Friday, January 30, 2015

Lessons from Switzerland's Franc Move

Jonah Engler - Lessons from Switzerland's Franc Move

As Switzerland's central bank shakes international finance by dropping its three-year cap on the franc, the wise investors and businessmen are learning from their mistakes, or the mistakes of others. Anyone who doesn't keep pace will be left behind, barely a blip on the radar of the world economy. However, the question is this: what lessons should the astute financier learn from this?


The first thing we notice when we begin to research the fiasco is that even the biggest companies took a serious hit. One of the biggest cement manufacturers in the world, Holcim LTD., lost 13% when the franc rose. A more relatable example, the world famous food company Nestle, took a loss of 11%. That is the largest loss in a single day that the company has experienced in nearly two decades. For those that would like to see a money figure, the Swiss Market Index's value dropped around 133 billion francs.

That is a massive amount of money by anyone's terms. Anyone who bet against the franc, be they international companies or individual investors, lost money. The Swiss National Bank had been resisting pressure to drop the cap on the franc for months, rightly fearing that it could hurt economic growth. More pessimistic financiers could point out that this train of events is a lesson against betting on currencies that are so strongly affected by arbitrary forces. However, the optimistic and daring will likely see it as proof that investors can capitalize on drastic economic peaks and valleys.

Less obvious, and perhaps more worrisome, is the effect a single country's economy can have on global money. Yields from German 10-year bonds took a record crash, ending up around 0.402%. The dollar, worth around 0.887 francs as of January 15th, a loss of more than 13%. This fact, combined with the usual vagaries of the world market, means that even non-international investors and businesses can lose money. With Switzerland's economy oriented very closely on exports, the country's monetary value drastically affects that of many other nations.

Even closer to home is the fact that few industries will escape taking a hit of some kind. Swiss watchmakers, responsible for more than 10% of the country's exports, are the employers of some of the highest-paid workers in Europe. The rising value of the franc will have a definite impact on these companies. The financial difficulties of the previously mentioned Holcim, LTD. will incontestably affect global cement prices, as well as any industry that uses their product. An even wider impact can be expected from Nestle's losses, since their product can be found in stores world-wide, particularly in the US.

Debate on whether the euro or the franc is at fault is pointless. The real question is what can businesses and investors do now? More importantly, is it possible to avoid such crashes in the future? The answer isn't plain and may never be. However, the clever financier will take warning. Artificially adjusted monetary systems can be hazardous to the unwary.

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