PROJECT M
 

True or false?

In June 2015 we asked experts to assess the impact of Switzerland abandoning its currency cap. Now the question is: how prescient were they?

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True or false?

In June 2015 we asked experts to assess the impact of Switzerland abandoning its currency cap. Now the question is: how prescient were they?

WHAT HAPPENED?

Volume of chocolate exported

Thanks to demand growth in Belgium, the Netherlands, Australia, Singapore and Japan, Swiss chocolate exports increased overall by 1.4% in 2015, despite turnover falling in most major export markets in 2015, reported Chocosuisse, the Association of Swiss Chocolate Manufacturers.

Volume of Emmental cheese exported

Emmental exports, meanwhile, fell 9.5% in 2015 following price increases related to the euro, according to Switzerland Cheese Marketing.

Number of take-offs and landings at Sion

Figures from the Federal Statistical Office show that the movements of non-commercial traffic at the semi-private airport Sion increased by 2.0%, reaching 29,187 movements in 2015. A more significant increase occurred in the previous year, largely due to good weather attracting more skiers to the region.

Assets under management in Swiss financial sector

According to the Swiss Funds & Asset Management Association, net inflows totaling more than 40 billion Swiss francs were invested in funds in 2015. Despite a negative wealth effect, assets under management in Switzerland increased by 1.9% year over year to reach a total asset volume of CHF 891.0 billion in December 2015.

Swiss GDP

Swiss GDP, meanwhile, stagnated in nominal terms and slightly rose in real terms after a slow start into the year. This modest increase was in keeping with a difficult monetary environment, according to figures released by Switzerland’s Federal Statistical Office (FSO). The second quarter 2015 saw negative growth and Switzerland narrowly missed a recession.

Swiss inflation rate

The Swiss inflation rate continued to drop further into deflationary territory. Whereas in 2014 prices decreased by 0.33%, they dropped even further by 1.31% in 2015. This marks an all-time low since the 1950s.

WHO GOT WHAT RIGHT?

Frances Coppola, investment writer, industry veteran

Overall, Frances Coppola’s predictions were accurate and her expectation that Emmental cheese would “take a beating” in 2015 was spot on. For chocolate exports, she predicted that with Swiss chocolate being a luxury brand, it would fare better than dairy producers. This corresponded with an export increase of 1.4%.

What surprised her was that chocolate sales to Belgium increased, given that Belgium has a luxury chocolate industry of its own. “It suggests that Swiss and Belgian chocolates are regarded as distinct products that cannot be substituted for each other. In luxury markets, customers are price insensitive and unlikely to look for cheaper substitutes. They tend to be brand loyal and sensitive to famous names and distinctive characteristics.”

The change of airport movements at Sion was also consistent with Coppola’s views that the super-rich would not significantly change their behavior in response to currency and oil price movements. As she and the other experts predicted, Switzerland remained the destination of choice for those looking for a safe haven for their wealth.

Coppola expected Swiss GDP to be stable in 2015. In the end, it rose 0.8%. But Swiss GDP growth is countercyclical versus other developed countries because of the safe haven effects, so it fared less well than in previous years because other countries were doing better, she explains.

The Swiss inflation rate fell, in line with Coppola’s view. Most of the deflation came from falling energy prices, plus weak demand within Switzerland due to the strong currency, says Coppola. Although inflows of money should raise inflation, the rising currency offset this effect. The zero lower bound on interest rates and worries about the size of the SNB’s balance sheet limited the SNB’s ability to resist deflation.

Gerhard Scheuenstuhl, managing director, risklab

Gerhard Scheuenstuhl’s projections proved overwhelmingly accurate. Last year, he predicted that “chocolate makers may come out unscathed,” which corresponds to the actual 1.4% increase in export sales. “Cocoa is bought through the international markets and with a stronger currency you pay less. You produce it inland with expensive Swiss milk and high quality standards. Overall this meant that prices should remain relatively stable.”

He expected Emmental exports to decrease, which tallied with industry figures. “If production costs in terms of Swiss franc appreciation increases, it is harder to sell that product around the world, therefore volumes decline,” he explains. Like the other four experts, he was also right predicting that airport movements at Sion would remain constant. “These aren’t your typical tourists: the normal tourist industry will suffer but the high-end tourists will not care because they’re not hugely affected,” Scheuenstuhl explains.

Hato Schmeiser, professor of risk management, St. Gallen, Switzerland

Hato Schmeiser predicted that Swiss firms would be able to buffer a price increase in chocolate or cheese by accepting lower margins.

“To be honest, it cannot be more than a guess,” Schmeiser admits when looking back on his projections in December 2016. “If you’re right, you’ll always find a convincing explanation and sometimes the other way around. The demand is multi causal and stochastic: if you’re not far away from the average growth rate over some periods, you should be happy with your guess.”

When it came to asset flows, Schmeiser was slightly off course: he expected assets flows 5-10% higher than in 2014, while the increase wasn’t so marked. “Yes, Switzerland is a safe harbor in many respects. However, we shouldn’t forget the Swiss government bond market, where negative interest rates can be interpreted as a strong demand given a limited number of bonds available,” he says. Swiss GDP rose 0.8%, slightly more positive than Schmeiser’s predictions of its remaining flat.

Brian Tomlinson, currency specialist at Allianz Global Investors

Brian Tomlinson’s predictions of falling volumes of exported cheese proved to be right. “Cheese is an easily substituted good in terms of quality,” he says.

Meanwhile, he expected volumes of exported chocolate to fall in 2015, which they did in key markets, although this contrasted with an overall increase due to unexpected growth in countries such as Japan. That can be explained by those countries faring well again the Swiss franc, Tomlinson explains. “For example, the yen has strengthened against the Swiss franc, making it cheaper for the Japanese to buy more Swiss chocolate.”

Tomlinson’s estimates were also pretty accurate when it comes to economic growth. Expecting two negative quarters in early 2015, the Swiss economy saw a negative growth of 0.42% in Q1 and just barely positive growth of 0.06% in Q2, narrowing avoiding a recession.

His prognoses of a rising franc pushing inflation into negative territory and assets under management rising were also precise. “It is because of a global flight to safety,” he explains. “Wealthy people are trying to get their money out of countries that might be unstable or uncertain regarding the future. Switzerland is the first safe haven destination. And that hasn’t changed despite the unpegging of the franc.”

John Mauldin, author of New York Times bestseller Endgame (2011)

John Mauldin expected cheese and chocolate makers’ exports to be affected negatively, which proved true for Emmental exporters but not for exporters of Swiss chocolate. “The real question though is not how much last year hurt their sales but how much it hurt their profits,” he points out. In order to keep sales, they probably had to reduce their costs.

Inflation’s fall was also correct. “The currency changes are going to reduce the potential for inflation almost inevitably so that isn’t a surprise,” explains Mauldin.

Assets under management also rose, in line with his expectations. “People want to put their money into Switzerland, not in cash – they are looking for other ways to deploy assets,” concludes Mauldin.

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