The Daily Update - Switzerland Brexit

Switzerland is of course assigned a seven star rating under our Net Foreign Asset (NFA) model, with a score of 179% of GDP. The model forecasts that it will remain a seven star country into 2020. This may not surprise anyone, what also may not surprise is that Switzerland doesn’t issue many government bonds. In fact there is virtually no government debt available and hence the current ten year bond, the 1.25% maturing in May 2026 yields -0.34% in Swiss francs, 48 bps through the ten-year German government bond denominated in euros and 84 bps through French government bond. Needless to say we doubt you will ever see us write a ticket purchasing Swiss government bonds for our funds.

However, with the EU referendum just a month away, Bloomberg has looked at the composition of the Swiss population and there are some interesting findings. According to the study, in 2014 16% of Switzerland’s inhabitants were EU citizens, not Swiss, and almost one in four of the population were foreigners, even though they may have lived in Switzerland for generations. The Swiss government is currently endeavouring to renegotiate the contract with the EU on free movement in an attempt to limit immigration, but is struggling to broker a deal which leaves other treaties in place. The article is used to reflect the position that the UK could face, should the “OUT” vote take the day.

Of the roughly 1.4 million immigrants from the EU residing in Switzerland the bulk come from Italy, Germany and Portugal, a huge proportion of the 8 million total inhabitants. Since 2002 labour market restrictions for EU citizens have constantly been dropped and so now an EU citizen can in most cases take a job without any special permission. Now, as figures show, immigrants hold positions of employment in much better paid jobs than ever before and as such play a much larger role in the Swiss economy; making any renegotiation of immigration treaties that much harder.

“The idea that Switzerland is an island at the heart of Europe, that’s false” said one analyst.

Ecoplan, a consultancy research company suggests that if the Bilateral Agreement I, which includes free movement of persons in Europe was nullified, then by the year 2035, the Swiss output per capita would be CHF 1,894 lower than if the current pact remained in place.

If Switzerland was not such a strong creditor nation their bonds may cheapen up enough to offer opportunities for our portfolios; we doubt this would be the case. We also doubt that the UK gilt market will get cheap enough, even on an “OUT” vote, to be of interest to us.