John Whitefoot: Switzerland is at a crossroads. On one hand, the country, long celebrated for its economic growth, saw its exports hit hard in May. That’s not a good long-term indicator for a country whose exports account for 50% of the gross domestic product (GDP).
On the other hand, Switzerland recently signed a free trade deal with China. For investors looking to diversify their portfolio, all the pieces are in place for an excellent trading opportunity. (Source: “Switzerland Exports,” TradingEconomics.com, last accessed July 12, 2013.)
When most people think of Switzerland, they think of banking.
That tradition came from Switzerland’s political neutrality (it avoided both World Wars), which has translated into long-term political stability, strong monetary policies, and economic growth, making it an attractive safe haven for investors. In fact, it is estimated that almost 30% of all funds held outside their country of origin are kept in Switzerland.
More recently, Switzerland’s political neutrality meant that it has been able to enjoy economic growth while the rest of Europe was embroiled in economic turmoil. Switzerland is not a member of the European Union (EU), and only became a member of the United Nations (UN) in 2002.
As a result, trade is the foundation of Switzerland’s prosperity. Switzerland’s economic growth hinges on its main exports, including watches and clocks (TAG Heuer, Hublot, Zenith), medicinal and pharmaceutical products (Novartis, Roche), food processing (Nestle), and electronics and machinery (ABB Ltd., Sika AG).
For years, Switzerland’s economic growth has been helped, in large part, by Germany and the United States, its two largest trade partners. In 2012, Germany accounted for about 25% of Switzerland’s foreign trade. The United States accounts for about 10% of all Swiss exports. That said, if it is counted as a single unit, the EU is actually Switzerland’s largest trading partner, accounting for more than 60% of exports.
Unfortunately, the strong Swiss franc and weakening sales to the economically ravaged eurozone and U.S. have put Switzerland’s ongoing economic growth in jeopardy. Because of the economic growth crisis, Swiss companies had to cut prices by more than five percent in 2011 just to keep exports alive, and they may need to do more to keep things going in 2013. (Source: Allen, M., “Exporters pick path through economic minefield,” swissinfo.ch, February 13, 2012, last accessed July 15, 2013.)
Switzerland’s economic growth came to a screeching halt when it was announced that Swiss exports fell 5.2% in May, with watches, pharmaceuticals, and chemicals being hit especially hard. Exports of pharmaceuticals and chemicals, the country’s biggest export category, slipped 6.8%; machines and electronic devices were down 3.2%; and watch exports fell four percent. (Source: “Swiss exports sag in May as watches, chemicals hit,” Reuters, June 20, 2013.)
Perhaps a victim of its own success, Switzerland’s economy has become increasingly dependent on foreign investment and exports. In an effort to encourage sustained economic growth, ward off a recession, and avoid deflation and a crippling of the economy, the central bank has capped the Swiss franc at 1.20 per euro.
The franc had been rising strongly against the weakening euro in the wake of the economic meltdown in the eurozone. Even though the franc has been capped, the Swiss economy has suffered from sluggish European demand.
To diversify risk, find new customers, and keep its economic growth in check, Switzerland has been looking increasingly eastward.
On July 5, Switzerland signed a free trade agreement with China—the first such deal with an economy in continental Europe. China is the eighth largest consumer of Swiss products. In 2012, bilateral trade between the two countries was US$26.31 billion. During the first five months of 2013, bilateral trade has already reached US$22.89 billion. (Source: “China, Switzerland sign free trade agreement,” Reuters, July 6, 2013.)
Whether investors are looking for exposure to the Swiss market or looking to hedge any risk, there are a number of exchange-traded funds (ETFs) to consider, including the CurrencyShares Swiss Franc Trust (NYSEARCA:FXF), iShares MSCI Switzerland Capped Index (NYSEARCA:EWL), and ETFS Physical Swiss Gold Shares (NYSEARCA:SGOL).
Whether you believe Switzerland is on the right path for economic growth or not, these ETFs are perfect for those looking for a long-term opportunity or to short.
This article is brought to you courtesy of John Whitefoot from the Daily Gains Letter.