The Swiss National Bank (SNB) might be expected to be a bastion of prudence and conservatism.
Yet regulatory filings with the US Securities and Exchange Commission reveal that the Bank currently holds over $80bn of US equities.
The SNB says that it holds no more than 20 per cent of its assets in equities, but being very rich, that still makes it one of the largest US equity investors. It has a holding of over $9bn just in tech giants Apple, Microsoft, Amazon, Alphabet (the owner of Google), and Facebook. The bank’s holding in Facebook is more than the $950m position held by top London hedge fund Lansdowne Partners, although still well short of Mark Zuckerberg’s $70bn holding.
Its other major holdings include oil blue chip Exxon, consumer giant Johnson and Johnson, and industrial bellwether General Electric, as it seeks to replicate the US market indices. In all, it owns over 2,500 different US equities, plus equities in other markets (in 2015 it included emerging markets in its equities universe).
Why does the SNB own US equities? Three main reasons come to mind.
First, the Swiss markets are relatively small.
Second, the bank continues to depress its own currency by selling francs and buying overseas assets. A lower franc helps Swiss exporters and tourism. At the moment, visitors consider Switzerland expensive, with the franc currently leading the Economist Big Mac index as the currency most overvalued (by around 20 per cent) against the dollar.
But that strategy backfired in the past. In January, 2015, after a long period of capping the franc against the euro, the central bank gave way and revalued the Swiss franc. Its euro holdings collapsed in value against the franc and the bank lost around $50bn on the day, although half was recovered in subsequent months.
Third, the bank appears to prefer some diversification into equities to owning the natural central bank asset mix of gold, foreign currencies and bonds. The Swiss actually held a referendum in November 2015, which, had it been successful, could have required the central bank to increase its holdings of gold – currently five per cent. (Switzerland operates an unusual system where a quorum of citizens can request a referendum – a practice which the UK seems unlikely to follow.)
With interest rates on government bonds close to zero around the world, the income central banks receive on their bond holdings has been decimated. The ECB owns 40 per cent of European government debt, which is subject to Eurozone break-up fears. The Bank of Japan has been buying most of the country’s bond issuance. The UK has Brexit issues.
This all leaves US treasuries as the safe haven in the bond world. The US Federal Reserve is, however, now increasing US interest rates, and commentators expect that interest rates on government bonds will follow, leading to the price of those bonds to fall.
Owning US equities is therefore a rational strategy, given the unattractiveness of other assets, and I expect the Swiss Bank to maintain its US equity position for some time. The size of its holdings prevents a switch into another stock market.
But although it may be logical, it raises an important risk that the famously cautious Swiss bankers would do well to consider.
The SNB now owns US equities equivalent to 13 per cent of Swiss GDP. A stockmarket crash such as in 2008 would cause a flight to safety and a rise in the Swiss franc – a double whammy for the value of the bank’s US equity portfolio.
It seems almost inevitable that this will end badly.