As of 11:20 GMT the FTSE 100 was down 0.55 per cent to 6,353.12, having fallen by as much as 1.41 per cent earlier in the session, while Switzerland’s SIX had plummeted 8.91 per cent to 8,378.50. The Euro Stoxx was down 0.62 per cent while individual markets such as France’s CAC 40 were also in the red.
The SNB brought in a minimum exchange rate of 1.2 Swiss francs per euro three years ago after strong inflows into the franc, considered one of the strongest safe haven currencies, caused it to appreciate dramatically.
Analysts now expect the Swiss franc to strengthen once more against the euro, which would bode ill for the country’s equities as it would make Swiss exporters less competitive. Below is a list of the 10 European funds with the highest allocations to Swiss businesses.
Source: FE Analytics
In a statement this morning, the central bank said it was discontinuing the currency ceiling as it believes “enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified”.
“The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm,” the bank said.
“While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.”
In addition the SNB slashed its deposit rate to -0.75 per cent, down from -0.25 per cent while shifting its target range for the three-month Libor further into negative territory, to between –1.25 per cent and −0.25 per cent, from the current range of between -0.75 per cent and 0.25 per cent.
It made these moves to ensure that the scrapping of the minimum exchange rate does not lead to “an inappropriate tightening of monetary conditions”.
Jennifer McKeown, senior European economist at Capital Economics, said: “The SNB’s decision to abandon its exchange rate ceiling is surprising and we suspect that the bank will soon need to intervene against the currency to prevent a further rapid appreciation against the euro.”
“We see current strong upward pressure on the franc against the euro mounting, particularly in the likely event that the ECB announces quantitative easing next week. A further appreciation against the euro could have serious implications for the economy given that Switzerland has typically sent nearly half of its exports to the eurozone and about 10 per cent to the US.”
Switzerland has been a popular destination for more defensive European investors as it is not a member of the beleaguered eurozone, is widely regarded as a safe haven and is home to a number of highly rated pharmaceutical giants.
The MSCI Europe ex UK Index has a 20.77 per cent weighting to Switzerland and FE Analytics shows 21 funds in the Investment Association universe have a greater allocation to Swiss equities. All these funds reside in the IA Europe Excluding UK sector.
As the table on the first page shows, Matthew T Barrett’s €14.8m MFS Meridian Continental European Equity fund has the greatest exposure to the county’s stock market at 28.30 per cent of assets. Among its top 10 holdings are well-known Swiss names like Novartis, Roche, Nestle and UBS.
Since Barrett took over the three FE Crown-rated fund in March 2009 it has just outperformed the sector with a 104.38 per cent rise. Over the same period, the MSCI Europe ex UK Index advanced 94.63 per cent.
The two crown-rated Aberdeen European Equity fund follows with its 25.3 per cent in Switzerland. Roche and Nestle appear in its top 10. Over the seven years of the past market cycle, the fund has returned less than half of both its average peer and its FTSE World Europe ex UK benchmark with a gain of 9.58 per cent.
The third fund on the list, Simon Rowe’s £937.5m Henderson European Growth portfolio, is the best performer of the three highlighted here. The four crown-rated fund is up 111.44 per cent since the manager joined the portfolio in April 2009, compared with an 86.04 per cent return from the peer group and a 77.16 per cent rise in the FTSE Europe ex UK.
Performance of funds vs sector over 5yrs
Source: FE Analytics
Investors must bear in mind, however, that FE Alpha Manager Richard Pease was on the fund between July 2001 and October 2014 but has since left Henderson to join Crux Asset Management.
Henderson European Growth is first quartile over one and five-year periods and second quartile over three years.
It is also a member of the FE Research team’s Select 100 of preferred funds thanks to its long-term approach and preference for strong companies that sell their products globally.
“Many of the fund’s biggest positions are now looking expensive, which limits the potential for growth. However, the fund should protect better than its rivals if the situation in Europe deteriorates,” the FE Research team said.
“If the European Central Bank prints more money it could lag behind the more aggressive European funds. The fund stands to do well when the emerging markets start to recover and good results for the healthcare sector would be particularly beneficial.”