief only for a short time. The exchange-rate arrow for the EUR/CHF cross remains pointed downward in the long run.

The long ends of yield curves around the world have consistently been tending to inch upward in recent years. In this sense, the movement in 30-year US Treasurys, whose yield climbed above the 5% threshold in mid-May after the rating downgrade by Moody’s, is no exception, but rather part of an international trend. The upward trend has a number of different causes that depend on location. They include increasingly dysfunctional policies and politics in the USA, a costly defense and infrastructure spending package enacted by the new government of Germany, and a by now seemingly sustained resurgence in inflation in Japan. Depending on one’s mood (or one’s investment positioning), the Japanese yield line on the long-term chart particularly looks either awesome or terrifying. Alongside further deteriorating fiscal conditions everywhere, the runoff of central-bank balance sheets is another yield driver here and there. But as so often happens, there is also an exception to the rule in the case of bond yields: Swiss Confederation bond yields are bucking the trend and have been distinctly drifting back downward again in recent months. Swiss sovereign debt securities, which are available only in limited quantities, are so much in demand that the Swiss Confederation is able to borrow money for 30 years at a market interest rate of less than 0.5%.

Chart in the Spotlight

Spot the outlier | Swiss bonds are bucking the trend

on 30-year government bonds

Sources: Bloomberg, Kaiser Partner Privatbank

“Tariff” is the most beautiful word in the dictionary in the eyes of Donald Trump.

Theme in Focus

Trump’s tariffs: A good idea?

The most beautiful word in the dictionary “Tariff” is the most beautiful word in the dictionary in the eyes of Donald Trump. Ever since his first term in the White House, if not before, it has been known that Trump particularly views tariffs as a means of pressuring trade partners into making “deals.” So, renewed tariff threats were expected to arise in the Trump 2.0 era. However, what Trump actually churned out on the issue of trade policy during his first 100 days back in office likely astonished even die-hard MAGA devotees. The average tariff rate on imports to the USA has increased roughly tenfold in the span of a few weeks. Punitive tariffs of more than 100% against China are tantamount to a trade embargo. The US president would like to obtain more than just favors from America’s trade partners. The tariffs are also aimed at repatriating manufacturing to the USA, generating federal revenue, and eliminating the USA’s huge trade deficit. They are even by now aimed at rescuing Hollywood.

Lessons from history

But are tariffs really the way to go? The majority of economists have their doubts about that. Strictly speaking, Trump and his advisors stand practically alone on this issue. A look back at history shows that question marks

are warranted. The 1930 Smoot-Hawley Act, for instance, is generally considered a cautionary example of the dangers of economic nationalism in a globally interconnected world. In 1930, US President Herbert Hoover sharply raised import tariffs in a variety of industries despite warnings from economists – the average tariff rate climbed to above 20%. By two years later at the most, the harmful economic impacts were undeniable. The raised US tariffs provoked far-reaching retaliatory actions by other countries, international cooperation crumbled (in the middle of a world economic crisis), and world trade volume decreased by almost a third. Although economic historians are largely in agreement that the Great Depression was made really great by an absence of effective fiscal and monetary-policy measures and not by trade policy, it is nonetheless estimated that the high tariffs and the resulting drop in trade with foreign countries reduced US economic output by more than 3% between 1929 and 1931.

There are also lessons from Trump’s first term in office. In 2018, the president slapped punitive tariffs ranging between 20% and 50% on imported washing machines. A study published in 2020 by economist Aaron Flaaen (of Georgetown University) points out four chief consequences of that action: (1) Prices of imported washing machines climbed 12% on average. (2) Although clothes dryers were not directly affected by the tariffs, their prices increased too by the same amount. (3) Washing machines and dryers manufactured in the USA also became more expensive. (4) Companies like Samsung and LG opened factories in the United States, creating around 1,800 jobs there. At first glance, the tariffs appear to have been successful – they poured around USD 82 million per annum into federal coffers. But that was counterpoised by around USD 1.5 billion in extra costs to consumers, which works out to a cost of around USD 820,000 per newly created job. The tariffs thus proved to be an extremely expensive and inefficient way to grow employment.

Risks

and side effects

This time as well, the Trump administration is hardly likely to achieve its (big) goals associated with the new tariffs regime. “Liberation Day” on April 2 thus far hasn’t done anything except liberate economic actors from having any semblance of security about future prospects. Even the 90-day suspension of most of the reciprocal tariffs does little to alter that because nobody knows what will happen afterwards. Recent US consumer and business sentiment surveys accordingly reflect an acute loss of confidence. Uncertainty prevails not just about how long ongoing tariff negotiations will take and with regard to possible retaliatory actions and final tariff rates. There are also closely related question marks about the future trajectory of inflation, economic growth, central-bank interest rates, and corporate earnings. Global supply chains risk getting ripped apart, similar to what happened after the outbreak of the pandemic in 2020. And although the long-term consequences of tariffs are deflationary, a combination of high inflation coupled with zero to negative economic growth (stagflation) looms in the near term.

Pro-tariff arguments put to scrutiny

When the most frequently cited arguments in favor of high tariffs get put to scrutiny, it quickly becomes clear that the logic behind Trumpian tariff reasoning is vulnerable to criticism and that the “art of the deal” negotiating tactics employed thus far are suboptimal:

• Tariffs make American manufacturing great again: Even if the USA wanted to resume producing a variety of manufactured goods itself overnight, it wouldn’t be able to do that because it lacks sufficient production capacity. It takes years and loads of money to (re)build manufacturing capacity in the USA, and doing that is unattractive for all but the fewest of companies, due in no small part to the political uncertainty under the Trump presidency. Last but not least, the USA lacks the requisite amount of skilled personnel needed to reindustrialize the nation. Although tariff uncertainty alone can induce a company to resume making future investments in the USA, it’s questionable whether that would also create many jobs – highly automated factories and few real jobs for workers are the likelier outcome. It seems certain that under a regime of high tariffs, products made in America ultimately would be much more expensive than before.

• Tariffs generate revenue and reduce the trade deficit: The US federal government anticipates USD 150200 billion of annual revenue from tariffs. Yet, not only is the federal budget deficit vastly larger than that at almost USD 2 trillion, any revenue generated from tariffs is likely to be more than offset by the prospect of tax cuts put forth by Trump. Despite the trade deficit, the United States has been an economic success story over the last several decades. The presidential obsession with the trade deficit is also problematic at root because it is based on an

Stagflation in sight | Too much of a gamble taken?

Bloomberg consensus estimates for USA for 2025

erroneous understanding of fundamental economic interrelations. The real reason for the deficit is that Americans consume more on the whole than they save. The federal government’s large deficits and the USA’s attendant higher interest rates, but also the country’s allure as a preferred place to invest and do business, attract more net capital inflows than outflows, causing imports to exceed exports. The USA’s current-account deficit is thus neither good nor bad. Higher import tariffs cannot change that at all because they have only a very indirect impact, if any, on the propensity to save in the USA. The only way that tariffs could reduce the USA’s current-account deficit is by plunging America into a recession.

• Tariffs make good deals possible: Certain preconditions are needed in order to make deals. For instance, verbal threats or actual actions on the way to a deal should hurt the adversary more than they inflict self-harm. What may go for South Korea and India in the case of the current Trump tariffs doesn’t hold for the big trade partners like China and the European Union. The bigger loser is the US economy. Moreover, demands must be clear to the adversary, which needs know what concessions it is expected to make. Clarity of this kind seemed to be missing lately even on the part of US trade representatives, which doesn’t exactly facilitate the ongoing negotiations. Furthermore, the counterparty must feel sure that a concluded deal won’t be undone soon. However, Trump by now has gained a reputation as a deal breaker, and the USA’s trade partners accordingly have little willingness to make hastily improvised concessions. Expert negotiators know that good deals take a lot of time. And last but not least, if the USA’s main aim in the end is to confront and contain its ultimate adversary, China, a concerted course of action coordinated together with other trade partners would be the most expedient approach. But Trump’s impulsive conduct toward friend and foe alike is the diametric opposite of that.

Sources: Bloomberg, Kaiser Partner Privatbank

There is a general consensus among economists that global free trade benefits everyone involved on the bottom line – exceptions confirm the rule. Enterprises relocate their production to wherever comparative advantages exist. Tariffs, however, suppress comparative advantage, divert capital to less productive uses, and take pressure off businesses to compete on price or quality. Although tariffs can preserve jobs in the short run in those industries affected by them, overall they cause a general increase in unemployment. Free trade, in contrast, admittedly displaces individual domestic industries occasionally, but it lowers prices, increases consumers’ disposable income, and creates new jobs in other fields. Tariffs flip this effect: they benefit few producers, make goods more expensive, reduce purchasing power, and brake economic growth and employment. Whoever wishes to maximize per capita economic output as a measure of standard of living should therefore be skeptical about tariffs. A general raising of the tariff level does not improve the standard of living. Slower growth in prosperity is the economic price of raising tariffs. Although there are winners and losers in any trade policy, free trade exhibits a much more positive net balance. If Trump’s tariffs gamble ultimately were to result in lower tariffs around the world, that would be beneficial in the long run. But if it leads to heightened trade barriers – and it looks like that’s where things are headed right now – then the USA and the world economy will bear the costs.

Deal or no deal?

The disruptive tariff tempest may not be over yet, and a number of sectoral tariffs loom as well in the near future. Meanwhile, the adverse consequences of Trumpian trade policy will soon become visible also in hard economic data and in the form of empty supermarket shelves, which is bound to stoke public discontent. The Trump administration will gradually face mounting pressure to present successful achievements soon. So, one can expect to see headline-grabbing news of “fabulous” deals in the near future.

But while the USA and trade partners like Japan and the European Union may be able to reach agreements tolerable to both sides in the weeks ahead, the trade war with China is likely to go on for longer because the call from Xi Jinping that officials in the White House initially expected and lately have been hoping for hasn’t happened yet. Beijing, however, knows that regardless of how many concessions are made to the Americans, Washington will further tighten the thumbscrews on China and will try to sabotage the country’s rise. The government of China therefore has braced itself for a prolonged dispute and is well prepared for it. Against this backdrop, the USA should not anticipate quick negotiation wins. China also has no shortage of means of exerting pressure, holding bargaining chips that include a mountain of US Treasury bonds (that it could dump on the market) and a quasi-monopolistic position in the business of processing rare-earth metals and minerals. Donald Trump, meanwhile, has neither time nor patience. So, he has already caved in to a degree, has allowed tariff exemptions for electronic goods from China, and has since early May floated the prospect of cutting tariffs against China a bit. In fact, the reduction in tariffs to 30% announced on May 12 was once again greater than expected. After a de-escalation phase, a face-saving deal for Trump and Xi now seems possible before the end of this year. A deal of that kind wouldn’t alter the rivalry between the two countries, but would keep attractive commercial relations alive for both sides.

However, it is highly unlikely that the average US tariff rate will revert back to single-digit percent territory under President Trump. Realistically, the trade chaos won’t come to an end unless and until Congress wrests control over trade policy from Trump. To do that, enough Republicans in the House of Representatives and the Senate must be willing to override his veto (which requires a two-thirds majority in both chambers of Congress). Since that is very unlikely to happen, the trade-war rollercoaster ride looks set to continue. Last but not least, a return to substantially lower tariffs is improbable also because Trump will rate and sell the by-now gushing tariff revenue as a triumph. The truth, though, is that Trump’s tariffs have not only harmed economic growth for 2025, but have also already inflicted a lot of damage – some of it irreparable – well into the future. However, the vibrant rally since mid-April on equity markets reflects a certain degree of optimism. The market evidently is proceeding on the assumption that the US administration will strike a lot of deals soon and that only a general 10% tariff on imports will remain while trade partners will be able to negotiate away most of the other punitive tariffs. If the Trumpian rollercoaster ride really does continue, though, investors shouldn’t expect stock-price performance to stay on a one way street.

Sources: Bloomberg, Kaiser Partner Privatbank

Ask the experts

What is stirring our clients (and moving the financial markets)

We are always available to our customers for concerns and questions about their portfolios. As a representative of this, once a quarter we summarize the most frequently asked customer questions and the answers provided by our experts, thus giving you direct insights into our asset management and investment advisory services.

The US dollar and the euro have depreciated sharply against the Swiss franc in recent weeks. Should Swiss investors hedge their foreign-currency asset holdings?

Kaiser Partner Privatbank: To hedge or not to hedge? When it comes to assets denominated in foreign currencies, that’s habitually the question, particularly for investors who use the Swiss franc as their reference currency because in the long run, the franc has cont-

Added volatility | A strong/weak US dollar mitigates/worsens US stock-price drawdowns Maximum drawdown S&P 500 in different currencies

inually appreciated against all relevant currencies over the past several decades, gaining around 2.1% per annum on average against the US dollar, for example, over the last 50 years. That has diminished returns for Swiss investors (after conversion into their home currency).

Currency hedging may be sensible in principle for another reason as well. That’s because a foreign currency also means additional risk in the form of heightened volatility, which can work both for or against an investor. For example, the brief bear market in the USA in 2022, during which the S&P 500 index corrected for a time by 25% at its nadir, was only around half as painful for investors who think in Swiss francs because it was accompanied by considerable US dollar strength, which limited the maximum drawdown to 13% in CHF terms. The exact opposite has been happening thus far in 2025. The selloff on the US stock market since early this year has been accompanied by an extremely weak US dollar, which has worsened the share-price declines for investors on the old continent.

So, it’s a clear matter, isn’t it?! By hedging currencies, you protect your return against weak foreign currencies and are able to sleep easier thanks to the resulting lower volatility. Unfortunately, however, it’s not quite as simple as that. Although the “sounder sleep” argument is correct, bear in mind that hedging against currency risk doesn’t come for free. The hedging costs are essentially determined by the size of the interest-rate differential between the foreign currency and the home currency (the Swiss franc). And that’s where the “problem” lies: the franc is a notorious low-interest-rate currency, so the cost of hedging against currency fluctuations usually has been correspondingly high in the past. In the aforementioned example using the USD/ CHF pair, the currency hedge cost an average of 2.8% per annum over the last 50 years. The insurance against a weak dollar thus cost more than the actual depreciation of the greenback; on the bottom line, investors with a currency hedge during that period paid an insurance premium 0.7 percentage points too high. The calculation looks a bit different if one takes the last 35 years as

the observation period. During that time frame as well, the US dollar depreciated against the franc by an average of 1.5% per annum, but the hedging cost since 1990 for an investor thinking in Swiss francs was lower than in the 50-year period and likewise amounted to 1.5% per annum. The currency hedge thus yielded no benefit, but there were also no opportunity costs caused by overly expensive insurance.

The examples demonstrate that if the cost of hedging, i.e. the interest-rate differential, exceeds the expected appreciation of the Swiss franc, then it doesn’t pay for an investor to hedge, at least not from a return standpoint. If the cost of hedging is lower or similarly as high as the expected appreciation of the franc, then it makes sense to hedge the currency risk. The expected appreciation of the Swiss currency is the one question remaining – a tried-and-tested yardstick for gauging it is the expected inflation differential between Switzerland and the foreign currency area. It historically has stood at 1 to 2 percentage points versus the USA and the Eurozone, and it seems realistic to assume an inflation differential of that magnitude for the years ahead as well. A simple set of guidelines can be derived from this reasoning to answer the question of whether or not to hedge (see table).

Going by this guidance, it evidently does not make sense at the moment to hedge against a strengthening of the Swiss franc due to return considerations. The cost of hedging, i.e. the interest-rate differential, is too high for that at present, amounting to around 4% in the case of the US dollar and around 2.5% in the case of the euro. At the moment, the ones who should hedge are mainly those investors who have a short investment horizon or who value low portfolio volatility more than a maximum possible return.

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Sources: Bloomberg, Kaiser Partner Privatbank

The Back Page Asset Classes

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