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Switzerland has traditionally punched well above its weight in business terms
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However, with a reliance upon exports, the strength of the Swiss franc threatens to suffocate those world-class companies which gave the country its hallmark of quality
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That said, short-term pain should lead to long-term gain
Fred Moore, alternate manager of the Newton European Higher Income Fund, looks at the strength of the Swiss franc and the potential impact on Switzerland's export machine.
"If you spend a lot of money on a Cartier or Jaeger-LeCoultre watch, both owned by the Swiss luxury group Richemont, you are buying into a product that distils a notion of manufacturing quality and excellence that is synonymous with Switzerland," explains Moore. "In fact, ‘made in Switzerland' is fundamental to the top-end positioning of these brands. It is a reflection of the fact that Switzerland, in business terms, punches well above its weight. The country abounds with global champions that are firmly stamped with a hallmark that spells quality: think Roche and Novartis in the pharmaceutical sphere, Nestle in consumer staples or ABB in power and automation," he adds.
"So far, so good, but is there a point at which Switzerland, as a home for business, becomes a victim of its own success? Or more specifically, is the strength of the Swiss franc suffocating those world-class companies which gave the country its hallmark of quality?" he asks. "Something these companies have in common is the fact that nearly all their revenues and profits are generated abroad. The Swiss franc has dramatically appreciated against most other major currencies since the credit crisis, in so doing reducing the Swiss franc value of these exports, and providing a major headache for the likes of Richemont," says Moore.
Currency headwinds
"Clearly, the current strength of the Swiss franc owes much to the robust Swiss economy with its balanced budget, low national debt, and a sustainable level of economic growth, but it is also a result of the negatives everywhere else around the globe. Indeed, world foreign exchange has rightly been described as an ‘ugly contest'," says Moore. "The world's reserve currency, the US dollar, is looking decidedly unstable as the US struggles to get to grips with its burgeoning debt. Meanwhile, the Eurozone has a solid core in Germany, but the single currency has to absorb, in terms of reputation, the profligacy of those countries on the periphery of the continent. And then, further afield, there are countries like Brazil and China that seem to be doing everything in their power to artificially depress the value of their currencies in order to aid their own exports," he adds.
"So, while many Swiss exporters are currently doing very well in terms of sales, they are struggling materially with this currency issue. However," explains Moore, "they need only look over the border to Germany to see that it might actually play to their strengths. German companies had to live with a strong deutschmark for years; it forced them to concentrate on the high-end, value-added areas of business where people are prepared to pay more for the quality of a good or service. German companies could never become complacent and were always having to chase efficiencies and best practice to stay competitive. At present," he concludes, "the Swiss are experiencing short-term pain, but ultimately it should lead to long-term gain."
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