Monthly Report 11/2025

Inflation in Switzerland could certainly rise slightly in the coming quarters, but it is likely to remain below 1% for the next two years. This means that price stability is guaranteed in the medium term. However, this is also linked to the forecast that the Swiss franc will remain strong.

The clouding of the economic outlook in the US, as well as weaknesses in the labor market and, increasingly, in consumer demand, are likely to prompt the US Federal Reserve (Fed) to cut key interest rates by 25 basis points at least three times in the next four quarters. This would reduce the key interest rate in the US to around 3.0%. This would roughly correspond to the structurally higher inflation rate and the trend of the dollar depreciating against the Swiss franc by around 3% per year.

In the Eurosystem, which includes the European Central Bank (ECB) and 20 national central banks, the goal is to keep inflation at 2% in the medium term. The inflation trauma was the “Great Inflation” from 1965 to 1982, which caused continuous currency devaluations. In Italy, for example, where the lira had climbed to astronomical heights, there were hardly any banknotes with a value of 500’000 lire left, but calculating large sums caused difficulties for many people.

In 1999, Italy joined the euro exchange rate mechanism, and in 2002, the lira was finally replaced by the euro. This enabled Italy, like many other countries, to gain confidence in a currency and maintain purchasing power for the first time in its history. Today, 83% of Europeans support the euro, both as a means of payment and as a tangible sign of shared goals and visions. Most recently, the euro has gained strength, particularly against the US dollar. Foreign issuers are increasingly issuing bonds in euros.

Trust in a currency is still not a given everywhere. In Turkey, for example, inflation rose to over 80% in 2022 due to President Erdoğan’s insistence on low interest rates. This eroded the value of the Turkish lira, undermined the confidence of the impoverished population, and led to instability. Later, the Turkish central bank initiated a change of course and raised interest rates sharply in 2023 and 2024. This helped to reduce inflation, but it remains high at over 30%.

A stable currency alone is not enough. To be innovative and remain competitive in the long term, every economy must renew its capital stock. Decisive action is needed to create conditions that make it easier for companies to invest, i.e., by removing bureaucratic hurdles, reviewing regulations, and speeding up approvals. Labor market and education policies are also part of this, and venture capital is needed as a driver of growth.

The government bond market was characterized by increased volatility in October, but also by optimism. On the diplomatic front, the ceasefire between Israel and Hamas seems to have given President Trump some leeway to seek solutions to the war between Ukraine and Russia. The possible use of long-range missiles, which the US could provide to Ukraine, is once again the focus of discussions and could increase pressure on Putin to move towards an agreement.

Meanwhile, Prime Minister Lecornu in France survived two no-confidence votes and struck a deal with the Socialist Party by promising to suspend the 2023 pension reform – a high price to pay for the government to remain in power. The starting point for the budget debate is a deficit target of 4.7% (as a percentage of GDP) for 2026, following an estimated 5.4% in 2025. France is still subject to an excessive deficit procedure and would need to converge towards 3% over time.

S&P downgraded France’s rating from AA- to A+, with a stable outlook, based on arguments very similar to those used by Fitch when it recently downgraded the country’s credit rating. The lack of political stability called into question the debt dynamics and the ability of any government to keep the deficit on the necessary reduction path. The suspension of the 2023 pension reform prompted S&P to downgrade France’s rating.

German lawmakers have received the EU Commission’s support for expanded infrastructure spending in Germany. As a result, long-term bond yields there are significantly lower than in France. Surprisingly, however, the yield on 2-year Greek government bonds is even lower than that of Germany. Greece has earned much recognition on the capital markets with targeted reforms.

In the US itself, budget agreements were more difficult to reach as the government shutdown continues without progress in resolving the differences between the political parties. This seems to satisfy the markets, as they assume that bond yields are likely to fall with lower government spending. In fact, the Fed confirmed the most minimal market expectations with its 25 basis point cut in key interest rates.

Also in the US, credit spreads were put to the test by actual credit events. In addition to the defaults by subprime auto lender Tricolor and auto parts manufacturer First Brands, there were cases of fraud involving commercial mortgage loans. However, strong third-quarter results from the largest US banks and companies helped stabilize credit markets.

After just over seven years, the differences in returns are relatively small. With the ZIF, the annual return is -0.8%. The ETFs launched by iShares on Swiss domestic government bonds are at -0.5% (0- to 3-year Swiss government bonds) and -0.4% (3- to 7-year Swiss government bonds) respectively.

Only in the area of very long-term bonds (7- to 15-year Swiss government bonds) is the ETF in positive territory at +0.2%. As can be easily seen from the chart above, this ETF also entails increased interest rate and thus volatility risks. In addition, much of the future has already been priced in. The annual return on 10-year Swiss government bonds is now only +0.1%. Not only is this fairly low in nominal terms, but it also means that such an investment is subject to relatively high volatility, i.e., it is not recommended from a risk-adjusted perspective.

The remaining term of a typical bond in the ZIF is significantly lower at 5.9 years (modified duration). On the other hand, the yield to maturity is much higher at +1.4%. Interest rates on short-term Swiss government bonds are back in negative territory. It is this prospect that makes us confident that the ZIF will achieve a higher return than Swiss government bonds not only in the current year but also in the coming years, thereby completely making up for the slight lag.

With the slightly more risk-tolerant Credit Opportunities Fund (COF), on the other hand, we want to build on the lead we have established over the years, as we explained in our October monthly report. A few new corporate bonds have been added, whose credit ratings are typically lower on average than those in the ZIF, which of course goes hand in hand with higher expected returns.

The core of the COF is not interest rate risks, as is the case with the ZIF and the Swiss funds, but credit risks. Credit risk premiums are collected for this purpose. And, as with a healthy insurance company, the COF performs well when the risk premiums in a given period (e.g., a calendar year) are higher than the actual claims. However, a single month can sometimes be accompanied by disappointing fluctuations.

The new bonds include a hybrid bond (BB+ rating) from Aroundtown, a broadly diversified real estate company with good connections in business circles, which has billions in liquidity and wants to opportunistically grab a piece of the growing data center pie in Germany. The Frankfurt financial center is one of the world’s top data center locations. The majority of the expected investment of more than €24 billion for German data centers will be invested there over the next four years.

The low interest rate environment makes it possible to finance a SARON-based mortgage loan at less than 1.0%. When purchasing real estate for rental purposes (“investment property”), the financing costs are likely to be slightly higher, but ultimately the current financing environment is attractive – even from a historical perspective. From 2009 to 2025, the average interest rate for existing mortgages was only 1.8%. That is less than half the historical average of 4.5% for the period from 1850 to 2008.

Current mortgage rates have led to a noticeable surge in demand over the past 12 months, which is likely to continue in the coming year. This can be seen from the fact that, according to the latest data, the volume of outstanding mortgages expanded by CHF 36 billion within a year at the end of August 2025 (+3.0% year-on-year according to the Swiss National Bank).

Because prices for residential property have risen faster than wages, the affordability hurdle for mortgage loans has also increased. This narrows the circle of potential buyers. In addition, job security has declined in recent months, partly due to US tariffs on Swiss products.

Another important factor is how to deal with the volume of mortgage loans. For money market mortgages, the SARON, which is determined by the Swiss National Bank’s (SNB) key interest rate, is the central reference value. Over the past 40 years or so (i.e., during a period of structural interest rate cuts), this form of financing has usually offered cost advantages over fixed-rate mortgages. The latter, on the other hand, offer greater planning security and protect against rising interest rates. This is highly valued by the vast majority of Swiss households. In 2024, 75% of all outstanding mortgages were fixed-rate mortgages.

In terms of amortization, it pays off to forego this option if the expected return on investment of the surplus liquidity (e.g., 3.0% in a balanced mandate) exceeds the cost of the mortgage loan (e.g., 1.0%). After the system change, private owners will no longer be able to use mortgages for tax optimization. This creates a fundamental incentive for amortization in order to reduce the interest burden.

However, a home with little debt ties up a lot of equity in the long term and thus poses a considerable cluster risk for asset development. An appropriate loan-to-value ratio of 30% to 60% of the mortgage lending value, on the other hand, promotes diversification and creates scope for higher-yield investments, such as a dividend-oriented investment solution.

There has always been talk of an imminent crash. The difference today is that, thanks to the internet, the prophets of doom can quickly reach a much wider audience than they could a few decades ago. Every time there is talk of a record high, the news is full of new warnings, setbacks, and crises. A slump in share prices would undoubtedly be painful, but those who are saving for their retirement can think long term.

It is also important to remember that every share price not only anticipates an optimistic future – there is always a degree of pessimism built into all prices. Incidentally, the world stock index was unaffected by the Asian crisis of 1997/98. Anyone who listened to Alan Greenspan, then chairman of the Federal Reserve, and his warning of “irrational exuberance” in December 1996 made a big mistake.

Of course, terrorist attacks such as those on September 11, 2001, the global financial crisis in 2008/09, and the start of the war in Ukraine on February 24, 2022, lead to temporary declines in stock prices. There have also been oil price shocks, fears of bird flu, and a New Economy bubble. “I guarantee you that there will be a huge crash at some point,” says Harvard economist Kenneth Rogoff, adding: “Even after the crash, stock prices could be higher than they are today.”

In his memoirs, Greenspan drew the lesson: “You can’t tell when a market is overvalued.” The hard truth is that you should invest money when you have it, and not wait until the markets seem favorable. And you should be careful not to buy stocks with money that you will need again in a few years. Or at least only do so if you can cope with a certain loss.

Another important factor is diversification. Our portfolios are better diversified than the MSCI World, which is dominated by a few US tech stocks. It is more concentrated than ever before in the history of the capital markets. In addition, 71% of the global stock index consists of US stocks. Emerging markets such as India are not represented at all, real estate is almost absent, and Europe is only represented to a very small extent.

Currently, the markets are characterized by a basic pattern: when interest rates fall, stock prices rise. With ten-year Swiss government bonds currently yielding just 0.1% per annum, it is clear that more and more capital is flowing into stocks, whose dividend yield alone is 2.5% to 4% per annum. You should only be overly concerned if you have invested too little of your truly long-term savings in stocks.

The global economy has never seen anything on this scale before. The Softbank-backed joint venture “Stargate” alone is providing initial investments of $100 billion, and ultimately perhaps as much as $500 billion, for OpenAI’s new AI infrastructure in the US. Even the recent successes of DeepSeek and the currently low returns from AI projects have not changed the fact that demand for data centers far exceeds supply.

As a result, the capacity of data centers could triple again by 2030, according to estimates by management consulting firm McKinsey. Nvidia also anticipates steep growth rates in its market analysis. The five largest US cloud investors (Amazon, Alphabet/Google, Microsoft, Oracle, and Meta/Facebook) have enormous expansion plans. Alphabet alone is investing $85 billion in accelerating the availability of data centers this year and is still in the upward phase of a typically S-curve-shaped investment cycle.

This also increases the demand for a round-the-clock electricity supply and significantly improved power grid stability. Power grids are outdated, particularly in the US, but also in parts of Europe. While until recently efficiency gains in semiconductors were able to keep the growth in electricity demand within limits, demand is currently growing enormously.

An AI-powered query on ChatGPT still consumes 10 times more energy than a search query on Google. Nvidia’s latest Blackwell platform is much more energy-efficient than the previous Hopper generation. Ultimately, however, any efficiency gains and lower costs paradoxically lead to an even steeper demand curve (known in economics as the Jevons paradox).

Around 50% of the additional electricity demand is expected to be attributable to data centers in the coming years. In addition, the introduction of electric vehicles is putting further pressure on energy capacities. Rapid advances in physical AI applications (e.g., humanoid robots) could further accelerate investment cycles and increase electricity demand even more.

For this reason, our DecarbRevo investment solutions are performing excellently this year. These promising portfolios include numerous companies that provide advanced, clean (decarbonized) energy solutions. Brookfield, the world’s largest infrastructure operator, recently signed a long-term energy supply contract worth $5 billion with Bloom Energy.