Swiss central bank's equity holdings worth 127 bln francs
* Equity holdings rise 41 percent in a year
* Diversification drive aims to spread risks
* GRAPHIC - SNB investments tmsnrt.rs/2bQHE10
By John Revill http://www.reuters.com/article/swiss-snb-stocks-idUSL8N1B7383
ZURICH, Aug 30 Switzerland's central bank now
owns more publicly-traded shares in Facebook than Mark
Zuckerberg, part of a mushrooming stock portfolio that is likely
to grow yet further.
The tech giant's founder and CEO has other ways to control
his company: Zuckerberg holds most of his stake in a different
class of stock. Nevertheless this example illustrates how the
Swiss National Bank has become a multi-billion-dollar equity
investor due to its campaign to hold down the Swiss franc.
It is now the world's eighth-biggest public investor, data
from the Official Monetary and Financial Institutions Forum
show. While most analysts think the strategy is sound, this does
expose the SNB to stock market risks that the likes of the
European Central Bank and U.S. Federal Reserve avoid.
"The SNB is in a bit of a corner, they have acquired a lot
of foreign currency as part of their efforts to weaken the franc
and they have to invest it somewhere," said Alessandro Bee, an
economist at UBS. "The bond market is drying up and so they are
going increasingly for equities."
Switzerland's reputation as a safe haven has long caused
problems for the SNB. Investors pile into the franc in times of
uncertainty, causing a rise in the currency which hurts Swiss
exporters and increases the risk of imported deflation.
While the SNB gave up capping the currency's value 18 months
ago, it still intervenes on the foreign exchange market from
time to time by buying euros with francs it prints, including
after Britain voted to leave the European Union in June.
Chairman Thomas Jordan has made clear the SNB will stick to
its course, which also includes negative interest rates.
"We're convinced that given the difficult situation with an
overvalued Swiss franc, a negative output gap, and negative
inflation, the current approach is the right one - expansion in
monetary policy with negative rates and willingness to
intervene," he said earlier this month.
The result is that its pile of foreign currency reserves -
which rose to the equivalent of 635.3 billion francs ($650
billion) at the end of June from 529.5 billion francs a year
earlier and 226.7 billion francs in 2010 - is likely to keep
growing.
The SNB's balance sheet is now proportionately the biggest
of any leading central bank. On top of that, its
stock portfolio has risen at roughly twice the rate of the
overall balance sheet as it diversifies its holdings.
In the last 12 months the SNB's equity holdings have surged
41 percent to around 127 billion francs, according to Reuters
calculations. Part of this is due to stocks increasing in value
despite losses in recent months, as well as new purchases.
The SNB has also diversified across stock markets. The
United States is its favoured location, with its holdings on
Wall Street jumping to nearly $62 billion at the end of June
from $38.6 billion a year earlier, according to a Securities and
Exchange Commission filing.
This includes $741 million in Facebook shares, giving the
SNB a 0.28 percent stake, according to Thomson Reuters data. The
figure is larger than the 0.17 percent of the firm's
publicly-traded stock held by Zuckerberg.
The SNB has increased its stakes in all of its top 10 U.S.
holdings this year, while many big institutional investors have
been reducing much of theirs. For example the SNB's stake in
Apple increased by 1.07 million shares in the second
quarter, while Invesco sold 9.53 million shares and Fidelity
sold 9.23 million in the iPhone maker, according to SEC filings. FRANCS FROM THIN AIR The SNB does not comment on the details of its strategy, but
says it does not pick stocks, investing instead in companies
according to their weight in various indices.
Governing board member Andrea Maechler also said this week
that it does not invest in medium-sized and large banks to avoid
possible conflicts of interest. It also shuns other stocks for
ethical reasons, she told Sonntagsblick newspaper
An in-house team manages the investments with help from some
outside bankers it does not identify. The SNB is mostly a
passive investor, starting only last year to vote by proxy on
issues such as executive pay and management structure.
While the upward pressure on the franc is unlikely to ease
much, this is not the only reason why the stock holdings are
likely to continue rising.
Alternative markets such as bonds - the traditional
favourite investment for central banks - are becoming more
risky. This is especially the case in the euro zone where the
ECB is buying up debt to stimulate the region's economy, helping
to push up prices and turning yields negative on many bonds.
The risk for the SNB is that bond prices fall back sharply,
should the ECB change its policy.
"It's a diversification strategy for them and it is harder
to find investment opportunities," said Alexander Koch, head of
macroeconomics at Bank Raiffeisen in Zurich. "With the ultra-low
interest rates environment currently there is a very high risk
that the prices of bonds can fluctuate more than equities."
The bank started its share buying spree in 2005 after a
change to Switzerland's banking laws allowed it to buy assets
other than short-dated bonds.
Around 20 percent of the SNB's foreign currency reserves are
now in equities, up from 17 percent last year and 10 percent in
2010.
"It makes sense for the SNB to do this, and I could imagine
them to increase the amount of shares they hold in the future
even further," said Koch. "They could even go up to 50 percent
of their holdings."
The bank's stock portfolio lost 200 million francs in value
in the first half of 2016, although it collected 1.7 billion
francs in dividends.
Nannette Hechler-Fayd'herbe, head of investment strategy at
Credit Suisse, said that the risks attached to the SNB's
investment portfolio were "absolutely manageable". Diversifying
its holdings was more important than any temporary setbacks in
global equities, she added.
The SNB is not obliged to make a profit under its mandate to
ensure price stability and support Swiss economic development.
However, it did report a net profit of 21.3 billion francs in
the first half of 2016 and its shareholders, including
Switzerland's cantons, have grown used to a hefty annual
dividend payout.
Still, not everyone is happy about the bank's strategy of
money printing and buying up stocks including constituents of
the U.S. S&P 500 index.
"The SNB creates Swiss francs out of thin Alpine air," said
James Grant, publisher of Grant's Interest Rate Observer, a U.S.
financial markets journal.
"Then they go and call their broker and go on a tour of the
U.S. stock exchange," he told Finanz und Wirtschaft newspaper.
"They get involved in important companies from the S&P which
create real profits, and they do that with money which has been
created out of nothing."
($1 = 0.9793 Swiss francs)
(Additional reporting by Timothy McLaughlin; editing by David
Stamp)
The U.S. stock market currently is more overvalued than it was at almost every bull market peak over the past 100 years.
That’s
crucial, since it undercuts one of the arguments some exuberant
investors currently are using to try to wriggle out from underneath the
otherwise bearish message of various valuation indicators. Their
argument in effect is “of course current valuation is high; what would
you expect when the market is at an all-time high?”
Unfortunately,
an equally sobering picture is painted when we compare the current
market not to historical averages but to just those past occasions when
equities were at the top of a bull market.
In fact, as you can see from the chart above, the current stock market is more overvalued than it was at 79% and 95% of bull market peaks dating back to 1900.
Giving
credence to this message is that it comes from six different ways of
measuring valuation. That should make it harder for the bulls to dismiss
the data: 1. The price/book ratio, which stands at 2.8 to 1:
The book value dataset I was able to obtain extends only back to the
1920s rather than to the beginning of the century, but at 23 of the 29
major market tops since then, the price/book ratio was lower than it is
today. 2. The price/sales ratio, which stands at an estimated 1.9 to 1:
I was able to access per-share sales data back to the mid 1950s; at 18
of the 19 market tops since, the price/sales ratio was lower than where
it stands now. 3· The dividend yield, which currently is 2.1% for the S&P 500: SPX, -0.42%
. At 31 of the 36 bull-market peaks since 1900, the dividend yield was higher. 4. The cyclically adjusted price/earnings ratio, which currently stands at 27.2: This
is the ratio championed by Yale University’s Robert Shiller. It was
lower than where it is today at 31 of the 36 bull-market highs since
1900. 5. The so-called “q” ratio: Based on
research conducted by the late James Tobin, the 1981 Nobel laureate in
economics, the ratio is calculated by dividing market value by the
replacement cost of assets. According to data compiled by Stephen
Wright, an economics professor at the University of London, and Andrew
Smithers, founder of the U.K.-based economics-consulting firm Smithers
& Co., the market currently is more overvalued than it was at 30 of
the 36 bull-market tops since 1900. 6. P/E ratio:
This is the valuation indicator that is perhaps most-often quoted in
the financial media. Nevertheless, according to data on as-reported
earnings compiled by Yale’s Shiller, and based on S&P estimates for
the second quarter, this ratio currently stands at 25.2 to 1. That’s
higher than at 89% of past bull-market peaks.
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To be sure, valuation
indicators are not helpful guides to the market’s shorter-term
direction. Overvalued markets can stay overvalued for some time, and
even become more overvalued. But value eventually wins out.
For
example, it was in December 1996 that Yale’s Professor Shiller gave his
now-famous lecture to the Federal Reserve about irrational exuberance.
His analysis struck many as silly during the subsequent three years in
which stocks continued to soar; when the dot-com bubble hit he looked
like a genius — and he eventually was awarded the Nobel prize.
A
timely analogy comes from Ben Inker, co-head of the asset-allocation
team at Boston-based money management firm GMO. He likens the market to a
leaf in a hurricane: “You have no idea where the leaf will be a minute
or an hour from now. But eventually gravity will win out and it will
land on the ground.”
So enjoy the market’s strength — while it lasts.
Remember when nearly a decade ago, just before the last credit bubble
burst, investors (at least those who cared about fundamentals) were
loading up on risk - after all "the music was still playing" - but
casting fearful glances at the relentless rise in corporate leverage
ratios as debt-to-EBITDA was rapidly rising, if not as fast or to levels
hit during the dot com bubble, aware that it would all end badly? Well,
take one look at the chart below...
But first some commentary from Barclays:
[A] prominent feature of extended bull markets is higher levels of
leverage, as measured by the ratio of debt to equity. We found that the
debt-to-equity ratio went up during every late-cycle bull market since
1980. Advances in debt and more efficient use of capital structures are
obvious ways for companies to offset the economic malaise that sets in
toward the end of business cycles and continue to drive stock prices
higher. It is when companies stop borrowing because they become more
cautious on their capital structures or credit markets tighten that bull
markets fail to get extended.
Total debt for non-financial companies in the S&P 500 has
increased by more than $1tn since the beginning of 2010. This has fueled
the surge in payouts... Companies in the S&P 500 have a cash flow
deficit of approximately $150bn per year that must be funded in the
investment grade credit market to maintain the current level of share
repurchases. While this may be a sustainable amount given the easy
conditions and low rates in high grade credit, the days of accelerating
growth in borrowings are likely in the past, in our view. This is
because some important measures of debt sustainability, such as the
ratio of debt-to-EBITDA are already elevated, as shown in Figure 9. The
median debt-to-EBITDA ratio of the non-financial companies in the
S&P 500 has reached 2.3x, a measure unmatched since 2000, which is
the earliest year that we have reliable data.
In other words, the highest in history. Here is Barclays' conclusion:
"Similar to our view on payout ratios limiting dividend growth, we believe debt-to-EBITDA has reached a point where it is becoming a constraint on additional leverage."
While we would be the first to agree, so far companies have proven
very resilient to recurring warnings that "peak debt" has arrived,
almost exclusively thanks to central banks which continue to force
investors to chase what little yield remains, ostensibly in corporate
debt - the BOE's launch of corporate debt monetization today being a
perfect example this morning - while ignoring all the flashing red
signs.
