With a recession looming in Europe, investors again are on the lookout for suitable safe havens. Ethenea’s investment strategist Andrea Siviero, who co-manages the firm’s 60 million euro «Hesper Fund - Global Solutions», believes the Swiss franc and the Japanese yen are well placed to take up this role, as the fund has taken a position on December 2023 Euribor futures in anticipation that the ECB won’t be able to further raise rates next year as much as currently discounted by the market.
Siviero’s investment position already moved short on the euro against the dollar when Russia launched its war against Ukraine. Now that recession is a prospect for the eurozone, he has expanded this short euro position by adding other currencies. Switzerland, he said, appeals because of its relatively low inflation rates, solid external position and a policy change at the Swiss National Bank.
“Inflationary pressures - inflation being 3.4 percent in Switzerland - are much lower than in the rest of Europe. Compared to other advanced economies, Switzerland remains a low inflation country. This low inflation environment should contribute to a further appreciation of the Swiss franc,” Siviero said in an interview.
The 3.4% reported annualised rate for Swiss inflation in June was a 29-year high. Since last summer, the Swiss franc has appreciated from about 0.92 per euro to a record 1.03 on 29 July. The Swiss National Bank in June raised its policy rate from -0.75 percent to -0.25 percent, in a move that surprised markets. The SNB has said it may raise rates further “at any time between regular assessment dates if circumstances so require.”
SNB ‘prefers a stronger franc’
Before joining Ethenea in 2020, Siviero held a position of director of international monetary cooperation at the SNB. «The Swiss franc has historically been a strong currency because of low inflation, its large current account surplus, its solid macroeconomic framework and political stability. In the past 10-15 years, the Swiss National Bank has been fighting against a strong Swiss franc as the strong currency was adding to deflationary pressures.
However, in a high inflation environment, the Swiss National bank has changed its approach to the Swiss franc’s exchange rate towards a policy that supports a strong currency and contributes to keeping a lid on inflation. Now, the Swiss National Bank is telling us that in the current inflationary environment, it prefers a stronger franc as it contributes to reducing the risks of imported inflation.”
Positioning the «Hesper Fund - Global Solutions» against the euro by taking long positions in dollars is part of a policy based on what Siviero calls “a divergent view” between the economic prospects of Europe and the United States. “We went progressively short on Europe and increased our exposures to the dollar, because we felt that Europe was the region that was the most exposed to the crisis in Ukraine because of its high dependency on Russian oil and gas the high cost of the war for European external trade, and because of the proximity of the region to the conflict.”
Reversal seen for Euro-yen
Looking at the second half of the year, Siviero said they have also added a long position in the Japanese yen to the «Hesper Fund - Global Solutions» portfolio. The Japanese yen also is a safe haven currency when it comes to recessionary risks.
“The Bank of Japan, along with the People’s Bank of China, are the only major central banks that have not been tightening, for various reasons. After a sharp decline during the first half of the year with most international currencies, due to the expectation of policy divergency, the yen’s weakness could rapidly reverse. If we go into a recessionary scenario, we believe that the central banks and particularly the European Central Bank will not be able to tighten policy as much as currently discounted by the market. And therefore, we could see a reversal of the Euro - Japanese yen.”
Investors expecting that the prospect of further tightening by the ECB will diminish next year as a result of a recession or sharply lower GDP growth than currently expected, could also consider using Euribor money market futures as a hedge. Siviero’s team does not believe Eurozone interest rates will rise as much as the market currently expects.
‘Very high challenges’
“We feel that the Eurozone is going into a sharp economic slowdown because of the very high challenges from record high inflation, the war in Ukraine, gas shortages, and because of the European Central Bank tightening policy into an already slowing economy. So we don’t believe that the central bank will be able to raise rates, as expected without causing a recession in the Eurozone.»
In his portfolio, he has anticipated this development by buying December 2023 Euribor futures, which point to the market expectations that the ECB will raise rates by about 1.5 percent by then. “This means a set of about six hikes of 25 basis points, or three of 50 basis points. With a Eurozone economy heading into a possible recession it is unlikely that they will be able to raise higher rates as much as currently discounted.”
About Hesper Fund - Global Solutions
The «Hesper Fund - Global Solutions» is a multi-asset fund and was launched three years ago. In June, the «Hesper Fund - Global Solutions» EUR T-6 increased by 1.81 percent. Year-to-date the fund is at +0.65 percent.
Total assets grew to an all-time high of 56 million euro. Volatility for the last 250 days has remained very stable at 6.7 percent, retaining an interesting risk/return profile. The annualised return since inception is at 7.42 percent.
Siviero manages the fund together with Federico Frischknecht.
The fund is currently authorised for distribution in Germany, Luxembourg, Italy, France, and Switzerland.
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