A safe haven investment refers to an asset that is expected to retain its value even as the markets take a hit. This includes hard assets such as gold, the value of which investors bid up during the volatile days of the 2008 financial crisis and the ensuing years. During that time, another traditional safe haven, US Treasury bills, received so much investor attention that yields were actually negative at some points. Investors were so panicked that they were willing to give up yield and effectively pay the government so that their principal would be safe in an investment backed by the US government.
The Swiss franc is another investment that has emerged as a safe haven for investors, given the stability of the Swiss government and its financial system. The country also has a low rate of inflation and people have confidence in the Swiss National Bank, Switzerland’s central bank.
Financial Crisis Safe Haven
During the financial turmoil of 2008, for instance, the Swiss franc gained appreciably as more investors fled unsafe assets and parked their money in Swiss francs, which they perceived as safe. And as the European debt crisis gathered storm in 2011, the Swiss franc appreciated against the euro to the extent that the Swiss National Bank began to provide support for the euro to maintain an exchange rate of at least 1.20 Swiss francs to a euro. The Swiss hoped that would help bring down the value of the Swiss franc and help the country maintain its price competitiveness in the export market. To provide support for the euro, the Swiss National Bank had to buy up euros using Swiss francs that it printed.
A study by economists at the Deutsche Bundesbank (the central bank of Germany), covering the period March 1986 through September 2012, found that the Swiss franc tended to appreciate during times when a global stock market index went down in response to financial stress. This was the case even though the economists also controlled the findings for other factors that typically determine exchange rates. However, during times of low financial stress, the value of the Swiss franc depended on more fundamental factors such as inflation. This led the economists to conclude that the Swiss franc is valued as a safe haven by investors during turbulent financial times.
Swiss Government Removes Support
Swiss citizens had been concerned that their central bank was inviting hyperinflation, or a period of very high inflation, by printing more money to buy euros, even though there hasn’t been any real evidence of this. Instead, there are more signs of declining prices in the Swiss economy. Nonetheless, in January 2015, the Swiss National Bank decided that it was no longer going to provide support for the euro. This came about in anticipation of the European Central Bank (ECB)’s move towards quantitative easing, which came about in March 2015. Through issuing more euros, the ECB will buy up the government debt of various Eurozone countries. Following the removal of the Swiss National Bank support, the euro has weakened against the Swiss franc.
Still a Safe Haven
The twists and turns of the European debt crisis are not yet completely done and there is still some speculation about whether Greece will leave the European monetary union. Moreover, it is still not clear how Greece will manage its huge debt burden. Even if there is economic fallout from Greece, the world has been preparing for a while and the impact is not likely to be huge. In the meantime, the Swiss franc retains its allure as a safe haven as this drama continues to play out.
The Bottom Line
Investors like the stability of Switzerland and see the Swiss franc as a safe haven. This is likely to continue into the future unless there is some fundamental change in the Swiss system.