Swiss Tsunami
Pfäffikon SZ, Switzerland – Where a small country can play a big role. The shock among currency trader and investors was great when the Swiss National Bank (SNB) decided to release its peg to the euro. The result was the exchange rate tumbling below parity and the stock market in Zurich losing 8.9%. “The SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified,” said the SNB. For three years the Swiss have more or less pegged their currency to the euro, but this has now come to an end. Moreover, the SNB earned CH 38 billion in 2014 with trading currencies and other investment activities.
Angry
The reactions are predictable. Speculators are angry and surprised. Thomas Jordan, the president of the SNB, isn’t listening. He didn’t even inform Christine Lagarde from the IMF. During a press conference he explained once again what the mission is of the SNB; price stability for the long term from a Swiss perspective. Decisions as these are always made unexpectedly so as not to play into the hands of speculators. The reaction which follows is usually excessive and generally stabilizes within 6 months. With that, Jordan is right on target. In Poland, first level thinkers thinking they were being clever with a Swiss mortgage, have taken a hit.
Tsunami
Mr. Hayek – CEO of Swiss watchmaker Swatch – is in high gear and is calling the SNB’s action a “Tsunami” for the Swiss industry. The tourist industry is also shocked as this will negatively impact tourism. For the average European Switzerland has once again become more expensive. But the industry is forgetting that this is due in part to the terribly performing European Union, and not the SNB. An interesting reaction reaction from the commercial banks in Switzerland yesterday was that no euros could be withdrawn from ATMs.
Timing
I believe that the SNB has made the right decision. Their timing is notable, as the ECB will convene next week and will most likely commence with monetary stimulus. The Swiss are not on board and are just in time to decouple their currency. In addition there is the case of Greece, which in Swiss eyes is a risk for the stability of the euro. The Swiss have seen their currency decline which, with regards to the dollar, is no longer justifiable. The SNB would like to be more flexible in the turbulent times ahead, which I fully understand. It remains for the mountain state to come to terms with the temporary negative effects. History shows that the their monetary policy has served the Swiss well, in stark contrast with the stalling and meandering of the EU.
Opportunities
The negative Swiss interest rates recently drew investors to decent Swiss dividend stocks. It is then not surprising that the Swiss stock market showed outstanding performance last year. After yesterday the stock market in Zürich is back at the drawing board. But for many of the underlying businesses, not much has changed. The negative market reaction is excessive and the currency effect temporary. For Swiss oriented investors, the current situation offers many opportunities in one of the most respected financial centers of the world.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
