Daily Management Review

Is Swiss Central Bank a real bubble?


Despite the fact that the Swiss share market has grown insignificantly this year, one subject has showed a staggering profit, which puzzled market experts trying to explain this phenomenon. This is the Swiss National Bank (SNB).

The SNB’s price per share increased by more than 3 thousand francs in August - twice the level of the previous year and 50% higher since mid-July, the Financial Times notes.

SNB shares are listed on the Swiss Stock Exchange along with shares of any other company, although somewhat lower because of their price liquidity. The Swiss cantons jointly own 45% of SNB shares, 15% belong to cantonal banks, and the remaining 40% - to private individuals or companies. The Swiss federal government does not own any shares.

Given the assets of SNB, we can conclude that the organization demonstrated a huge appetite for Apple shares and currently owns US stocks for more than $ 80 billion: a hedge fund backed by shareholders also faced another hell of a year. Perhaps this explains why shareholders consider these benefits an important factor.

The Financial Times has several theories about what led to the bank's astounding success.

First, it will almost certainly pay dividends this year against the background of the profit and loss statement. Dividends are paid by law in the amount of no more than 15 Swiss francs per share.

If they are paid in full, it will yield a return of 50 b. p. This is much higher than the yield on 10-year bonds of the country minus 15 b. p.

On the other hand, here’s what one of the German investment bulletins published: " Actien Börse, a newsletter for German investors, encouraged the purchase after comparing the shares with the ultra-rare 19th-century Blue Mauritius postage stamp in July. The trade of 100,000 shares of SNB is rather small, so even a modest purchase or sale leads to significant price fluctuations."

Of course, these arguments seem quite obvious: investors could block higher yields, buying up treasuries and hedging their actions. And the impact of this newsletter sounds like it's exaggerated.

Nevertheless, FT hints at one of the possible drivers, which is probably closer to the truth: private investors are trying to arrange a frontal attack on the possible repurchase of shares by the central bank.

SNB will not be the first central bank to buy out its shares

"Another theory is that investors are speculating that the bank can hold a buyback." It wouldn’t be the first time; in the early 2000s, the Bank for International Settlements bought out its private shareholders and was able to focus on socially significant functions, rather than on interests of financial investors.

Regardless of their motives, the income of shares is determined by private shareholders. During a small increase in SNB shares, it is unlikely that a canton or cantonal bank will buy shares in bulk, because their property has been "set in stone" for many years.

It is more difficult to explain why the price of SNB shares so sharply increased this summer.

Institutional investors do not invest in them, so there is no demand for analysis or coverage. Since the impact of even a small financial market fluctuation on financial indicators is so tangible, it would be difficult to make a reliable estimate of profits," said Andreas Venditti, an analyst at Vontobel Bank in Zurich.

An alternative is that a private investor quietly buys out all available shares. The largest private shareholder is German citizen Theo Siegert, German business leader and professor at the University of Munich. He owns 6.7% of the bank - more than any Swiss canton, except for Bern. Nevertheless, if the buyer was Siegert, he would have to draw up a new report as a major shareholder, after he overcomes the 10% threshold.

Against the background that the buyback is unlikely, and the financed buyout of the central bank may not be possible, there is only one possible conclusion: SNB provokes the growth of shares in the process of creating the next bubble.

source: ft.com