The resilience of the SMI during the German recession

The resilience of the SMI during the German recession

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The German stock market has fallen by an average of 3% over the past six phases of economic decline, while the SMI is showing a positive balance of 6%.

Every week, the markets register record negative indices. Uncertainty about key US central bank rates, a slowing European economy and high inflation are driving investors away from risky assets. For the first time, the Swiss equity index, labeled defensive, offered a slight diversification factor to investors during periods of weakness in the European domestic economy, which had not been the case in recent months due to the nature of the risks. The real strength of the Swiss stock markets would therefore depend on the German recession.

Over the past decade, the easing of monetary and fiscal policy has been instrumental in resolving financial market crises and is part of an implicit deal between investors and central banks. High global inflation, which particularly affects the United States and the euro zone, is now reducing the room for maneuver of the monetary authorities to manage the crisis and reduce volatility. As a result, stock and bond markets are experiencing a sustained rise in fluctuations, and uncertainty reigns among international investors. Various key indicators of the health of the European economy point to a slowdown in the second half of the year. In a more traditional economic climate, an easing of budgetary policy would make it possible to combat such a slowdown. However, due to the surge in inflation, the European Central Bank plans, according to its president, to raise its key rate in July and September.

The tightening of monetary conditions in the midst of an economic slowdown constitutes a double shock for the markets.

The countercyclical dynamic between the economic slowdown and the paradoxical tightening of monetary policy leaves the markets skeptical and reawakens fears of a recession. Central banks did not immediately normalize interest rates and must now make up for lost time. The tightening of monetary conditions in the midst of an economic slowdown constitutes a double shock for the markets.

Worries about inflation and recession

In summary, the priorities of investors and those of central banks have diverged for several weeks. While consumers and monetary authorities are primarily concerned about inflation, investors are worried about economic growth, which they see as the main problem facing the global economy. Thus, they protect their stock market portfolio by hedging against recession and not against inflation. In the first quarter, inflation-protected government bonds and pro-cyclical currencies such as the Chinese yuan were in vogue. Today, investors are turning to government bonds and defensive stocks. However, European inflation, which hit a record high in May, needs to be watched closely. If it turns out to be stronger than expected, the probability of stagflation in the euro zone would increase considerably. In such a situation, the Swiss stock market generally does better than its German counterpart.

In times of recession, the SMI takes advantage of its defensive nature

Recently, global equity markets have suffered from the continued outflow of capital. Risk sentiment also hit the Swiss stock index, which is defensive in nature. After just over 100 days of trading in the new economic year, the SMI has lost almost 10% of its market capitalization, posting its weakest start-of-year rate since 1988. Investors are clearly positioning themselves in favor a rise in interest rates and a slowdown in the global economy. Given the overall scope of macroeconomic risks, the Swiss stock market does not offer any advantages in terms of diversification compared to larger stock exchanges, particularly in Europe. During the first five months of the year, most major European stock indices suffered the same fate.

In some cases, the defensive nature of the SMI has advantages. In turbulent times, Swiss stock market prices seem much stronger than average. In Germany, the stock market has fallen by an average of 3% over the past six recessions, while the SMI is showing a positive balance of 6%. Few stock markets have such a capacity for resilience in times of European crises. Benchmark stock indices in France, the United Kingdom and even Japan also lost value during the German recessions. Although forecasts are still uncertain, developments over the past few months suggest that the German economy is set to experience a setback this year or next. For the first time, the SMI will absorb the losses resulting from other major stock markets.

The evolution of the SMI since the beginning of the year

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