Expert commentary on the long-term performance of Swiss equities and bonds

After one of its worst years in close to a century in 2022, the performance of a typical 60/40 Swiss portfolio perked up again in 2023, providing a return in line with its annual average since 1926. The year was unusual in that positive returns from bonds outpaced those from equities—something that has happened in only six of the past 98 years when Swiss equities have gone up.

Looking at government bonds and equities separately, last year’s nominal returns from Swiss equities were below their very long-term average (since 1926). Yet average annual returns for investments initiated between seven and 15 years ago are still not far from the very long-term average. Overall, our analysis shows that a 10-year investment initiated in Swiss equities would have produced a negative performance in only three of the 98 years since 1926, all linked to the 1929 Wall Street crash. Nobody who kept their initial investment in Swiss equities for at least 14 years would have made a loss since 1926.

Despite their outperformance, 2023 was not actually a standout year for Swiss government bonds in terms of nominal returns, and even less so when one looks at real (post-inflation) returns. While generally much less volatile than equities, the average annual return in nominal terms from these instruments since 1926 (4.0% in CHF) is just over half that of Swiss equities (7.7%). The gap is starker in real terms: equities have returned 5.6% on average in real terms since 1926, while Swiss bonds have returned 2.0%.

Making generous assumptions for various portfolio costs, we calculate that CHF 1,000 invested in Swiss equities in 1926 would be worth almost CHF 880,000 at end-2023. To achieve CHF 1 million from a full century of investing would require an annual return in 2024 and 2025 of close to the actual long-term average of 7.7% since 1926.

Swiss inflation remains comparatively low

Long-term interest rates trended downward for three decades starting in the early 1990s, largely due to disinflation. Mid-2021 marked the end of this long period as the energy crisis, post-pandemic supply bottlenecks and fiscal stimulus contributed to asharp acceleration in inflation throughout the developed world, including Switzerland. But price increases have been more modest in Switzerland than in the euro area and the US for several reasons. First, the strength of the Swiss franc has helped to reduce imported inflation. Second, while a large share of it comes from Russia, Switzerland’s dependence on natural gas is comparatively low as the country’s electricity needs are almost entirely met by hydro energy and nuclear power. Third, there are government-imposed price controls on a wider range of goods and services than in euro area countries.

Since its peak at 3.5% in August2022, consumer inflation has fallen significantly and is now within the Swiss National Bank (SNB)’s target range of “below 2%”. While we expect inflation to average 1.7% in 2024, the outlook for Swiss inflation looks highly uncertain and price rises could remain above their pre-pandemic average of 1% in the coming years, driven by the energy transition and the trend towards ‘re-shoring’.

The SNB has played a major role in keeping inflation under control by moving away from trying to weaken the Swiss franc towards aiming to keep it strong. After having sold more than CHF 110 bn foreign currencies in the first three quarters of 2023, the SNB’s focus is no longer on selling currencies to strengthen the CHF. The SNB embarked on a tightening cycle in mid-2022, raising its key interest rates by 75 bps in June, the first rate rise in 15 years. Between June 2022 and June 2023, the SNB raised its policy rate by 250 bps to its current level of 1.75%. In 2024, gradual disinflation will lead major central banks, including the SNB, to shift gears towards modest easing.

Chart 1 - 10-year Swiss government bond yield

A balanced approach worked slightly better in 2023

Along with presenting our annual analysis of the long-term returns of Swiss equities and bonds taken separately, we think it is also interesting to look at the long-term performance of a balanced Swiss- portfolio consisting of 60% Swiss equities and 40% Swiss bonds. Our calculations assume that the portfolio is rebalanced annually to ensure the 60/40 mix is maintained, in line with our annual time series.

With a fall of 14.7% in CHF, 2022 was the fourth-worst year for a balanced Swiss portfolio since 1926. Last year was better, with the same portfolio registering a positive 6.6%return (chart 2). Coincidentally, this matches the geometric average annual return posted by a balanced Swiss allocation over the past 98 years. What makes 2023 a bit unusual is that equities underperformed bonds. Historically, for around two-thirds of the time (64% to be precise), equities have performed better than bonds. This outcome is perfectly in keeping with the purpose of a balanced allocation, which is to benefit from equities’ upside while (hopefully) benefiting from bonds’ protection when equities are weak. But what is striking about 2023 is that while equities went up, they underperformed bonds. This has only happened in only six years since 1926, equivalent to a probability of less than 9%. While equities remain the asset of choice for the long run, this shows they do not always post the best returns; even roses have thorns.

In real terms, adjusted for general price increases, a Swiss 60/40portfolio returned 4.8% in 2023, just slightly above the long-term geometric average of 4.6%.

Chart 2 - Swiss 60/40 portfolio, annual return breakdown since 1926

2023 was a good, but not outstanding, year for Swiss bonds

The worst year on record for Swiss bonds (sovereign and investment-grade corporate bonds) was 2022, when they made a nominal return of -12.1% in CHF. Last year was much better, with a 7.4% nominal total return, making it the 12th-best year for Swiss bonds over the past 98 years (chart 3). But taking into account the post-pandemic inflation surge, the real return goes down to 5.6%, which puts Swiss bonds’ 2023 performance close to the second quartile of real returns since 1926.

Chart 3 - Best annual nominal returns for Swiss bonds since 1926

Swiss equities: to time or not to time

Taking the Swiss Performance Index (SPI) as a reference, Swiss equities posted a nominal total return of 6.1% in 2023, well shy of the long-term geometric average of 7.7% since 1926. Chart 4, showing average annual returns for Swiss equities between 2009 and 2023, is an extract from a much larger series that can be downloaded here. The last row of the extract gives annualised CHF returns up to the end of 2023 for different starting years. If one focuses on holding periods ranging from seven and 15 years up to end-2023, the average return posted by Swiss equities is not far from the long-term average of 7.7% achieved since 1926. Returns toward the shorter end of these holding periods are somewhat skewed by equities’ poor performance in 2022.

Chart 4 - Average annual CHF returns on Swiss equities over the past 15 years (extract from long-term annual return table compiled by Pictet Wealth Management)

An equity drawdown is always stressful. But these numbers show one needs to consider the ability of equities to recover after a sell-off. Smoothed over a long time period, the impact of bear markets tends to dissipate. An unlucky investor with a five-year time horizon would have faced a negative total return on Swiss equities 14 times over the 98 years between 1926 and 2023. Those 14 occurrences are linked to three major market events: the Wall Street crash in 1929, the bursting of the ‘dot com’ bubble in 2001 and the global financial crisis in 2008. But investors with a 10-year horizon would have suffered a negative return if their initial investment had been made in only three different years since 1926, all linked to the 1929 crisis. And our analysis suggests that since 1926, nobody who invested in Swiss equities for at least 14 years would have experienced a loss on their initial investment (chart 5 illustrates the returns for investments in Swiss equities held over the past 15 years). This shortens to 10 years for a 60/40 Swiss portfolio. In short, a disciplined, patient approach to equity investing is the best response to the old adage that “you can’t time the market”. Even if this is true investors can build up their portfolio’s resilience through a buy-and-hold approach.

Chart 5 - Swiss equities’ annualised returns grouped by 15-year periods (y-axis) and return range (x-axis)

Two more years to forget the 2022 drawdown

With figures going back to 1926, we now have almost a century’s worth of data on annual returns. A good way to illustrate the ‘magic’ of compounding is to track the total returns from CHF 1,000 invested at the end of 1925. Assuming that dividends are reinvested and no money is withdrawn, our analysis shows that the initial CHF 1,000 would have grown to CHF 1.39 million 98 years later. Of course, this figure is too good to be true: we need to consider the costs (brokerage fees, stamp duties, cost of portfolio rebalancing…) linked to equity investing. To take these costs into account in our calculations, we deduct 50 bps from our annual equity returns since 1926. This gives us acumulative total return on the CHF 1,000 investment of CHF 876,563 between 1926 and 2023. To reach a century return of CHF 1 million after costs would require a return in line with the 7.7% long-term average over the next two years. Patience remains a virtue; as returns compound overtime, investors’ time horizon can make all the difference.

Things are different for bonds. On the one hand, risk indicators look less forbidding: Swiss bonds show anannualised standard deviation (a measure of volatility) of 4% compared with 20% for Swiss equities, while the maximum drawdown (the maximum potential loss from investing at the market top and selling at the market trough) is also lower for Swiss bonds compared with Swiss equities (12% for Swiss bonds in 2022 vs. 34% for Swiss equities in 2008). But while they fared relatively better than equities in 2022 and 2023, the average annual return offered by Swiss bonds is around half that earned on Swiss equities if one looks back to 1926—4.0% versus 7.7% (in CHF). In short, while bonds, despite the 2022 mishap, have proved their worth in mitigating portfolio risk since 1926, equities remain the investment of choice over the long term (chart 6). Put another way, a decent long-term investment horizon together with a certain risk tolerance justify a significant allocation to equities.

Chart 6 - Equities provide a larger share of a 60/40 portfolio returns than bonds. Increase in the nominal value of a Swiss equity, bond 60/40 portfolio since 1926 (31.12.1925 = 100)

Equities offer more attractive real long-term returns than bonds

The average annualised return (geometric mean) for Swiss equities- and bonds in Swiss francs over 10 years now stands at 7.7% and 4.0% in nominal terms, respectively. Given the 2022 sell-off in both asset classes, these figures are somewhat lower than in July 1998 (the first year we published long-term return updates), when 10-year returns were 8.6% and 4.6%.

The resurgence of inflation postcovid means that it is more important than ever to pay attention to real returns (which take account of erosion in the value of money). In real terms, the return from Swiss equities averaged 5.6% between 1926 and 2023, only slightly down from the 6.0% figure for the period between 1926 and 1998. The variation is smaller for Swiss bonds, which made an average annualised 10-year real return of 2.0% up to the end of 2023 compared with 2.1% at end-1998. Again, these figures show that equities provide better real returns than bonds over the long run.

Conclusion: more of the same

Our long experience of looking after private investors and family offices suggests that drastically reducing equity exposure in reaction to near-term performance issues and then missing the subsequent market upturn is the biggest risk to long-term total returns. The past three years have provided an extreme example of the issues involved. Having boomed in 2021 as economies reopened after the pandemic, central banks’ tightening of interest rates in response to the spike in inflation put both equities and bonds under extreme pressure in 2022. This could have discouraged investors. But then both bonds and equities rebounded in 2023 despite all the odds, including high rates.

With this in mind, our advice is the same as before: investors should make an effort to map out a long-term, robust and sustainable investment strategy and think carefully about how it is implemented. Only too often, this vitally important question takes second place to other considerations thought to be more important (cost of asset management and advice, cost of analysis etc.).

Equities remain the investment of choice over the long term given how difficult it is to ‘time the market’. Good advice and a long-term perspective can make a big difference to investors’ wealth, both in nominal and real terms.

Appendix: where do our data come from?

Our study of Swiss equities and bonds, originally published in 1988 and updated annually since 1998, uses data going back to 1926. We have used the Swiss Performance Index (SPI) as a base for calculating equity returns since 1992. The Pictet Bond index is used for our analysis of the performance of Swiss bonds until end 2003. For reasons of simplicity and consistency, it was decided to switch to the Swiss Bond Index Total Return AAA-/BBB Index for annual returns since 2004. This switch has necessitated slight adjustments to historical data on bonds from 2004 to 2021. Such a change does not impact our past comments but will make future updates easier.

For illustrative purposes. Past performance shouldnot be taken as a guide to or guarantee of future performance. Performances and returns may increase ordecrease as a result of currency fluctuations.

Glossaries and Disclaimers