The SNB created an earthquake this week by abolishing the floor rate of 1.20 with the euro. The EUR depreciated by 18% against the CHF while the Swiss stock market experienced a historic crash (down 13% over the week). After the moment of surprise, if we take a step back we can ask ourselves if something has fundamentally changed, or if we are simply falling back into normality.
Indeed, from a historical point of view we know that:
- The CHF is a safe haven currency, a bit like the equivalent of gold for currencies.
- The dollar is a structurally weak currency, even if in the short term it may experience jolts of pride.
- As for the euro, we have less perspective, but we already know that it is a "catch-all" currency, an amalgam that has never really worked until now and which seems to have drawn more from its Latin ancestors than from the Deutschmark.
- The stock market rises when currencies devalue, and vice versa.
The Swiss stock market has certainly devalued, but at the same time the CHF has become more expensive. The real intrinsic value of the securities has not fundamentally changed, even if it is true that the outlook for export industries has darkened. The investor who holds Swiss shares finds himself with investments that have fallen in their currency but whose currency has become more expensive. This is quite easy to understand for an investor whose benchmark is not the CHF, it is a little less so for the Swiss investor.
For the latter, there are two scenarios, which are not mutually exclusive:
- He invests in Swiss stocks. In this case, in one week he has just lost an average of 13%.
- He invests in foreign stocks. As the CHF has taken the elevator, the other currencies have depreciated by 18% for investments in euros and by 16% for investments in dollars.
That being said, the Swiss investor, although having suffered a loss in his currency of approximately 15% (depending on the allocation of his assets in the various currencies) also finds himself at the head of a portfolio in CHF which is worth more compared to other currencies (in a proportion equivalent to the loss he suffered there). In short, he is a little poorer in CHF, but still just as rich compared to other currencies. Better still: he can use his cash reserves in CHF as well as his current and future income to buy foreign securities at a good price.
In the end, we are only returning to an old normality, the one that prevailed until August 2011. It is rather the 4 years that followed that were not normal. We therefore find the laws of the market and the basic principles that prevailed at the time are regaining their rightful rights. Investors who continued to follow them despite the fixing of the floor price by the SNB are certainly doing much better today than the others.
For more details, refer to the following "old" articles which are still relevant today:
http://www.dividendes.ch/2011/12/actions-en-devises-etrangeres-et-risque-de-monnaie-12/
http://www.dividendes.ch/2011/12/actions-en-devises-etrangeres-et-risque-de-monnaie-24/
http://www.dividendes.ch/2012/01/actions-en-devises-etrangeres-et-risque-de-monnaie-34/
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And yes, which proves that attempts to go against the logic of a market always end up failing. What worries me more is the massive QE in the US as well as in Japan and soon in Europe… These are indeed attempts to go against logic… And the backlash will come sooner or later…
It's always the same... we've already experienced this after the dotcom bubble burst... we found ourselves a few years later with subprime mortgages, then just a little later with the budgetary problems of spendthrift states.
QE only postpones the deadline. Sooner or later you have to pay. And it is better not too late, because the bill is getting heavier and heavier.
Hello Jerome,
Abolition of the minimum exchange rate by the SNB, what does that change?
Non-resident in Switzerland, I make the same analysis as you - I would add
Excerpt from today's Temps: E. Widmer Schlumpf
"Switzerland and its companies can get by with a euro at 1.10 francs," she explains to Sonntagsblick, confident that the exchange rate will stabilise at this level. >
Likely, even if it will have a cost for Switzerland
However, I imagine that the abrupt decision taken by E.WF was influenced because it is not predictable to this day, to know the decision that the European Finance Commission will take in monetary matters regarding the euro - on January 22, 2015 - At 1.20 we could predict an uncontrollable influx of Euro to be changed into CHF
It should be noted that it was not Widmer Schlumpf who made the decision, but the SNB, independently.
Companies can perhaps get by with 1.10, but we can only regret that it is so abrupt. And above all, nothing says that 1.10 will be the new "standard"... In any case, in the long term, nothing argues for an adjustment at this level.
Jerome,
We often agree on how to approach investing, but on this article, I completely disagree with you, let me explain...
. the € was built for and by the Germans, it was a strong currency for a long time. What has changed is that the risk of weak countries leaving the € zone is real and would create a precedent that scares Berlin. So, Merkel is reviewing her position because Germany knows how much Europe benefits it.
. we can bury our heads in the sand and say that nothing has changed. But the reality is that we have lost 16% of our assets in a few moments… Anyone who wants to take advantage of the strength of the Franc can only do so by leaving Switzerland because let's not kid ourselves, prices will not fall or will fall very little in the confederation. Normally, exchange rates should have a quasi-neutral effect, but in Switzerland, prices rise when the Franc falls and do not move when the Franc rises. This can be explained by various factors: the Migros-Coop duopoly, profiteering multinationals, a market that is still quite closed…
. by stating that you can use your cash to buy foreign assets, you are making a serious error in analysis because these assets are always valued in the same way, so it amounts to speculating on the exchange rate alone. A European share, for example, has not become less expensive in terms of P/E.
. we must also talk about export companies and the tourism industry. These sectors are going to be affected very strongly.
. the SNB's communication has been incredibly bad from 2011 to today in this affair. Too long to explain, but this point is almost unanimous to the point that it can dance on its head now without moving the markets.
. I will conclude by saying that generally speaking, the Swiss are too confident in their country, their belief that they will be able to continue to enjoy their lucky star for a long time to come is dangerous. Letting their currency rise as it is now is perhaps the straw (or the bucket?) that will make the cup overflow... The world has changed, is changing and the Swiss island that resists everyone is untenable from my point of view.
Furthermore, we should also spare a thought for those who are suffering from a Franc that has gained 60% in a few years against the €: foreign borrowers, workers, SMEs, etc.
Hi Thierry. I don't understand how your opinion is different from mine? I am completely in line with what you just wrote. We "lost" 16%, which we had artificially gained in September 2011. For me, nothing has changed, the market has finally regained its rightful place. The difference is that today, as a Swiss investor, we can use the relative strength of the franc to buy foreign stocks at a better price. Of course, these have not become cheaper in terms of P/E, we agree on this point. It is not a question of speculating on the currency, but on the contrary of always taking the exchange rate risk as one of the points to take into account when buying a stock.
Hello Jerome,
For foreign securities, we agree that the exchange rate risk is lower today than before the 15th.
I do not agree, however, that we had an artificial gain, I say that we have an artificial loss today. Indeed, the Franc is today significantly overvalued. The floor rate limited this overvaluation to an acceptable level and the SNB manipulated the exchange rate to counter an inverse manipulation. This was not criticizable in a world where all countries manipulate their currency with impunity: China and its very largely undervalued Yuan, the USA and its continuously running printing press, Japan and its negative rates (formerly), Europe now… The SNB puts Switzerland in a very dangerous position by exposing it to speculation on its currency and it has also cast a notorious discredit on the central banks for which trust is essential and on the €, the main currency of Switzerland's customers. We can say that the SNB has lost a battle in the currency war. Now I dare to hope that she has not lost the war and that she will continue to intervene in the markets by buying currencies...
The damage to the Swiss economy should also be taken into account: loss of jobs, possible drop in wages (likely if the Franc exceeds parity with the €), bankruptcies, relocations, etc.
But the most serious thing for me is that Switzerland has just tarnished its image and that many foreign companies will now think twice before coming to set up here.
Yes, you are right, it is also an artificial loss today of course, always due to a speculative aspect. In the long term, however, we should not expect the CHF to weaken much compared to today. We can even expect the opposite. So we might as well be aware of this and invest in securities that provide some protection against exchange rate risk (Swiss companies with little exposure abroad, domestic market, and/or foreign companies that benefit from the weakness of their own currency, export-oriented).
Yes, the SNB has lost a war. One that should not have been lost. And the old demons of the Swiss economy, which is very export-oriented, are coming back at a gallop. Luckily, I changed my professional sector some time ago and I am no longer under the pressure that there was before 2011 for exports. It is clear that the coming times will be tough for these sectors.
Glad to hear you've changed industries. Good luck.
Jerome,
As an investor in 100% Suisse shares, I have just suffered a big fall! But at the same time it leaves me an excellent door to invest at a low price and thus increase our dividends. My only fear at the moment is how much the dividends will be in 2016 for the year 2015 considering that our companies will have difficulties to export and generate profits.
Jerome, I have been following your blog for some time and appreciate your analysis and ideas.
Best regards,
retiredat50
Thanks retiredat50!
glad to see a new blogger arrival on the swiss scene 😉
It is clear that Swiss companies focused exclusively on exports will have difficulty.
I am thinking especially of the machinery industry.
Sir,
If you are investing for the long term and you will hardly need the income from your investment for many years, there is no problem for you. Continue to invest according to a determined strategy. Every crisis has an outcome. In this case, it is the sustainability of the €, either the problems are solved and the currencies will regain their values, or it disappears and we return to national currencies with, for example, a strong Mark and a weak Lira.
I just wish you to work in a sector with little or no exposure to exports or tourism.
Yours sincerely,
Thierry.
Good morning,
Exchange rate 1.20 CHF/Euro
According to what we can read everywhere, this rate was fixed by the BNS to protect itself from an influx of euros but
It also seems to be accepted that this rate does not reflect economic reality and that the CHF should return to a rate close to 1.10
In this case, for a Swiss investor, would it not be an appropriate time to change CHF into EURO?
All this remains very theoretical. Perhaps the CHF is currently too expensive and will return to 1.10.
It is true that we can take advantage of this situation to make targeted purchases of foreign securities. On the other hand, I would not keep foreign cash (USD and EUR) in the long term. These currencies have too much of a tendency to weaken.
It may be wiser to bet on currency volatility, in short to adopt a non-directional strategy. But I am not an options specialist, so I cannot suggest examples.
Good morning,
with a substantial portfolio invested in CHF, EUR, USD and GBP, I suffered, like many Swiss people, the "double whammy" or "double Kiss Cool effect" - if you prefer - where my securities in CHF (my reference currency) fell and where my securities in foreign currencies had a negative consolidation/translation effect.
I do not dwell too much on the past and on the question of whether the SNB has good communication or not, but I think about how to fix the problem or take advantage of the situation. For me, there is no doubt that we must take advantage of such a situation and a possible exaggerated reaction of the markets. Such a situation has not presented itself to us since March 2009.
Here is the approach I took as soon as the markets opened on Monday January 19 (you must of course have a certain firepower, i.e. some cash set aside):
1) Purchase of European securities (GBP, EUR) which were either on my watchlist or which were already in the portfolio but in negative (in local value). The purchase costs are now more affordable.
2) Arbitrage of listed Swiss real estate companies (Allreal, Mobimo, etc.) to free up cash and strengthen my position on Swiss gems that I have in my long-term portfolio and that have suffered due to their significant export share (Inficon, Bucher, Comet, Bossard, etc.). Exports in decline with rising unemployment can put pressure on real estate prices. Finally, it's not as simple as that and not immediate, but it's a question of perception and expectations of investors who can liquidate this type of asset.
3) Non-conversion of dividends received in foreign currency into CHF as long as the CHF stagnates at a historically high level (but reinvestment in the currency in question). This may last for some time!
4) Return to real estate securities when investors abandon them for more cyclical securities.
5) Continue to collect my dividends and do nothing else. “I don't work for money but money works for me” 🙂
There you go. The future is of course uncertain but I am sure that I am not going to let a great opportunity pass me by...
Birdie
Hi Birdie. Good to read you again. I recognize your opportunistic contrarian side there.
Personally I haven't pulled the trigger yet, I'm still in observation mode, but it's possible that I'll be tempted by some US or European opportunities.
Good evening,
Having cash in euros, I am looking at bare ownership SCPI shares