The Swiss National Bank (SNB) surprised the markets yesterday when it announced the end of its currency floor, which had seen the Swiss Franc pegged to the EUR/USD at 1.2. The reason? The SNB claimed that the overvaluation of its currency had decreased since the introduction of this floor in 2011. And even more versus the USD (against which the EUR has depreciated in recent months). The SNB, however, hasn’t ruled out further intervention on the currency markets to protect the CHF. At the same time, its key interest rate has been cut to -0.75% from -0.25%.

The immediate result was a strong appreciation of the CHF against the other currencies that equalled, and even exceeded, previous highs (versus EUR & USD). We see this as a technical manoeuvre, with massive buybacks of investors’ short positions, the latter under the impression that the SNB was going to defend its currency at all costs against excessive overvaluation.

As regards equities, the CHF changes have been slightly positive for the euro investor, especially as regards healthcare and consumer staples stocks. The CHF rose more than Swiss Exchange stocks dropped.

For Swiss corporates, on the other hand, the increase in the CHF will affect revenues big time, especially those of exporters and companies, most of whose expenditure is in EUR or USD.

In our global funds and in healthcare portfolios, exposure to Swiss stocks was mightily reduced yesterday. We also sold CHF to secure earnings. As regards our European funds, the slight negative impact on Swiss watchmakers was offset by the ratchet effect on certain defensive stocks (Nestlé). We are neutral on Switzerland in most of our portfolios.

Given the yield drop in Switzerland, investors are switching to Swiss defensive names. Additionally, there has been a ratchet effect on certain segments across Europe (i.e. rise in comparable companies in Consumer Staples/Healthcare, in euro, cf. graph).

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Olivier Hautfenne

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