Putting money in Switzerland is like putting your money in a bomb shelter.
As a neutral country that never takes sides in geopolitical disputes, Switzerland attracts capital from other countries to its franc in times of crisis, and this can benefit its bonds and stocks as well. After the Sept. 11 attacks, the dollar fell 10% against the Swiss franc. The franc had a longer rally of 14.5% against the dollar in 1998 in the face of the Long-Term Capital Management blowup and the Russian debt default.
There are mutual funds built around this idea, including the five-star
(PRPFX), which over the years has garnered a lot of attention for owning Swiss government bonds and gold in several different forms.
One aspect of neutrality, and perhaps maturity, is that the economy is very steady: It's characterized by slow growth (annual growth has ranged between -1% and 2.5% for the last five years), low unemployment (close to 4% for several years), and low inflation (CPI growth has not exceeded 2% in more than 10 years).
As you might expect with such a slow-growth, mild-cycle type of economy, interest rates are very low, which, in part, reflects how little fear and volatility are priced into the market.
Source: Swiss Central Bank
You might think that this would mean weak stock performance, but that hasn't been the case in dollar terms. In the last five years, the
has ended up in the same place as the Swiss Market Index, but the
iShares MSCI Switzerland Index Fund
has outperformed dramatically because of the dollar's weakness against the Swiss franc.
There is another interesting and useful aspect to the Swiss franc. Older investors may remember the "Ted spread," which assessed anxiety by comparing the implied interest rate spread between U.S. Treasury bills and eurodollar futures. The Ted spread has become less important recently because of the euro.
In the past few years, many forex traders have used the Australian dollar and the Swiss franc in a similar manner as the Ted spread. The idea is that the Aussie does well when there is less apprehension and the Swiss franc does well when there is more apprehension or uncertainty.
The last month provides an excellent example of this effect.
Index of Anxiety
As news broke of Iran's latest move regarding its nuclear ambitions, the Aussie fell swiftly; now that the shock has worn off, the selloff has partially unwound. The pair may have also priced in the conflict in Nigeria as well.
Does this matter? Well, the Aussie turned higher before the U.S. stock market started to recover from last Friday's decline. I believe that certain parts of the bond and forex markets can sometimes be short-term indicators for equities.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. At the time of publication, Nusbaum had no positions in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
to send him an email.