Although markets have been a bit skittish so far this year and despite concerns about growing debt and slower growth, there are plenty of great value opportunities out there for alert investors.
Still, it makes sense to play some defense by hedging your stock picks with what I call “shock absorbers.” Cash, gold, silver, and high-quality bonds come to mind, but there are also some better options out there — namely stable markets and their currencies.
But first, let's take a look at three qualities that make a country a good hedge and safe haven:
1. Strong, stable currency with ample liquidity
The country's currency should demonstrate deep liquidity so that investors can move in and out of it without sharp movements in price. It needs to be widely recognized as a reserve currency.
2. Financial and political stability
The fiscal discipline and political stability of the country needs to be unquestioned. Countries with large fiscal deficits are unable to be dependable safe havens since the path of least resistance is to devalue the currency to make debt loads more manageable.
3. Market-based, rules-driven, open economy
Investors and trading partners thrive best in a market-oriented economy where the rules are clear and transparent. Faith in the fairness of the judicial system and institutions is vitally important.
Switzerland and the Swiss franc fit the bill nicely.
For starters, relatively small Switzerland is home to four of the five largest firms in Europe in terms of market value: UBS (NYSE: UBS), Nestlé (OTC: NSRGY), Novartis (NYSE: NVS) and Roche. These companies are increasingly tapping into emerging market growth.
Switzerland also has a number of other factors on its side:
It has the highest per-capita income in the world.
While it's only 137 miles by 216 miles in size with a population of 7.2 million, Switzerland packs a punch and is a financial and multinational powerhouse.
The Swiss franc is backed by ample gold reserves, fiscal discipline, a trade surplus, and very little foreign debt.
Outward looking, Switzerland has 40% of its gross domestic product attributed to exports.
Switzerland represents the third-largest financial center in the world after New York and London. It is also home to world-class pharmaceutical, engineering, and food companies.
Switzerland enjoys a stable government, vibrant democracy, and a reputation as an asset haven in times of stress. The Swiss have had a functioning democracy for 500 years and actually have a fairly weak central government, with a legislature that meets for only two weeks, four times a year. (Good idea for U.S. Congress?) Voters actually defeated a referendum that would have implemented a shorter workweek and longer vacations.
All men between the ages of 20 and 42 are required to engage in military training each summer, resulting in an army of 625,000. Swiss Guards have protected the Vatican since 1506.
Switzerland is on Sale
That all sounds pretty good, especially since the Swiss stock market is trading at a discount to the S&P 500. Now, how should Switzerland become part of your portfolio?
Large, global blue chip companies are almost always favorable due to attractive price-to-book valuations, entrenched brand names, dominant market shares, proven management teams, solid free cash flows, and double-digit growth potential.
What better way to play this trend than with Swiss quality, value, and global growth?
The iShares Switzerland Index (NYSE: EWL) is a smart way to gain exposure to a basket of Switzerland’s leading multinationals and has an expense ratio of only 0.59%. In addition, while a rising Swiss franc puts pricing pressure on Swiss exporters, a strong Swiss franc supercharges returns for investors in EWL.
My go-to stock pick in Switzerland is Nestlé (OTC: NSRGY). This consumer giant has a share-buyback program, a focus on growth in emerging consumer markets, and a rising dividend.
ABB (NYSE: ABB) is a terrific infrastructure play and has been on a tear, winning power and automation-technology contracts all over the world.
You may also wish to pair EWL with iShares Singapore (NYSE: EWS). Singapore is the “Switzerland of Asia,” with $40,000 of foreign exchange reserves for every citizen.
And if you only want exposure to the Swiss franc, take a look at the CurrencyShares Swiss Franc Trust (NYSE: FXF).
You can’t go wrong buying Swiss quality — and it's even better if the country is on sale.
Until next time,
Carl Delfeld for Wealth Daily
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