Burdened by debt loads that have mounted after decades of generous subsidies and social welfare programs, governments across Europe are furiously slashing spending in an effort to bring public finances into shape. After a near-collapse in Greece, a number of other major European economies have ventured to the edge of fiscal disaster. Much of the attention has focused on Spain and Italy, two countries battered by skyrocketing unemployment. But even Germany, one of the continent’s more stable economies, is forging ahead with steep budget cuts.
Amidst the chaos that has gripped Europe in recent months, however, there are a few bright spots. One is Switzerland, home to a well-diversified economy that falls outside of the euro zone.”Switzerland has been marching to a different beat than its European Union neighbors, with a solid government budget surplus and resurgent economy,” writes Deborah Ball. The country’s unemployment rate recently fell to 3.8%, well below the rest of Europe. Unemployment in Spain, which has been hammered by a prolonged downturn in construction activity, is around 20%, with youth unemployment at twice that level. The Swiss central bank recently increased its 2010 economic forecast, projecting economic expansion of 2% for the year. GDP growth throughout much the euro zone is expected to be negligible this year and next. “Reports on the economy are quite positive and indicate a faster economic recovery than anticipated,” said Swiss National Bank board member Jean-Pierre Danthine recently.
Switzerland is known for its neutrality, a reputation earned by its longstanding reluctance to meddle in global affairs. But Switzerland’s role in currency markets has been anything but neutral; for some time now the National Bank has been spending billions of dollars to halt the rise of the franc against the embattled euro, causing foreign reserves to more than double since the end of last year. But that policy is coming to an end, a move that has received far less attention than Beijing’s recent announcement but that could have a major impact on the the regional economy. “After months of aggressive intervention in currency markets, the Swiss central bank says it plans to stand down, a move many in the market say is likely to put new pressure on the euro,” writes Ball.
Not everyone is happy about this development. The likely rise of the Swiss currency would come at the expense of the euro; some economists expect the franc to appreciate roughly 5% against the euro in the coming year. Swiss companies have a few concerns themselves; as the franc rises, Swiss exports become more expensive for euro zone consumers. While currency strength is often perceived as a positive development, it can have an adverse impact on the local economy–a relationship that is all too clear to Japan.
Switzerland ETF Options
For investors looking for exposure to Europe without getting bogged down by the currency woes, Switzerland may be an interesting option. Below we profile two ETFs, including one offering exposure to Swiss equities and one focusing on the country’s currency.
- iShares MSCI Switzerland Index Fund (EWL): iShares’ EWL tracks the MSCI Switzerland Index, which measures the performance of the Swiss equity market. Allocating nearly 75% of its assets to its top ten holdings, the fund primarily invests in several companies that are well known through out the globe. Chocolate manufacturer Nestle and banking giants UBS and Credit Suisse are among the top holdings of EWL. The fund is been down by about 5% on the year, but is still far ahead than many funds in the Europe Equities category.
- Rydex CurrencyShares Swiss Franc Trust (FXF): FXF offers exposure to the Swiss Franc, rising as the currency appreciates relative to the U.S. dollar. FXF is an interesting option for investors who expect the government’s new “hands-off” approach to send the currency higher in coming months. But FXF deserves a watchful eye; if the franc rises too significantly, the central bank may be forced to reverse its policy and step in.
Disclosure: No positions at time of writing.