Quantcast
Menu
Save, make, understand money

Experienced Investor

Do investors need to care about the Swiss franc?

Cherry Reynard
Written By:
Cherry Reynard
Posted:
Updated:
03/02/2015

The Swiss have allowed their currency to float freely, having imposed restrictions since 2011. We explain why it matters for UK investors.

What have the Swiss been up to?

The Swiss Central Bank surprised markets yesterday by lifting the cap on its currency. The Swiss franc is often used as a ‘safe haven’ currency at times of panic in markets: the cap was imposed in 2011 to prevent a significant rise in the currency, to prevent Swiss goods becoming prohibitively expensive and negatively impacted the country’s exporters.

What happened as a result of removing the cap?

There was an immediate near-40% rise in the value of the Swiss franc. This prompted a huge drop in the Swiss stock exchange, home to some of Europe’s top companies, including Nestle, Roche and Novartis.

Does it matter?

Apart from those planning a ski-trip to Switzerland, who will now have to find some more spending money, Hargreaves Lansdown estimates that UK fund investors have an exposure of around £4bn exposure to the Swiss stock market mainly via European funds, but also via UK Equity Income funds. It points out that Roche and Novartis are popular fund holdings with managers in the UK Equity Income sector, who can invest up to 20% of their portfolio overseas. For instance, Woodford Equity income has 3% invested in Swiss Pharmaceutical giant, Roche.

So far, the effect of the rising currency has more than offset the fall in the stock market. Hargreaves Lansdown believes UK investors would have made around 2% on their Swiss stock market holdings this morning.

Any other considerations?

A number of analysts have suggested that as the rise in the Swiss franc has made Swiss assets instantly more expensive, other perceived ‘safe havens’ – such as the UK property market – may benefit. This could push up sterling against other currencies.

Comments

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

“The Swiss stock market has been decimated this morning by the central bank’s decision to remove their currency peg to the Euro. However UK investors can afford a wry smile because the appreciation of the franc has made their Swiss holdings more valuable, despite the stock market plunge.

“European investors will now be keenly watching whether the ECB turn the money printing taps on next week, and considering what effect this will have on the single currency, and on stock markets across Europe.”

Jan Dehn, Head of Research at Ashmore

“The prospect of quantitative easing from the ECB is now triggering reactions in non-Euro countries, such as Switzerland. The Swiss National Bank (SNB) today decided to pre-empt ECB QE by cutting interest rates by 0.5% to -0.75%, while at the same time removing the 1.20 EUR cap for the exchange rate.

“Indications are that SNB immediately began to intervene to weaken the Swiss franc. Investors will now effectively be charged 75bps for the pleasure of investing in Switzerland. Alternatively, investors can put their money into a broad portfolio of Dollar-denominated external sovereign bonds issued by more than 60 less indebted, faster growing and non-money printing EM countries and get paid 5.7%. Tough decision, that one.”