Originally Published 19th January 2015.
Last Thursday the Swiss National Bank (SNB) suspended it’s support for a Euro floor against it’s currency of 1.20, the Euro promptly fell 45% against the Franc. i.e. Swiss investors lost 45% in value of their European assets. Eventually the Euro recovered for a loss on the day of 17% to settle near levels of the August 2011 Franc crisis. The Swiss stock market also fell 15% in two days, implying the only safe haven were Swiss Franc denominated bonds and cash accounts. However the SNB also lowed the target deposit rate to negative 0.75% per annum, whilst holders of 10 year Swiss government bonds have to pay 0.13% per annum (pa) for that pleasure.
Whilst the timing of the decision was a surprise the market reaction was supreme shock, only days before a member of the SNB publicly supported the previous policy. The previous policy was also beneficial to growth and price stability in the Swiss economy. After the announcement investors, traders and global companies scrambled to hedge their exposure, supplemented by any future SNB commitment to foreign exchange stability already losing credence. In sympathy with the SNB the Swiss economy at only the 20th largest economy in the world, inhibits the risk tolerance for limiting external influence.
The Swiss Banking industry has a long history in lacking moral discrimination of deposit ownership. Swiss regulators also condone misrepresentation by financial intermediaries (when referring suspect money drug traffickers or terrorists to them). All-in Swiss financial system participants are the most rational in the world. Some may therefore not be surprised in a conflict between Swiss words and deeds.
Investors with Swiss liabilities, long investment horizons and generating non-investment income in Swiss Francs: should continue to seek growth in the equities of high growth areas and value companies (the US stock-market has outperformed the Swiss currency by 5% pa over the last 30 years); maintaining fixed income in the major trading block currencies with potential for recovery back to fundamental levels before increasing allocation to Swiss fixed income. Those with short investment horizons and not generating non-investment income in Swiss Francs, continue to be inhibited by negative domestic interest rates and domestic equities that are presently penalised by an uncompetitive exchange rate.
Steven J Cohen CFA, BSc (Econ) Hons Lond. 19th January 2015.