Gnomes of Zurich strike back
THE tendency to think of Switzerland as no more t han t he home of hand-crafted watches, fine chocolate and ski chalets every so often has to be revised.
The late former British Prime Minister Harold Wilson famously blamed Britain’s historic devaluation of the pound in 1967 as the work of the ‘gnomes of Zurich’. Almost five decades on, the gnomes are at it again.
As if there is not enough uncertainty on f i nancial markets at present, as a result of the crashing oil price, the Swiss National Bank ( S NB) has added a new dimension.
Its decision to abolish the threeyear old cap on the Swiss franc at €1.20 produced an epoch-making move in the currency, which soared 30pc. The move, designed to stem the huge flow of euros into Switzerland, some of them fleeing from sanctions on Russia, caused the pound to jump to a seven-year high against the single currency at €1.30.
No one quite knows why the SNB chose to move at this juncture but the assumption is that it is in anticipation of the European Central Bank finally unsheathing a ‘quantitative easing’ plan designed to shake the eurozone out of stagnation. That was seen as unleashing another batch of inflows.
To discourage that from happening, the gnomes also have increased the deterrent against holding Swiss francs by shifting down the negative interest rates to 0.75pc – effectively increasing a tax on holding money in Swiss bank accounts.
The suddenness of the currency shift clearly will have a big impact on Swiss exporters such as the watchmakers. It is hard to believe that, with bonkers prices at the luxury end of the market, it will be much affected.
The really big shock to the system will be in the trading rooms of the banks and brokers. One thing that even the most manipulative foreign exchange traders cannot do is change central bank behaviour. The effective revaluation of the Swiss franc, referred to as ‘Francogeddon’ by the markets, is major.
Even with the best hedging-insurance contracts in place dealers are going to be caught with losses. IG indicated that it might be £30m down, possibly an underestimate.
But an event on this scale can lead to gains and shortfalls in the billions. Macro hedge funds, that make big bets on economic trends, potentially could be the biggest winners, as was the case with George Soros in 1992 when he bet against the pound, making billions.
There will be losers on a similar scale with publicly- quoted enterprises required to reveal their exposures as quickly as possible.
Among the big winners will be Prince Andrew and Sarah Ferguson. Their shrewdly purchased Verbier ski chalet instantly will be worth a great deal more.
Silver savers
THE pensioner bonds need to be seen as part of George Osborne’s savings revolution. Whether the Chancellor views himself as a future leader of the Tory Party or not the Osborne reforms will live on long beyond his sojourn at Number 11.
The pensioner bond offers an immediate investing opportunity for those retirees who decide to take cash instead of buying an annuity and for the tax-free sums taken out of pensions.
In the past the government has been very reluctant to offer savings products that outbid the commercial banks. Historically, pension bonds offering rates that are twice those on the best buy tables, 2.8pc for a year and 4pc for three years (all before tax), would have created shrieks of unfair competition from the high street banks.
Since two of the biggest beasts, RBS and Lloyds, are under government control and most of the rest only alive as a result of taxpayer rescue schemes in 2007-08, they can scarcely claim an assault.
Critics will find much to attack. The ceiling on investment of £20,000 (if you buy the two) will be seen as too low, the online sign-up too com- plicated and the phone back-up hopeless. What happened to the days when you could just stroll down to the trusted Post Office?
The biggest complaint will be that, at £10bn, the bonds will be inadequate given the 10m people potentially who qualify.
Maybe, but it is a bigger issue than we have seen in years and, if popular, there is no reason to think pressure won’t grow for a further series.
Family affair
ONE of the huge advantages of being a family-controlled enterprise is that the proprietors can think long-term. As a result the Weston clan, which controls 54.5pc of Associated British Foods, is able to stick with sugar, even in a sticky patch.
The £128m hit for write- offs of sugar assets will take some of the shine off the market-beating story from fashion outfit Primark, chalking up a 15pc sales gain in the third quarter. With an increasing share of income coming from ABF’s Continental operations this will not wholly be converted into supercharged profits because of the dismal euro exchange rate.
ABF has the cash flow and investor base to ride out the storms.