Soaring franc puts Swiss companies under pressure

Major companies favoured by leading European fund managers are facing severe price pressures as the global flight to safety propelled the Swiss franc to new heights today.

The Swiss National Bank warned last week the outlook for the Swiss economy had “deteriorated substantially” due to the strength of the Swiss franc, but its attempt to intervene and weaken the currency was neutered by the market’s search for safe havens.

The franc, which has risen 20% against the dollar since mid-February alone, rose again today in the wake of the move by Standard & Poor's to cut the US credit rating.

By early afternoon, one dollar was worth 76.25 centimes, having hit a record 74.85 centimes earlier, according to Bloomberg.

Currency appreciation has provided an additional boon to managers attracted by high-quality stocks shielded from the wider continent’s sovereign debt crisis.

Leading names including Cazenove’s Chris Rice, Henderson’s Richard Pease and Jupiter’s Cédric de Fonclare held over 20% of their portfolios in Swiss stocks at the end of June.

However, the gains are now starting to put pressure on earnings, leading companies such as Novartis, Swatch and Nestlé  major holdings for many European managers  to mirror the SNB’s warning the franc’s appreciation is damaging Swiss industry.

“The interesting aspect of July has been the significant weakening in corporate margins revealed by the Q2 reporting season,” said Rice, manager of the £1.1bn Cazenove European fund, speaking about Europe as a whole.

Rice (pictured) said the trend was predominately due to reduced cost absorption, and pointed to rising raw material and operating costs as well as currency pressure on the likes of the Swiss franc.

Any further rise in the Swiss currency will have a particularly pronounced affect on exporters, said Jennifer McKeown senior European economist at Capital Economics.
McKeown expects the franc to reach parity with the euro next year, with “disastrous implications for Swiss exports, which account for over half of GDP”.

Martin Skanberg, co-manager of the £316m Schroder European fund, said: “We currently have a tactical underweight in Swiss equities.

“We believe the industrials and materials sectors in particular could be disadvantaged given the strength of the Swiss franc.”

Others, however, see plenty of value in Swiss holdings. Stephen Docherty, head of global equities at Aberdeen and manager of the £896m Aberdeen World Equity fund, acknowledged the strength of the currency is “on balance probably negative for the big global companies based in Switzerland,” but added the global nature of such firms “means they have costs in some regions which can be matched up”.

The manager’s  buy and hold strategy means he tries not to second guess currencies, and suggested valuations for defensive holdings such as pharmaceutical Roche remain attractive.

Managers have also been reassured by the way defensives are working to overcome the rise of the franc.

At Roche, a cost-cutting drive has led the company to raise earnings targets for this year even as the strong franc prompted a 12% drop in first half sales.

Rival Novartis has also pointed to productivity drives as a way to offset currency pressures.

Accordingly, Skanberg said the Schroders team balanced their underweight view with more optimism on certain defensive areas.

“We remain selectively overweight the Swiss pharmaceutical and healthcare stocks which we expect to be better able to withstand margin pressures,” he said.