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.
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
2Source: Bloomberg, as at 22 February 2023.
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