(The opinions expressed here are those of the author, a columnist for Reuters.)
LONDON, Sept 4 (Reuters) – This year’s pandemic shock has supercharged assets at opposite ends of the risk spectrum – but two in particular are linked by the Swiss National Bank’s ongoing battle against deflation.
The SNB has for years now been engaged in the seemingly enviable position of selling Swiss francs and buying some of the world’s leading technology stocks – banking tens of billions of dollars of quarterly profits, most of the time at least.
The reason for this long-running dance in two very different parts of global markets is that Switzerland’s central bank has been fighting a vicious cycle of consumer price deflation and bouts of excessive Swiss franc currency strength for many years.
Its preferred tools to prevent franc strength further deflating the economy have been the most deeply negative interest rates in the world alongside continual currency market intervention that has seen its foreign reserves more than double to more than $900 billion in just eight years.
The resulting expansion of its balance sheet – Switzerland’s version of quantitative easing, in effect – has seen it accumulate an array of overseas assets, mostly in euros and high-grade bonds, but a third in dollars and 20% in global equities.
And its top-five equity holdings as of mid-year are the vanguard of the global tech stock boom: Apple, Microsoft, Amazon, Facebook – stocks whose cumulative market capitalization of $7.8 trillion has climbed 50% this year amid tech demand during lockdowns and buying from the likes of the SNB.
According to SNB filings to the end of July, a third of its $125 billion equity portfolio were held in technology stocks. Some 5% of the SNB’s holdings were in Apple shares alone – its single biggest investment – and 18% of its equity stash was in the top five U.S. tech giants.
How big a player is the SNB in these stocks? The SNB was Apple’s 23rd-largest shareholder at mid-year and its 69.4 million shares would be worth about $9 billion by now. It was Microsoft’s 34th-biggest shareholder and Amazon’s 32nd.
In the second quarter alone, the SNB made $37 billion in profit on its foreign-currency investments – reversing a first quarter loss of similar size.
Curiously JPMorgan estimates that, based on equities’ constant 20% level a proportion overseas assets, through the big price swings of the first half of 2020, the SNB may even have been a net seller of stocks in the second quarter. Whether that means it was just more concentrated in tech is an open question.
Other big Western reserve managers and sovereign funds have similarly big passive-equity holdings – Norway’s giant sovereign fund is a case in point. But few hinge just on a safety play in the currency market like the SNB’s hoard.
With Switzerland on Thursday recording a seventh straight month of annual consumer price deflation in August – and for almost half the 120 months of the past 10 years – it claims it can’t afford to let the franc rise much higher on a sustained basis.
Even though the pressure has reduced on the franc against a recovering euro of late, it will likely remain a seller of the currency – and a growing technology stockholder by default – at least until a vaccine arrives to finally end the pandemic’s exaggerated investment drive to both safety and the new economy.
SNB officials, such as Vice Chairman Fritz Zurbruegg late on Wednesday, stress they will continue to resist franc strength to meet “price stability” of between zero and 2% – unlikely any time soon, given the latest inflation report.
As currency analyst Louis Curran at JST Capital points out, it has to juggle two currency pairs to do so. While the euro recovery has taken pressure off its primary focus of euro/franc, there’s a risk any broader dollar slide now catapults the franc further into five-year highs against the greenback too.
And with the European Central Bank now wary of a bout of deflation of its own, as well as excessive euro strength against a sliding dollar, speculation is rife that it may signal even more easing ahead – something that would merely add to SNB headaches as its largest counterpart meets again next week.
So where does it all end for the symbiosis between the franc and tech stocks?
One possibility is an end to the pandemic takes excess heat out of both simultaneously – reducing both the pandemic tech premium and safety bid and removing SNB intervention pressure at the margin.
But the issue pre-dates COVID and will likely outlive it. How risky is equity concentration to Switzerland and can it even resist franc strength for long without sinking interest rates deeper below zero and disturbing its important banking sector.
For the SNB, what’s clear is that the spiral of currency strength and deflation will not go away easily – a salutary lesson for the ECB in Frankfurt as it considers just how much more easing and asset-buying it may need to do over the years ahead.
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