the swiss guard's surprise

The surprise move by the Swiss National Bank (SNB) to rein in the Swiss Franc to the Euro on 6 September stunned markets and investors alike. The SNB has enforced a lower limit of 1.20 for the EUR-CHF exchange rate, stating that it was willing to "enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities", signalling a determination to keep its currency from being overly-strengthened. The Swiss Franc had seen its value rise against the Euro by 12.75% on the 5 September prior to the announcement by the SNB as investors viewed it as a safe-haven currency as compared to the Euro with the sovereign debt crisis clearly being a key driver of capital flows into the nation.

an instant discount

Following the announcement of the price floor, the Swiss Franc in a dramatic swoop dropped almost 9% as investors were caught off-guard by the SNB's actions. However, taking a look at the Swiss equity market, the index only rallied by 4.36% on 6 September, indicating that markets have perhaps failed to fully price in the immediate discount arising from the lower limit set by the SNB (Chart 1). This apparent market inefficiency leaves investors with additional potential upside to be gained on-top of the regular potential upside from earnings growth, dividend yield and valuation multiple expansion.

Chart 1: instant discount not fully priced in

translating Earnings

With the Swiss Franc now devalued, the earnings of Swiss companies from overseas, will have to be revised upwards, a result which was cheered by businesses based in Switzerland over the past week. With 1 Euro or 1 USD now worth more Swiss Francs as compared to prior the devaluation, the devaluation will boost the earnings of companies which uses Swiss Francs as both their transactional and reporting currency. Furthermore, a lower currency will enable tourism and Swiss exports to be more competitive and attractive than before, boosting exports, revenues for companies and as a result, Swiss GDP (which has shown signs of a slow down amidst a decline in global trade).

Although we do not carry a single country fund that focuses on Switzerland's equity market, several of our funds focused on the European regional market have portfolio allocations ranging from 10-15% to the Swiss markets. Our recommended fund HENDERSON HZN PAN EURO EQ A2 EUR which has a 15.8% exposure to Switzerland through global powerhouses such as Roche and Nestle (factsheet issued in August 2011), has almost double the Stoxx 600's exposure of 8.41% as of 8 September 2011. Investors who believe that the SNB can successfully devalue the Swiss Franc might like to consider our recommended fund.

However, in light of the changes to our investment outlook following our review on the market, investors could rethink their portfolio strategy or rebalance their asset allocation to equities in other regions and countries , such as the Global Emerging Markets, which have better prospects. Given that equities are valued cheaply given the market rout that has taken place, we believe that the potential upside for this asset class is attractive and should be seriously considered.

Recommended Fund:

HENDERSON HZN PAN EURO EQ A2 EUR

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