Of Swiss francs and Central Banks

By Retz Reeves

In 2014, international investors bravely contended with geopolitical firestorms, intimidating Ebola, economic malaise, falling oil prices and a strengthening dollar. Surely, we thought, 2015 would be easier, but international markets continued to fight the same headwinds that were exacerbated by the terrorist attacks at the office of the newspaper Charlie Hebdo and elsewhere in Paris on January 7th. The ACWI-EX US benchmark was down year-to-date over 4% by the end of the day.

But as cries of “Je suis Charlie” reverberated throughout the globe and world leaders marched in solidarity in Paris, European citizens rallied – and so did international markets.

Then, on January 15th, the Swiss National Bank (SNB) discontinued the minimum exchange rate of 1.2 CHF (Swiss franc) to the euro. The SNB had previously put in place the euro “peg” when the Swiss franc was overvalued in order to keep Swiss exports competitive, protect the Swiss economy and decrease uncertainty in financial markets. With the peg, however, as the euro dropped against the dollar, so did the Swiss franc – to unsustainable levels.

Do I wish they had unwound the peg over time, giving companies and investors time to adjust? Yes, of course! Despite my frequent visits to Switzerland, however, I was not consulted on the matter.

As a result, large-capitalization (cap) Swiss stocks dropped circa 10% and small cap stocks dropped even more in local currency as investors realized the strengthening CHF would mean less earnings when Swiss companies repatriated profits generated in other currencies. Many ADR equivalents of Swiss stocks rallied as the dollar fell versus the franc, however, offsetting the drop in share prices in local currency. As such, Frigate Folio, which has a considerable weighting in Swiss ADRs, benefitted from the strengthening franc – and was in positive territory year-to-date as of January 20, 2015. The Treasure Harbor Folio, with less Swiss exposure, and Yellowtail, containing smaller cap companies, were still in negative territory through the same period, however.

What’s next? Well, the dramatic movement in currencies has to be viewed through the eyes of individual companies and many questions need to be asked, including: What is the geographic make-up of profits? How well are costs and revenues matched? Does the company hedge? And what about euro-based companies – will this development help or hurt them?

As we progress through earnings season I anticipate companies will try to address currency movements and other relevant events. As usual, I will be watching a lot of earnings webinars and listening to numerous conference calls. That said, given those unexpected actions of the SNB, I felt like checking up on some things in person this quarter, and have already set up meetings in Switzerland, Paris and Germany in March to explore further the impact of the currency moves and other pertinent investment issues.

So wish me luck as I plan my wardrobe, pack my bags and wind my way through immigration throughout Europe – which is not likely to be too much fun. I’ll bring back stories and photos and, hopefully, some good investment ideas, too.

Don’t hesitate to write or call or with questions. In the meantime, I wish for you a happy, healthy and prosperous 2015, and I thank you for investing along side of me.

– Retz

About Retz Reeves

Portfolio Manager of the Frigate and Treasure Harbor Folios.
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