Given that the post-Great Recession economic expansion is one of the longest in history, one can be certain that the world’s central banks will have to come up with an even more imaginative monetary policy than zero/negative interest rates and massive expansions of their balance sheets through the purchases of government bonds to stimulate the economy back to life. If we look at the example of the Swiss National Bank (SNB), we may get an idea of how the world’s central bankers will respond to the next economic contraction.
While the Swiss National Bank is not the first central bank that one thinks about when the topic of central banking is raised, is using some monetary policies that are rather unique in the world of central bankers. While, like the rest of us, central banks are searching for yield on their foreign currency/exchange reserves which are used by central banks for one of seven reasons:
1.) to keep the value of their local currencies at or near acceptable exchange rates
2.) to keep the value of their local currencies lower than the United States dollar
3.) to maintain liquidity in case of an economic crisis
4.) to ensure that foreign investors have confidence in the bank’s ability to protect their investments
5.) to fund certain sectors of their economy
6.) to ensure that a nation has the ability to meet its external obligations…and, key to this posting:
7.) to improve returns on their reserves by investing in safe investments which historically have been gold and government debt
Let’s take a closer look at the last item in the list, central banks investing in “safe investments”. Like the rest of us, central banks like to achieve a return on their “savings”.
Official Monetary and Financial Institutions Forum or OMFIF, some central banks have “forayed into…equities, though most remain wary of proceeding too far in this direction“. On average, the global central banking system has a 1.5 percent allocation to equities. OMFIF notes that the Swiss National Bank is an exception as you will see later in this posting. As well, the Bank of Japan holds nearly $165 billion worth of equities although most of these are in exchanged traded funds (ETFs) rather than holdings of specific stocks and these ETF holdings make up just 3.6 percent of its total balance sheet, however, in January 2017, the BoJ owned 2.5 percent of the total market capitalization of the Tokyo Stock Exchange and nearly 58 percent of Japanese equity ETFs listed on the Tokyo exchange.
Now, let’s look at the outlier, the Swiss National Bank. According to its own website, the SNB owned the following assets as its foreign exchange reserves at the end of the second quarter of 2018:
Notice that 21 percent of the banks assets are in equities, up from 20 percent on a quarter-over-quarter basis. According to Trading Economics, at the end of the second quarter of 2019, the SNB had CHF 749 billion (US$781 billion) in assets, down from its all time high of CHF 757 billion (US$789 billion in April 2018 but well above levels seen prior to the Great Recession:
This means that the SNB held roughly $163.6 billion in equities at the end of Q2 2018.
Unlike the Bank of Japan, the SNB actually holds individual equities in its portfolio. Thanks to the NASDAQ, we can see at least some of the equities were held on June 30, 2018 thanks to the filing of form 13-F or the Institutional Holdings Information that is filed with the Securities and Exchange Commission. Here are the position statistics for the quarter:
Here is the sector weighting:
Here are the top holdings where the SNB’s position has increased (1085 equities in total):
Here are the top holdings where the SNB’s position has decreased (246 equities in total):
Here are the new positions (89 equities in total):
Here is the SNB’s equity investing philosophy:
As you can see, the Swiss National Bank has taken a rather unique position among the world’s central banks, using its financial heft to invest rather heavily in equities. While its relatively small size makes reduces its overall influence on the world’s stock markets, the same cannot be said for the world’s most influential central banks, most particularly the Federal Reserve. Here is a table outlining the Fed’s current reserves which are held in the System Open Market Account (SOMA):
Let’s close with this last rather sobering quote from the OMFIF report:
“Central banks’ accommodative monetary policies have ‘won time’ for these institutions as well as for politicians. This may delay the reckoning; it will not prevent it.”
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