Invest Snapshot: Swiss Central Bank removes cap on franc

Background:

Switzerland’s reputation of financial stability turned it into a safe haven for European millionaires at the start of the Eurozone crises in 2011.  Money poured into it from elsewhere in the Eurozone as investors sought a safe place to park their cash.

With everyone wanting their money in Switzerland, the Franc exploded in value. This resulted in high value Swiss exports to become less competitive abroad.

So in the summer of 2011, the Swiss National Bank announced a cap on the exchange rate between the euro and the franc. The euro wouldn't be allowed to weaken below 1.20 against the franc. The bank maintained the cap by printing francs on a regular basis to buy euros in the market to ensure that the currencies wouldn't breach that line. The cap held without a hiccup for more than three years.

With the ECB planning to implement monetary stimulus within the next month which may push interest rates down, the euro is set to weaken further.  It is therefore a big risk for the Swiss National bank to keep on purchasing assets (euros) which are expected to lose value.

On Thursday without any hint that it was coming, the SNB removed the cap, causing the franc to soar against other currencies.

Looking forward:

In a note from Société Générale, currency strategist Kit Juckes explains that the SNB is not giving up on their mission to keep the franc relatively weak, but is rather just changing tactics. Juckes believe further intervention is likely, but that this would rather be in USD/CHF than EUR/CHF.

 Whenever there are gigantic moves in any market, you can expect that a lot of people just lost a ton of money. There are other big ramifications in eastern European countries, where many people have mortgages denominated in francs. Those mortgages just got a LOT more expensive.

Possible effect on South African investors:

With trading conditions set to deteriorate in eastern Europe, some big industrial companies from South Africa might be impacted. Some of the best performing shares of 2014 with operations in eastern Europe are:

• SABMiller-derives around 32% of turnover from Europe
• Steinhoff-Derives around 65% of turnover from Europe
• Naspers-Derives around 10% of turnover from Europe.

Other companies such as Medi-Clinic and Richemont have big operations in Switzerland and should also be impacted by a stronger franc. A stronger franc should aid Medi Clinic which derives about 50% from its Group revenue in Switzerland. These profits are then converted to rand. The stronger franc will mean that Medi Clinic will report more rand’s for every franc earned.

In the case of Richemont, the picture is not as pretty. Richemont incurs a significant portion of its costs, around 40%, in Switzerland, but only 5% of sales are derived there.

Impact on Discovery funds:

Discovery has exposure to Richemont, Naspers and Steinhoff through the following Discovery Single Manager Funds:

	Steinhoff	Naspers	Richemont
Discovery Balanced	5.60%	5.30%	0.40%
Discovery Cautious Balanced			0.13%
Discovery Moderate Balanced		4.30%
Discovery Best Ideas			6.50%
Discovery Dynamic Equity	4.41%	6.50%

These companies are currently owned by many South African funds and therefore shouldn’t impact the Discovery funds’ performance too much relative to its peers.