Swiss Market Commentary
Swiss Market Commentary
By: Stefan Frischknecht
Portfolio Manager for the Swiss Helvetia Fund, Inc.
Stefan Frischknecht, Portfolio Manager for the Swiss Helvetia Fund, Inc. explains what effect that appreciation of the Swiss franc has had on the equity market so far and how the team is seeking bottom-up opportunities to try to exploit the market volatility that he expects will persist in the short term.
For more than three years, the Swiss National Bank (SNB) has had a cap in place to prevent the Swiss franc from appreciating beyond 1.20 francs to the euro. However, with the euro’s depreciation this year, authorities have had to increasingly intervene in the currency markets, buying euros in order to keep the exchange rate from breaching this level. This has had a significant effect on the central bank’s balance sheet: the latest disclosure, as at the end of November, shows the balance sheet at almost half a trillion francs (compared to GDP of 650 billion francs). Although the SNB would have had other options available to it to manage this huge balance sheet, on January 15, it decided to abandon the cap. As a result, the exchange rate fell to 0.85 francs to the euro and experienced considerable volatility throughout the day, to recover eventually to around parity. The currency strengthened by a similar extent against other currencies, including the US dollar.
The effect on the stock market
The Swiss stock exchange as measured by the Swiss Performance Index (SPI) lost 8.6% on the day of the announcement. The Swiss franc gained about 12% against the US dollar when the Swiss market closed, resulting in approximately a 3.5% gain for the average dollar-denominated investor. Obviously, there was a lot of disparity between individual stocks. Whether the daily move correctly reflected the new exchange rate level needs to be analyzed in terms of the transactional and translational impact on the market’s constituents, but in general we believe that the appreciation of Swiss franc had not been fully reflected in the decline of the stock market on January 15. In our minds, as a general rule of thumb, and ignoring variations between stocks: if the Swiss franc gains 15% against a bundle of other currencies, the Swiss equity market should be 15% lower on average. With a further decline of 6% on January 16, and absent further significant currency moves, the stock market seems to have adjusted almost fully for the Swiss franc appreciation over the two days.
We believe that in the long-term, Swiss equities are a good investment. Many Swiss companies are global leaders and over the last several decades, Swiss companies have successfully coped with a strengthening Swiss franc. However, in the short term, we expect exchange rate and equ ty market volatility to persist. This is both an opportunity and risk. We have started to look into trying to exploit the volatility by “bottom-fishing” in stocks that fulfill three of the following four conditions: 1) share price loses more than the overall market, 2) an already attractive valuation prior to the share price fall, 3) almost no transactional foreign exchange exposure and 4) pricing power. Any action taken will be gradual as there remain a number of important events that have the potential to have a significant impact on financial markets, such as the European Central Bank meeting on January 22. Although the Swiss franc in our view is trading significantly above its purchasing power parity, the seismic impact that the SNB’s decision had on Swiss assets, aftershocks and a further overshooting of the Swiss franc cannot be discounted. However, we are confident that mid-term we should be able to benefit from a return to levels that we believe more accurately reflect fundamentals.
The views and opinions contained herein are those of Stefan Frischknecht, Portfolio Manager, Swiss Equities, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This piece is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument mentioned in this commentary. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice, or investment recommendations. Information herein has been obtained from sources we believe to be reliable but Schroder Investment Management North America Inc. (SIMNA) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and / or strategic decisions. Past performance is no guarantee of future results. Sectors/regions/companies mentioned are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The information and opinions contained in this document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties. Schroders has expressed its own views and opinions in this document and these may change. The opinions stated in this document include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized.
About The Swiss Helvetia Fund, Inc.
The Fund (www.swzfund.com) is a non-diversified, closed-end investment company seeking long-term capital appreciation through investment in equity and equity-linked securities of Swiss companies. Its shares are listed on the NYSE under the symbol "SWZ." The Fund seeks to achieve its investment objective by investing generally in Swiss equity and equity-linked securities that are traded on a Swiss stock exchange, traded at the pre-bourse level of one or more Swiss stock exchanges, traded through a market maker or traded over the counter in Switzerland. The Fund also may invest in Swiss equity and equity-linked securities of Swiss companies that are traded on other major European stock exchanges.
Closed-end funds, unlike open-end funds, are not continuously offered. Typically, shares of closed-end funds are sold in the open market through a stock exchange. Shares of closed-end funds frequently trade at a discount to net asset value. The price of the Fund's shares is determined by a number of factors, several of which are beyond the control of the Fund. Therefore, the Fund cannot predict whether its shares will trade at, below or above net asset value.
The Fund is managed by Schroder Investment Management North America Inc.
About Schroder Investment Management North America Inc.
Schroder Investment Management North America Inc. is a unit of Schroders plc (SDR.L), a global asset management company with approximately $447.7 billion under management as of September 30, 2014. Schroder's clients include major financial institutions including banks and insurance companies, as well as local and public authorities, public and private pension funds, endowments and foundations, intermediaries and advisors, as well as high net worth individuals and retail investors. The firm has built one of the largest networks of offices of any dedicated asset management company with more than 400 portfolio managers and analysts covering the world's investment markets, offering a comprehensive range of products and services.
Schroder Investment Management North America Inc. is an investment advisor registered with the U.S. SEC. It provides asset management products and services to clients in the U.S. and Canada. Schroder Investment Management North America Inc. is an indirect, wholly-owned subsidiary of Schroders plc, a U.K. public company with shares listed on the London Stock Exchange.