Equities shine as investors move out of euro

Banks such as UBS and Credit Suisse are charging institutional depositors to accept deposits in Swiss francs. Consumers have to pay money to the banks (as much as 1 percent in some cases) to deposit money.

The reason for such a move by banks such as UBS and Credit Suisse and other custodial banks such as State Street and Bank of New York Mellon is the zero interest rate policy set by the Swiss National Bank (SNB).

The SNB has capped the value of the Swiss franc at 1.2 against the euro as the Swiss economy is an export-driven economy and is hurt by a strong currency.

The eurozone debt crisis saw investors flocking to the safety of the Swiss franc leading to the currency climbing. Reuters

The eurozone debt crisis saw investors flocking to the safety of the Swiss franc leading to the currency climbing up to levels of below 1.1 against the euro in mid-2011.

The SNB has cut rates to zero percent to discourage investors from buying the Swiss franc and has also been intervening in the markets to keep down the value of the currency. The SNB intervention to maintain the cap has added liquidity into the system leading to banks being flooded with cash that earns no money for them.

The zero percent rates prevailing in Switzerland has made transaction costs of accepting Swiss franc deposits more than the interest earned in keeping the money and banks are faced with negative spreads on such deposits. Hence banks are charging negative rates for depositors looking to deposit money in Swiss francs.

The same is true with currencies like the Danish kroner, where interest rates are zero percent and banks do not want to keep money in kroners given the negative carry. Denmark pegs its currency to the euro and is affected by the flight to safety trades against the euro.

The fact that investors who chose to diversify their currency holdings away from the euro are being discouraged by central banks in countries such as Switzerland and Denmark are now searching for places to invest. Interest rates in countries such as the US and UK are close to zero and are not attractive destinations for money moving out of the euro. Bond markets in emerging economies have problem of absorption with many countries including India imposing limits on bond purchases. China growth slowdown has deterred commodity investments.

Equities have found favour with investors looking to move out of the euro. Equities world over (except China) have been the best performing asset class, calendar year to date.

Scanning equity indices across the globe, the Sensex and Nifty have returned over 20 percent, the S&P 500 has gained close to 20 percent, Nikkei has returned over 11 percent, Hangseng has risen by 20 percent and the German Dax has returned 27 percent in calendar year 2012 (as of end November 2012). Commodities have declined with the Reuters CRB Commodities index that tracks a basket of commodities down around 3 percent. Gold and oil prices have been flat.

The Sensex and Nifty have climbed up over 20 percent calendar year to date on the back of strong FII flows. FIIs have invested over $20 billion in Indian equities in calendar year 2012 and this investment has come in despite the economy seeing its worst growth since 2002-03 with GDP growth expected at around 5.8 percent levels for 2012-13.

The scenario is similar to other countries as well with GDP growth from the US to Japan being revised down on the back of multiple economic issues facing the globe including issues of sovereign debt and unemployment.

The trend of liquidity flowing into equities is likely to continue in 2013 as the eurozone economy flounders on the back of austerity measures adopted by member countries.

Economic growth outlook for the world for 2013 has been revised downwards by the IMF by 30 bps. Zero percent rates will continue in countries of Switzerland, Denmark, the US and Japan leading to search for returns. India will see healthy FII flows in equities and bonds in 2013 leading to equity levels rising and bond yields falling.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors

Updated Date: Dec 21, 2014 04:57 AM

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