Immediately after the gigantic shock on the Swiss Franc due to last week’s decision of the SNB to remove the floor on the EUR/CHF exchange rate, the value of the SMI (Swiss Market Index) dropped by more than 10% due to pessimist expectations about exportations. But is this really bad news for the Swiss economy? Well, contrary to what most people think, I rather consider this number as a very good sign.
Of course, if you calculate the value of your assets in terms of Swiss francs, you just lost a lot of money by holding Swiss stocks. But if you calculate your returns in terms of euros, dollars or actually any other currency, you just earned a lot of money in a few hours! Indeed, the Swiss franc gained a considerable value in that same period, which far offsets the lost value on the Swiss stocks. If the SMI price was showed in terms of euros or dollars instead of Swiss francs, investors would have actually observed a significant increase in value.
The graph below shows the value of the SMI (in blue) and of the euro (in red), both expressed in Swiss francs. As we can see, both assets started at the same point, but for every moment after the shock, one franc invested in the SMI was worth more than one franc invested in the euro.
If investors really expected the new exchange rate to have ravaging effects on Swiss corporations, then the SMI should have lost even more value than the euro. “But this is because the shock also increased the value of other European stocks”, will say some people. Well, even if you discount for that effect, as a European or American investor you still earned money by holding Swiss stock on January 15.
While this effect is not true for every company, it is even stronger for some of them. The value of Nestlé shares for example, expressed in euros, increased by 7.1% between January 14 and January 15.
How is that possible? An expensive franc is clearly not going to help firms’ exportations, so how could they have gained value? I see two different explanations:
- The market is not efficient, and did not fully incorporate the effects of this shock yet (i.e. the Swiss stocks are currently overpriced). Despite my belief in a mostly efficient market, this is not a completely unrealistic explanation notably because an important share of the Swiss stock is hold by Swiss investors, who are much more risk-lover when it comes to Helvetic risk than international investors.
- Swiss corporations hold an important quantity of Swiss assets (Swiss francs, infrastructure in Switzerland, etc.) that gained a lot of value due to the shock, and are worth more than the decreased future profits. By holding a stock in a Swiss company, you also own a fraction of these assets.
It is also important to remember that the demand for Swiss goods is far from perfectly price elastic, especially since most of them are already luxury products, and that the margins in Switzerland were already extremely high by international comparison. So even if the demand and the margins will decrease for these products, the magnitude of that effect might be considerably lower than it would have been in most other countries.
What I think is important to remember from that article is that a gain or a loss is always relative to a referential, and that most people will use the referential that best fits their need to describe their financial situation.
If you have a diversified portfolio, you will always hold both euros and Swiss francs. So the pessimist will tell you he lost five million Swiss francs in that operation, and the optimist that he won five million euros. But remember that it only depends on the referential you use to measure your wealth, and that it doesn’t make especially more sense to use as a referential a money only used by eight millions people, even if this is the country where you live.