Doug Frey connected me with an outstanding BlackRock team in Singapore. So, when he offered to help put me in touch with a group in Zurich, Switzerland, I jumped at the chance. Thanks to Doug, I was able to meet with Maria Sala and Stephan Meschenmoser at BlackRock in Zurich. Maria works on the iShares side of the business while Stephan works within BlackRock Solutions, a specialized risk management group and one Stephan described as a sort of “free radical team” within BlackRock.
Consistent with my other meetings at BlackRock, Maria and Stephan came to the table with a lot of great information and were eager to share it. They noted that the major topics that are most important to Swiss investors and the Swiss economy are: 1) currency, and 2) low yields. These topics were the foundation for the wonderful discussion that followed.
The safe haven currencies have been the US dollar (USD) and Swiss franc (CHF). The value of these currencies moved essentially to parity in 2010. CHF was also pegged, although informally, to the EUR in September 2011. While the USD can absorb massive movements of currency, the CHF is far more sensitive to sizable moves. On 15 January 2015, the Swiss National Bank (SNB) announced it would no longer hold the CHF to the EUR peg… and major events unfolded. For more detailed explanations of the events of January 2015, please review the articles linked here.
A strong currency in Switzerland, like a strong currency anywhere, offers advantages for some and disadvantages for others. Tourism has been hurt. Using the often cited (and somewhat lighthearted) Big Mac index, one can see that a Big Mac is more expensive in Switzerland than in any other country (as of July 2015). http://www.economist.com/content/big-mac-index
Manufacturing, while expected to be impacted by the strong currency, has largely been able to hold its ground. This is due, primarily, to the uniqueness of the high-end, precision products being manufactured in Switzerland.
Because of the strength of the Swiss franc, SNB has implemented negative interest rates on cash holdings. The bank took this step to try to curb the continued appreciation of the CHF. Retail investors are protected from negative interest rates and are currently at 0% yields on cash holdings. Institutions, pensions, and other groups with massive cash holdings, however, may pay up to -3% on cash holdings. And the more cash they hold, the more negative the yield becomes.
This negative yield associated with cash holdings is a significant headwind for asset managers and an important topic for investors in Switzerland. Currency hedging is also a major topic that permeates all investment strategies and portfolio considerations.
Investment managers are looking for new places for their cash to avoid the built-in negative yield. This has prompted a dramatic move into equities, particularly high dividend payers. Swiss corporate bonds have seen a significant increase in value and assets are moving into international equities.
Another yield play in Switzerland relates to the tax system. Taxes paid in advance to the government which are not ultimately owed receive a yield in the 1-1.5% range. This means that many are clamoring to pre-pay their taxes in Switzerland to 1) avoid the negative cash yield, and 2) receive a guaranteed yield from the government.
Speaking of the government, BlackRock noted that Switzerland is one of the few countries in the world that currently has a surplus. They’re not shrinking their debt rapidly, but it is shrinking… which is more than most countries can say.
Beyond yields and government debt, we also talked about the equity markets in Switzerland. They noted that the market is highly concentrated, with just 5 or 6 companies representing approx. 80% of the total benchmark index. Because of this concentration, investors pay close attention to these handful of companies as anyone of them could have a dramatic impact on the index.
Banking regulations continue to evolve in Switzerland and the investment landscape evolves with them. BlackRock noted that recent changes are effectively “industrializing” the investment approach for clients. With the fee-based approach, the more you pay, the more you get. This makes the ETF cost structure very compelling for many investors which helps explain their significant growth in recent years.
I asked about the challenges we see throughout the world, and particularly in Europe. Stephan commented that slowing momentum and stalled reforms are the real concern for Europe from his perspective. Greece continues to be an open question, but the size of the “Greece problem” makes the financial impact less material to the Eurozone. Greece is not part of (or a material part of) most of the significant benchmarks. Greece represents “a lot of noise, but the actual implication is nil.” Stephan noted that this Greek crisis is not the same as it was a few years ago as the debt has moved to public institutions.
The larger issue related to Greece is the message it sends and the precedent set with whatever is decided. The “poster children” for progress and effective reforms are Ireland and Spain. The upcoming elections and stalling reforms in many European nations are seen as the real risk in the short term. It seems that the concern is not focused on Greece, but rather its neighbor, Italy. The north/south divide in Italy is real and growing. Northern Italy is healthy and flourishing while southern Italy is falling apart. Infrastructure is still a real challenge in many parts of southern Italy. This lack of or failing infrastructure are real hurdles to growth.
Demographics throughout Europe are also an important consideration. As they explained, Europe has been and will continue to be in a “sweet spot” in the intermediate term, but they see a real demographic challenge coming in the longer-term.
Finally, we discussed the challenge of many sovereign nations in Europe who all have their own agendas and biases, but all need to agree on the monetary policy implemented by the ECB. It’s one government in the U.S. versus 26 governments in Europe. Switzerland’s independence gives it the luxury of working within just one government. This direct democracy can decide for itself and it can get things done. They cited the example of a referendum that recently went to the polls asking if the mandatory vacation time should be changed from 4 weeks to 6 weeks in Switzerland. The Swiss voted “No” and kept the vacation at 4 weeks. This illustrates the pro-business, reasonable, rational nature of the Swiss.
As I suspected when going to the meeting, the Zurich BlackRock team did not disappoint with their perspectives and insights. Thanks again to Maria and Stephan for the time they spent with me. Thanks also to Doug for coordinating the meeting. Switzerland is as impressive as the BlackRock team which serves it.
Special thanks to Brennan Staheli, Joseph Hirschi, and the Lunt Capital team for their contributions to this report.