The yield on long-term bonds in Swiss francs is also around two percentage points below that on corresponding euro paper. This has lowered the attractiveness of the Swiss franc somewhat compared with the euro. The stabilisation of the euro/Swiss franc relationship – albeit at a relatively high rate for the Swiss franc – is a positive development. Experience has shown that the exchange rate development has a significant influence on business activity in Switzerland. We are still determined to counteract any additional upward trend of the Swiss franc that might jeopardise the economic recovery. BIS Review 73/2002  1  Bonds In the capital markets around the world, nominal yields dropped considerably (see graph). However, borrowers with medium and low credit ratings did not benefit much from this development as credit risk premiums rose during the year. This also limits the macroeconomic stimulus effect of the yield decline. In addition, real interest rates did not decrease to the same extent because simultaneously inflation expectations again subsided markedly. Particularly in the euro's core countries – first and foremost in Germany – real interest rates are high. They depress the economic outlook and increase the growth differences between the member countries. Shares Stock markets were characterised by extraordinarily sharp fluctuations and hefty price losses. This was due to risk aversion increasing in the course of the year and the effectively higher risk level, which both depressed share prices. The sharp price swings mirror the difficulty of assessing the risks and opportunities in this environment.

The stock market slump has persisted for almost three years now. In the past few weeks, though, all major stock markets have at least witnessed some upward corrections. 2  BIS Review 73/2002  The long-term expectation that higher yields can be achieved only by taking higher risks has not proven true over a relatively long period of time. Unlike shares, low-risk bonds have generated attractive yields during this phase. This experience together with the fact that numerous, notably institutional investors have lost part of their risk capability might, in many instances, result in equity weightings remaining low in the foreseeable future. This change of behaviour will limit the stock markets' growth potential for the time being. At present, the price/earnings ratios of the major stock markets are close to the average of the past 15 years. This indicator suggests that, despite the price losses suffered, shares are not yet particularly low-priced. However, compared with the very low yield level of bonds, which are the most important investment alternative, shares do seem quite inexpensive. Does the stock market slump have any adverse effects on economic development? This seems certain for several reasons. For the corporate sector, it has become more expensive to raise capital, which undermines investment activity. Although direct shareholding is less common in Switzerland than, for example, in the United States, the asset losses incurred discourage private consumption. In many cases, the deteriorated financial position of pension funds necessitates an increase in contributions and/or a decrease in existing premium reductions.