For security reasons, individuals, large organizations and even nations will keep some of their excess gold and foreign currency reserves. The American dollars remains the main and most reliable reserve currency, but the Swiss franc has also emerged as one of the best alternatives. This article explores why the Swiss franc is a good investment.
High security, low risk and inflation protection
Investors around the world are looking for better returns and security for their invested capital. Although bonds are safe, they tend to offer lower yields. Stocks and other financial instruments offer higher returns, but they carry greater risks. Inflation is another factor that decreases Return. Investors look for assets that offer a balance of inflation protection, risk security and return potential. Gold and the US dollar are traditional assets, but the Swiss franc has also emerged as a potential investment option as it qualifies on all three metrics.
The development of the Swiss franc as a safe bet
The following events have supported the status of the Swiss franc as a safe and robust investment vehicle:
- Russia earns billions selling oil and gas. So far, he’s kept it safe in US dollars, US securities and gold. However, the sanctions imposed by the United States and the European Union on Russia have caused the country to seek alternatives to US dollars and securities. The drop in the Russian ruble has also pushed Russian investors and businesses to seek safe currencies, and many have chosen the Swiss franc as a safe haven.
- The European multi-nation debt crisis from 2009 to 2013 saw a substantial flow of funds from affected European nations to Switzerland. The countries mainly aimed to secure their currency (euro) to the Swiss franc.
- The 2008 global financial crisis, which originated in the United States, also saw the transfer of funds from US currency and securities to Swiss assets.
Why is the Swiss franc a safe investment?
- The geopolitical and economic ecosystem: Switzerland has a solid economic system, comfortable with a limited but realistic growth rate with controlled requirements. The advantage for Switzerland lies in its size. It is a small country with a limited population. In addition, proper exploitation of available natural resources and limited investments in production and agriculture necessary to support stable and continued economic growth are key factors for a stable Swiss economy and Swiss franc. Switzerland is the sixth largest creditor of the United States as of December 2021, which reflects its stable financial situation.
- It doesn’t fail: Switzerland’s income exceeds its expenditure, so there is no deficit. This makes it autonomous and stabilizes its currency. In addition, the economy did not plan major investments.
- An alternative to gold: Inflation is one of the main reasons why investors choose gold. Gold is used as a reserve across the world by various nations because it is perceived as a good hedge against inflation. A quick check of historic inflation in Switzerland indicates relative stability, which has led to huge investments in the Swiss franc.
Graphic courtesy: Tradingeconomics.com
- Independent monetary policy: The Swiss franc is not backed by gold. The Swiss National Bank (SNB) can print any amount of currency without the need for a reserve. In fact, it is a form of quantitative easing (EQ), which allows a central bank to independently control the exchange rate. For example, the European debt crisis led to strong demand for Swiss francs from Eurozone countries, which pushed the valuation of the Swiss franc to higher limits. This made Swiss exports expensive and the strong valuation of the franc posed a danger to the Swiss economy. The Swiss National Bank pegged the Swiss franc rate to 1.2 euros and mitigated the effects of strong demand for Swiss francs. In doing so, the Swiss National Bank said“The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.” Banks like UBS charged fees to large institutional investors who maintained a large amount of deposits in their accounts. These measures discouraged the unbridled buying of Swiss francs and stabilized the Swiss economy. However, since the euro is pegged to the franc at a fixed rate, its decline against other currencies in 2014 led to the depreciation of the Swiss franc. Again, timely reverse action by the Swiss National Bank on January 15, 2015, to remove the peg of fixed prices to the euro ensured that the Swiss franc retains its stability.
- Small debt market: The small size of the Swiss debt market adds to its economic advantage. If a major economy, such as Russia or Germany, placed its huge reserves in Swiss debt, it could effectively take control of Swiss debt. Due to the small size of the market and the lack of foreign funds requirement by Switzerland, as it has no deficit, such buybacks are impossible. This protects the Swiss economy and helps keep the valuation of the Swiss franc stable.
- Other factors: With a high GDP, no budget deficit, a low unemployment rate, a large economic contribution from the financial services sector, a high per capita income and a destination for funds via secret bank accounts, the Swiss franc remains a safe investment. .
The Swiss franc has been popular among investors looking for a safe haven for their money. Clearly, the Swiss economy is unlikely to emerge from its low-debt, low-growth ideology and remain a major banking destination. The fundamentals make the Swiss franc a safe and stable investment for years to come.