Given the high temperatures this summer, cold water might actually sound appealing. However, Swiss savers likely found little pleasure when the Swiss National Bank (SNB) poured cold water on interest rates in June by cutting its key interest rate to 0 percent. Further rate cuts into negative territory appear unlikely but cannot be ruled out if the global trade dispute does not ease in the coming months.
Investors should not assume that zero interest rates are just a short-term phenomenon: In mid-2011, the SNB lowered its key interest rate to 0 percent, then lowered it into negative territory and only allowed it to rise above the zero percent mark more than ten years later. During this period, the interest rate on savings deposits averaged less than 0.1 percent.
It could be argued that the SNB is pursuing zero or negative interest rates due to low inflation. Indeed, Swiss inflation is currently also at 0 percent, so investors should generally be able to maintain their purchasing power in real terms, though there are some instances where costs are rising.
Take, for example, rising health insurance premiums. While most of the cost increases in the health care system are due to expanded services and are therefore rightly not counted as inflation, they can still represent a significant strain on household budgets. This added expense should at least be offset by investing, which is not possible with a savings account in a zero or negative interest rate environment.
In such a situation, investors must ask themselves how much liquidity they actually want to hold, as cash has become an expensive luxury in a zero or negative interest rate environment. Excess liquidity can be invested in equities through a professionally managed portfolio. Swiss equities delivered an average annual return of 7.5 percent (SPI Total Return) during the last zero and negative interest rate period between 2011 and 2022.
Low interest rates pose a particular challenge for investors who rely on regular income. Bonds can no longer guarantee this income in a zero-interest-rate environment. As an alternative, dividend stocks are an option¡ªspecifically, shares of companies that pay high dividends.
Of course, the volatility of equities is significantly higher than that of bonds or a savings account, which should be considered when allocating excess liquidity. Dividend stocks should therefore not only offer high dividend payouts, but also have defensive qualities, meaning solid balance sheets and belonging to defensive sectors.
Risk management can be further improved by paying special attention to diversification. This includes spreading equity investments broadly, both geographically and across sectors.
With a well-diversified, defensive portfolio focused on dividend stocks, investors can kill two birds with one stone: protect income from loss of purchasing power during a zero or negative interest rate phase while avoiding significant additional risks.
