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The Swiss franc and what it means for asset allocation

Investors who calculate in Swiss francs need to think about certain things differently, says Andrea Quapp, Lead Investment Director, Multi-Asset Class Solutions (MACS), Continental Europe.

14 December 2023

The view from Switzerland is often somewhat different – even when it comes to investing. In recent years, growth stocks such as US tech companies Apple, Amazon and others have dominated the stock market. However, their high price gains are denominated in dollars. For a Swiss franc investor, this performance is put into perspective when you consider that the dollar has lost around half of its value against the franc since the turn of the millennium. In view of this starting position, the question arises for investors who calculate in francs: what risk am I taking by diversifying my portfolio globally – and will I achieve any value advantage at all?

Partly due to the lower inflation rates in Switzerland compared to other countries, the franc has strengthened over time. However, after a phase of strong appreciation between 2007 and 2011, the real value of the franc against the dollar has remained rather stable in recent years. The nominal growth of national economies abroad is often higher, so we believe it should be possible to benefit from equity investments in these markets. When investing in fixed interest asset classes, however, the depreciation of the foreign currency can be a disadvantage. For a Swiss franc investor, foreign currencies are therefore more of tactical relevance. In times of low correlation between capital markets and currencies, a larger share of foreign currencies can make sense.

Swiss franc strength always under observation by the SNB

In recent months, the Swiss franc has started to appreciate again; The Swiss National Bank (SNB) is likely to tolerate this over a foreseeable time horizon. A strong franc lowers import prices and thus the inflation rate, but at the same time also the value of the high foreign currency reserves that the SNB has accumulated in recent years in order to weaken the franc. For a long time, the SNB's mantra was: if the franc appreciated excessively, the central bank would step in and buy foreign currency. The paradigm shift came with the first interest rate hike in June 2022.

In addition to central bank policy and the economic situation in the individual economic areas, the geopolitical situation plays a decisive role. In times of uncertainty, "safe havens" such as the Swiss franc are sought after. Such flight movements are usually caused by "black swan" events, ie events that nobody could have foreseen. The most recent example is Russia's war of aggression against Ukraine. From 20 February 2022 to the end of September 20221, the euro lost 22% of its value against the Swiss franc. Neither the timing nor the extent of this change was foreseeable. The same applies to the countermovement; from September 2022 to the anniversary of the outbreak of war, the euro rose again by de facto the same percentage2.

Certain sectors are lacking in the domestic market

At a Money Market Apéro in 2021, the SNB stated the following: «The foreign exchange market today is a so-called ‘fast-paced electronic market’; highly frequent, electronic and complex. In a small, open economy like Switzerland, changes in the exchange rate have a significant impact on inflation and the economy and must therefore also be taken into account when formulating monetary policy.»

Around 40% of Swiss companies hedge their foreign currency exposure. With the exception of shock events, which lead to an immediate, downright export paralysis, the adaptability and flexibility of companies through productivity gains as well as the pricing power of manufacturers more than compensates for a Swiss franc appreciation. Swiss companies are generally able to cope well with a strong franc - apart from exceptions triggered by surprising decisions such as when the SNB cancelled the minimum exchange rate against the euro at the beginning of 2015.

There is hardly any correlation between the performance of stocks in the main Swiss SMI index and movements in the Swiss franc. Investors already receive a certain degree of international diversification with an investment in large multinational Swiss companies. Companies such as Nestlé generate well over 95 per cent of their revenues outside their home market. However, numerous high-growth sectors such as technology and commodities are not very common in Switzerland. In order to utilise their potential, Swiss franc investors generally have to leave their "home country".

As investors, however, we should always question our own ability to forecast and recognise where we are less able to make accurate estimates. There are numerous other predictable sources of return with lower volatility in the asset classes of equities, bonds, indirect real estate investments and, to smooth out portfolio fluctuations, in satellite investments such as private equity, actively managed hedge fund strategies and indirect infrastructure investments.

The Swiss franc: a long-term success story

Swiss franc in comparison
Development of currency pairs from 1999-2022

Source: Bloomberg | GAM, own illustration | Note: CNY decoupled from USD in May 2005 | Stress test periods: 11 Sept. 2001, recession 2002 (May 2022 to Sept. 2002), 2nd Gulf War (Nov, 2002 to March 2003), financial crisis (Sept. 2007 – Dec. 2008), euro debt crisis (Dec. 2008 to Jun. 2012), Ukraine/Russia war (Feb. 2002 to…)

1 Source: Bloomberg, as at 30 September 2022.
2Source: Bloomberg, as at 22 February 2023.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein.Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realised. Specific investments described herein do not represent all investment decisions made by GAM. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future.

The Swiss Market Index (SMI) is the most important stock index in Switzerland and comprises the 20 largest stocks from the Swiss Performance Index (SPI), which is Switzerland’s overall stock market index comprising almost all of the stocks listed on the SIX Swiss exchange. The SMI covers approximately 80% of the total capitalisation of the Swiss equity market. Investors cannot invest directly in indices. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with the Funds. Therefore, comparisons to indices have limitations.

This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

Andrea Quapp

Investment Director, Head of GAM Investment Solutions
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