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Investing in Switzerland
Posted by: Charles Sizemore (IP Logged)
Date: April 30, 2012 09:32AM
Switzerland will always have a special place in the hearts of doom mongers. For decades its franc has been the “go to” safe haven currency when the world got dicey. The meticulous Swiss gnomes have always had a well-deserved reputation as prudent stewards of wealth — and a well-deserved reputation for discretion and privacy. And importantly, their policymakers had little tolerance for inflation.
Investors with long memories will recall that the Swiss franc was the currency of choice in the 1970s for Americans looking to escape rampant inflation (and perhaps leisure suits and disco as well). Outside of gold Krugerrands, few other asset classes offered much in the way of protection.
Like shag carpet and other novelties from the 1970s, Switzerland is popular again. It’s easy enough to understand why. With the world — and particularly Switzerland’s backyard of Europe — in a prolonged period of on-again/off-again crisis, the Alpine country is viewed as a refuge.
Consider the strength in recent years of the CurrencyShares Swiss Franc Trust (FXF). As the European sovereign debt crisis really started to heat up last year, the franc almost went parabolic vs. the euro. Unfortunately, the strength of the currency was killing exports and destabilizing the Swiss financial system. To the detriment of investors and traders who had been piling into the franc as a haven, the Swiss National Bank came down like a hammer to weaken the value of the franc. Yet even after the move, many trust a devalued franc over a fragile euro or dollar. I can’t say that I don’t understand.
There is a lot to like about Switzerland as an investment haven. It is home to some of the world’s finest multinational companies, including Sizemore Investment Letter favorite Nestle (NSRGY), pharmaceutical heavyweights Roche(RHHBY) and Novartis (NVS) and engineering juggernaut ABB Ltd. (ABB), which is the major competitor to Sizemore Investment Letter recommendation Siemens (SI).
Perhaps unfortunately, it is also home to two of the largest international banks in the world, UBS AG (UBS) and Credit Suisse (CS), two institutions that gave the country quite a bit of heartburn during the 2008-2009 meltdown.
Investors looking for blanket exposure to Swiss stocks could consider the iShares MSCI Switzerland ETF (EWL). It is a basket of Switzerland’s biggest and most influential companies.
A note of warning on this ETF, however. If you buy EWL, you had better like Nestle, as the food and consumer products company makes up nearly a quarter of the portfolio. Health care stocks collectively chip in 30% as well. So, well over half of the ETF is invested in defensive (if not outright boring) sectors. This is not necessarily bad, of course. It’s just something to consider.
Nestle has been hit in recent years by rising commodity costs and the trend of consumers trading down to generic food products. Even so, the company has a fantastic foothold in virtually every major emerging market country, and I consider Nestle about the closest thing to a “buy and forget” company available today. It helps that the company pays a solid dividend of 3.5%.
Nestle recently made a splash by announcing that it would buy Pfizer (PFE)'s baby food business for $12 billion. The purchase fits well with Nestle’s existing product lines, and it further strengthens its position in emerging markets. Roughly 85% of the unit’s revenues come from emerging markets, and I would expect that number to only increase with rising incomes and livings standards.
On April 19, management announced that the company would be raising the dividend by CHF 1.95. Expect to see more of this in the years ahead. Nestle is not a “home run” stock, but it should be a steady producer for decades to come.
ABB also announced earnings in April, with mixed results. Revenues grew by 8 percent for the quarter , but new orders from China — one of ABB’s key markets — were down 35%. ABB, like Siemens, is a fine company with great long-term prospects in building out the infrastructure that emerging markets need to rise to developed-world status. But with budgets tight and markets jittery, the next year may prove to be challenging.
The Swiss banks, like their American and European counterparts, also face a rocky road ahead. Regulators are squeezing risk out of the system and banks are shrinking their balance sheets and reducing leverage — all of which is good for long-term stability. But it’s not good at all for bank profits.
Credit Suisse revealed late the month that earnings had improved over the last quarter but were down substantially from the first quarter of last year. Profits were 44 million Swiss francs, down from 1.1 billion the first quarter of 2011.
Overall, I continue to like Swiss stocks in general and Nestle in particular. But given the nonexistent yields and the SNB’s recent tendencies to aggressively lower its value, I’d stay away from currency positions in the franc.
Disclosures: Charles Sizemore is long Nestle.
Stocks Discussed: FXF, NSRGY, UBS, CS, SI, ABB, NVS,