Over the past 2 years, inflation has become a concern for many investors worldwide, and Swiss peers are no exception. As of early 2023, inflation in Switzerland peaked at 3.3% year-on-year, with major central banks around the world willing to do whatever it takes to combat it.
The trajectory the inflation rate has embarked on has truly added to the general uncertainty surrounding the economy and the markets. Notably, 7 out of 10 Swiss residents believe prices will continue to increase this year, with more than 2 out of 10 expecting this surge to impact their living standards.
Now, with elevated inflation still above the SNB target and anxiety levels reaching a climax, how can one protect their investment portfolio? Alternative assets might be the solution. Drawing wisdom from more seasoned counterparts, over 8 out of 10 institutional investors plan to increase their allocations to alternative, illiquid assets over the next 2 years. That being said, real estate emerges as one of the most lucrative alternative assets in this scenario.
There are several reasons for this, notably the effect of inflation on traditional asset classes. First, high inflation and the corresponding rising interest rates negatively impact growth stocks and stocks with high debt levels. Second, current bond yields have not risen sufficiently to outpace inflation, which is crucial for maintaining or increasing the value of your investment. Finally, should one opt for a complete exit from both the stock and bond markets, the real value of cash received would diminish unless an interest rate higher than inflation is achieved.
While many believed gold would be a perfect hedge due to its intrinsic value and limited supply, this is no longer the case. The correlation between gold and inflation (as well as inflation expectations) is not as strong as previously considered. Hence, it is apparent that gold does not qualify as an adequate “inflation hedge,” particularly for Swiss investors.
On the other hand, real estate offers competitive returns and the benefits of portfolio diversification while ultimately standing for the perfect “inflation hedge.” Rising immigration and the ongoing reduction in the number of vacant apartments, which has been steadily accelerating, imply that there is simply not enough available housing to meet the demand. As a result of these combined factors, the property market in Switzerland is likely to experience steady and robust growth this year and beyond, no matter the rising or falling inflation, driven by demand-supply dynamics rather than speculation.
Furthermore, the Swiss real estate market has outperformed the Swiss stock market by 1.67x over the last 20 years. Simultaneously, the risk-return ratio is better for real estate as it has a low, and in some cases, negative, correlation with other major asset classes, such as stocks (0.3743) and bonds (0.3548).
In summary, investing and diversifying with high-quality real estate would be the ultimate choice for any prudent investor as we enter a new economic and financial era. Hence, rebalancing your retirement investments toward assets that perform better during inflationary periods has become a necessity.
