Swiss 10-Million Cap Damage Can’t Be Easily Dodged, Lombard Says

(Bloomberg) — The strict limits Switzerland must implement in a proposal to cap its population at 10 million would make economic fallout hard to avoid, according to Lombard Odier.

The country “has a track record of cushioning the economic impact of contentious votes through pragmatic implementation,” Bill Papadakis and Samy Chaar wrote in a note to clients, highlighting how the government enacted a similar 2014 vote in a way that still maintained key aspects of a free-movement agreement with the European Union.

“This latest initiative’s concrete policy triggers would make similar efforts more challenging,” they said. “If the initiative were implemented largely as written, the consequences would be far-reaching. Bilateral accords with the EU would be at risk, undermining both labor supply and Switzerland’s future access to the EU single market.”

Swiss voters on June 14 will consider a plan to limit the population at 10 million. Given it has already surpassed 9.1 million, annual migration would have to fall by more than half to stay below the cap through 2050. The move could affect industries ranging from manufacturing to finance and technology, which increasingly depend on foreign workers to fill vacancies. Recent polls have shown the vote will be a close call.

Switzerland, which isn’t part of the EU, also has to be mindful of relations with its biggest trading partner.

“Any threat to the free movement of persons would undermine the framework governing mutual market access and carry strategic risks,” said Papadakis, who is a senior macro strategist, and Chaar, who is chief economist and chief investment officer Switzerland at Lombard Odier. “Any implementation would have to minimize conflict with long-negotiated existing EU agreements.”

Investor uncertainty over the long-term fallout is a further worry, as it could weigh on equity valuations “even in the absence of an immediate impact on profits,” they added.

Swiss stocks have already taken an outsized hit since the start of the Iran war, with the Swiss Market Index down 4.5% since the conflict erupted at the end of February, more than any of Europe’s other major regional benchmarks.

While large multinationals can reposition their activities as conditions change, small and medium-sized Swiss companies could feel the effect more, Lombard Odier warned.

As a result, declining confidence in the predictability of their earnings may over time put downward pressure on their valuations, they said.

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