The Swiss Franc as a safe haven15 Jan, 2020 by Investors In Property
Investopedia defines a “safe haven” as “an investment that is expected to retain or increase in value during times of market turbulence”.
Classic examples of safe haven investments include hard assets like gold, US treasury bills and defensive stocks – for example utility, healthcare, & consumer goods companies, which are essential commodities, resistant to the state of the market. Over the last 15 years in particular – during which time the Swiss Franc has increased in value substantially against the USD, EUR and GBP – the Swiss Franc has emerged as another safe haven for investors.
Offering protection from inflation, security from risk and potential for returns, it is Swiss stability and consistency that underpins the attraction of the Swiss Franc. In this article we take a look at why Switzerland is such an attractive location for investors and what this might mean for your search for a property in the Alps.
According to the World Bank, in 2018 Switzerland had a GDP per capita of 82,838.929 USD – the sixth highest GDP per capita of any country – and had the 20th highest total GDP of 705,501.30 USD.
The Global Competitiveness Report – a yearly report from the World Economic Forum which “assesses the ability of countries to provide high levels of prosperity to their citizens” – ranked Switzerland first in the world from 2009 to 2018. While Cornell University’s Global Innovation Index ranked Switzerland consistently at number 1 from 2011 through 2018.
To drive this economy, Switzerland has a dominant tertiary sector based around watch-making, pharmaceuticals, finance and tourism. Major pharmaceutical companies Novartis and Roche are headquartered in Basel, which acts as a global hub for the industry. Similarly, Geneva and Zurich are leading centres of finance with UBS and Credit Suisse both headquartered in Zurich. Literacy rates in Switzerland are very high and unemployment rates low, and there are some top universities and schools – for example the Swiss Federal Institute of Technology.
Geography & politics:
Switzerland’s political and economic predictability is key to the stability of the Swiss Franc. Famous for neutrality, Switzerland has not invaded another country since 1815 (France) and distances itself from conflicts.
A small country with a modest population of approximately 8.6 million people, Switzerland is not strained by a burgeoning population. Low population growth rates mean there is limited strain on resources and the relative availability of employment, housing and essential services is good.
Switzerland’s central location within Europe and membership of the European Free Trade Association and Schengen Area, add to the attraction of Switzerland as a base for foreign companies and an expatriate workforce. Approximately 2.1 million Swiss residents are foreign nationals (according to the Federal Statistics Office, OECD 2017). In order to prevent double taxation for the same item, Switzerland has signed Double Taxation Agreements with 55 countries so far.
No deficit & independent monetary policy:
Swiss income consistently exceeds expenses and there are no plans for major economic outlays. As a result Switzerland is essentially self-reliant and is able to stabilise its own currency. The economic system operates with a limited yet realistic growth rate.
The Swiss Franc is not backed by gold, so the Swiss National Bank can print any amount of currency without need for a reserve. The Swiss National Bank has actually been known to be quite active in the forex market to ensure that the Franc trades within a relatively tight range, to reduce volatility and keep interest rates in check. Unlike other safe-havens, in particular gold, the Swiss Franc is readily available on a large scale, highly liquid and backed by the country’s strong and stable economy.
Not without risk though:
The Swiss Franc’s safe-haven status is no secret, meaning Swiss Francs and securities can become overvalued during times of adversity. For example, the European sovereign debt crisis led to such high demand for CHF that the Swiss National Bank (SNB) was forced to peg its currency to the euro - at a rate of 1.20 euros per franc - to prevent its own economy and export sector from suffering. Then, in 2015, the Swiss Franc was freed from this artificial cap, sending further shockwaves through the foreign exchange market.
Notwithstanding this unexpected decision and its ripple effects, investors worldwide still see the Swiss Franc as a genuine safe-haven and the Swiss Franc has been rock solid over a number of decades now.
Investing in the Swiss Franc & Investing in Swiss property
For those looking to invest in the Swiss Franc, in the purest sense, exchange-traded funds (ETFs) and the forex market are the main and obvious choices.
However, for those seeking a second home in Europe, or specifically in the Alps, buying a property in Switzerland provides an opportunity to benefit from the steady, secure status of the Swiss Franc in addition to delivering on their interest in a ski property/lakeside property.
From October to December 1980, the exchange rate was 4 CHF to the Pound (GBP). In 1986, when we at Investors in Property first started selling properties in the Swiss Alps, the exchange rate was between 3 & 2.3 CHF to the Pound. At the time of writing, January 2020, the current rate is 1.2564 CHF to the Pound.
What does this mean? The CHF has been steadily strengthening against the Pound for over 30 years. As a rule of thumb, if you take any 5 year period over this 30 years, the Swiss Franc has appreciated against the Pound, so, in spite of short term variations, after 5 or 10 years of property ownership (and all the good times that that property will bring) you will be pleased to have bought Swiss Francs.