Until recently, financial markets were facing historically low bond yields and high equity valuations, and operating in an environment that was responding to expansions in central bank balance sheets. Contrary to its reputation as a financial “safe haven”, it is now apparent that global inflation dynamics do not stop at the Swiss border. In February 2022, 12-month inflation reached 2.2%, one of the highest levels in the country since the mid-1990s with the exception of a short-lived inflationary episode in 2008. The Swiss National Bank now forecasts even higher inflation levels. At its March 2022 meeting, it raised its inflation forecast for 2022—compared to that of December 2021—by one percentage point to 2.1%.

The Swiss investment community is reacting to the new regime. A recent survey shows that a slight majority of market participants have already taken steps to align their portfolios with a rising inflation environment and a normalization of monetary policies. "International investors are tilting their equity exposure toward value and financial stocks, and further purchasing floating rates notes and TIPS (Treasury Inflation Protected Securities)", notes Prof. Francesco Franzoni, SFI Senior Chair and Professor of Finance at Università della Svizzera italiana, and coauthor of the PDN. In contrast, the room for maneuver for investors focusing on the Swiss market is rather limited. Domestic options are scarce as the entire Swiss franc yield curve was in negative territory until the end of 2021 and since the beginning of 2022 has risen above zero only for government bonds with a maturity of three years or more. Dr. Francesco Mandalà, Chief Investment Officer at MBaer Merchant Bank AG and coauthor of the PDN, adds, "Despite this shift, Swiss franc–denominated bonds are likely to generate a negative return this year due to the rise in interest rates".

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