For security, individuals, large organizations, and even nations will keep some of their surplus reserves in gold and foreign currencies. The U.S. dollar remains the primary and most trusted reserve currency, but the Swiss franc has also emerged as one of the best alternatives. This article explores why the Swiss franc is a good investment.
High Security, Low Risk, and Protection From Inflation
Worldwide, investors look for better returns and security for their invested capital. While bonds are secure, they tend to provide lower returns. Stocks and other financial instruments offer higher returns but they come with greater risks. Inflation is another factor that lowers returns. Investors look for assets that provide a balance—protection from inflation, security from risk and potential for returns. Gold and the U.S. dollar have been traditional assets, but the Swiss franc has also emerged as a potential investment option because it qualifies on all three parameters. (For related reading: Why The Swiss Franc Is So Strong)
The Development of the Swiss Franc as a Safe Investment
The following events supported the Swiss franc’s status as a safe and robust investment vehicle:
- Russia earns billions by selling oil and gas. So far, it has been keeping it securely in U.S. dollars, U.S. securities, and gold. However, sanctions imposed by the United States and the European Union on Russia caused the country to seek alternatives to U.S. dollars and securities (for more, read: How U.S. & European Union Sanctions Impact Russia). The decline in the Russian ruble has also driven Russian investors and businesses to search for safe currencies, and many chose the Swiss franc as a safe haven.
- The multi-nation European debt crisis of 2009 to 2013 saw substantial fund flow from the affected European nations to Switzerland. Countries were basically aiming to secure their currency (euro) to the Swiss franc.
- The global financial crisis of 2008, originating in the United States, also saw the transfer of funds from U.S. currency and securities to Swiss assets.
Why Is the Swiss Franc a Safe Investment?
- The geopolitical and economic ecosystem: Switzerland has a strong economic system that is comfortable with a limited yet realistic growth rate with controlled requirements. The advantage for Switzerland lies in its size. It is a small country with a limited population. In addition, appropriate exploitation of available natural resources and limited investments in production and agriculture required to support stable ongoing economic growth are the key factors of a stable Swiss economy and Swiss franc. Switzerland is the seventh-largest creditor to the United States as of June 2018, which is evidence of its stable financial position.
- No deficit: Switzerland’s income exceeds its expenses, so there is no deficit. This makes it self-reliant and stabilizes its currency. Also, the economy has no plans for any large investments.
- An alternative to gold: Inflation is a key reason investors choose gold. Gold is used as a reserve across the globe by various nations because it is perceived to be a good hedge for inflation (for further reading, see Inflation Hedge). A quick check on historical inflation in Switzerland indicates relative stability, which has led to huge investments in the Swiss franc.
Graph Courtesy: Tradingeconomics.com
- Independent Monetary Policy: The Swiss franc is not backed by gold. The Swiss National Bank (SNB) can print any amount of currency without any need for a reserve. Effectively, it is a form of quantitative easing (QE), which enables a central bank to independently control the currency rate. For instance, the European debt crisis led to a high demand for Swiss francs from the eurozone countries, which sent the Swiss franc valuation to higher limits. It made Swiss exports costly, and the franc's high valuation posed a danger to the Swiss economy. The Swiss National Bank pegged the rate of the Swiss franc to 1.2 euros and mitigated the effects of high demand for Swiss francs. In doing so, the Swiss National Bank declared, “The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.” Banks like UBS imposed a fee for large institutional investors who maintained a large amount of deposits in their accounts. These measures discouraged the rampant buying of Swiss francs and stabilized the Swiss economy. However, since the euro was pegged to franc at a fixed rate, its decline against other currencies in 2014 led to the depreciation of the Swiss franc. Again, a timely reverse action by the Swiss National Bank on January 15, 2015, to remove the fixed price peg against the euro ensured that Swiss franc retained its stability.
- Small Debt Market: The small size of the Swiss debt market adds to its economic advantage. If a large economy, such as Russia or Germany, placed its huge reserves in Swiss debt, it could effectively take control of Swiss debt. Due to the small market and no requirement for foreign funds by Switzerland, because it has no deficit, such buy-ins are impossible. This shields the Swiss economy and helps keep the Swiss franc valuation stable.
- Other factors: With strong GDP, no budget deficit, low unemployment, significant economic contribution by the financial services sector, high per capita income and as a destination for funds through secret bank accounts, the Swiss franc remains safe investment.
The Bottom Line
The Swiss franc has been popular among investors looking for a safe haven for their money. It is apparent that the Swiss economy is unlikely to move from its low-debt, low-growth ideology and will continue to remain a major banking destination. The fundamentals back the Swiss franc as a safe and stable investment for years to come.