The Swiss Fondue

Swiss National Bank’s decision to reverse its August 2011 decision – that had established a floor for franc against the euro at 1.20 level – sent the waves of ripples across the global markets. The franc immediately appreciated 14% against the euro and 13% against the US dollar and the British pound. The Swiss Market Index (SMI), made up of 20 of the largest and most liquid stocks, declined 9% on January 15th, 2015.


SMI was on a continuous uptrend since bottoming in mid-2011. It briefly breached the uptrend line in mid-2014 but now it seems to have decisively broken down. Off course, other market indices are also feeling the pressure so far in 2015.

By constitution, SNB is required to act in the interests of the country as a whole with the primary goal of ensuring price stability and creating appropriate environment for economic growth. There is no doubt that today’s decision is going to affect both the price-stability or the so-called inflation/deflation scenario and the overall economic environment.

A 14% currency appreciation will make Swiss export less competitive and will reduce import prices too. To maintain export levels, Swiss exporters will have to reduce prices. But the reduced import prices may not completely offset the reduction in sales prices. Hence, this may put a downward pressure on the wages and upward pressure on unemployment exacerbating already falling inflation situation.

Swiss_infl-chart-3-1-50Chart from

Unless Switzerland’s inflation situation reverses there is a very likely chance that the Swiss franc will remain strong (also see Rudi Dornbush’s Overshooting Model). Swiss economy is heavily influenced by the bigger Euro Zone economy and the ECB is poised to announce some sort of QE measures later in the month, which will put more upward pressure on the franc. Now that SNB has eliminated the floor, EUR/CHF rate will be greatly influenced by the free market dynamics. This means that maintaining the price-stability and creating an environment for economic growth is going be quite challenging for SNB. Similarly, country’s exporters will also be challenged by the dynamics of input and output prices, wages and monetary environment.

Switzerland has a population of 8.1 million and GDP of CHF603 billion. In 2013, it exported CHF 201 billion worth of goods or 33.4% of GDP and imported CHF 178 billion of goods or 29.5% of GDP. Thus the total Swiss foreign trade forms 62.9% of the GDP with a trade surplus of 3.8% of GDP. Note: Import and export data does not include gold, silver or other precious metals trade, which was approximately between CHF 13 billion and CHF 14 billion in 2013 with, roughly, equal amount of export and import.

For a land locked country with small area and little natural resources, Switzerland exports significant amount of its GDP and naturally it imports a lot too. A significant fraction of the import is value-added and then exported back. Hence the exchange rate impact is not going to be straight forward and different sectors will fare differently based upon their export/import components.

Also, trading partners and the underlying currency used for export/import affect the trade too. Using the 2013 data , Switzerland exported 18% of its GDP to EU and imported 22%. The next big currency block was US with 4% of exports and 2% of imports of the GDP. Followed by UK, China and Russia at 1% for exports and imports.

The rising currency will put pressure on the sales and profitability of Swiss exporters. So logically their stock prices will decline on the Swiss exchange but may rise on the foreign exchanges depending upon the exchange rate.

Switzerland’s biggest export sectors are:

Sectors / Industries % of Export
Chemical and pharmaceutical 40.3%
Machinery & Electronics 16.6%
Watch Industry 10.9%
Precision Instruments 7.3%
Metal Industry 6.0%
Jewelry 4.3%
Food, beverage and tobacco 4.1%
Motor Vehicles 2.6%

A significant fraction – 23.2% – of Switzerland’s import consists of semi-finished products. Here are biggest import sectors:

Sectors / Industries % of Import
Chemical semi-finished 5.9%
Metal Based semi-products 4.6%
Watch components 1.1%
Electrical and Electronics semi-finished 2.2%
Raw Materials 0.9%
Other Semi-finished 8.4%
Consumer Goods 44.9%
Capital Goods 23.5%
Energy Source 8.0%

Analyzing export / import amount for these industries it is clear that any drop in import prices (due to stronger franc) will not give much relief to exporters to maintain the same level of profitability after taking into account the lower selling prices (due to stronger franc) in the countries importing their product.

For the U.S. investors, Swiss companies listed as ADRs on US exchanges offer another kind of opportunity. ADRs represent the price of the stocks deposited in the home country with a U.S. bank. They reflect the valuation of the company but they also carry exchange rate differential. Swiss market, and hence the stock prices of Swiss companies, declined after SNB’s decision. The stock prices of ADRs did not.

There are more than 50 Swiss companies trading as ADRs on the U.S. OTC markets but few big companies listed on major U.S. exchanges. Following is how these big companies fared on two stock exchanges on January 15th, 2015.

 Company  Ticker  % Change in U.S. price   % Change in Swiss price
ABB Ltd. ABB 3.18% -8.98%
Credit Suisse Group AG CS 1.80% -10.99%
 Logitech International S.A. LOGI 4.98% -7.78%
 Novartis AG NVS 4.13%  -8.68%
 Syngenta AG SYT 4.44%  -8.67%
 UBS Group AG UBS 0.30%  -11.74%

Off course, U.S. exchanges opened after SNB’s announcement so these stocks were already reflecting the declines on the Swiss stock exchange. But this saga is far from over and we will write more.

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