All wealth management companies that use loan financing have 100% EUR funding. EUR is currently the only obvious financing choice, as the fluctuations and uncertainty in the foreign exchange markets appear to continue.
Throughout most of 2010, the problems of government debt in Greece and many other countries, especially in the Mediterranean region, have significantly increased currency fluctuations. At the beginning of May, we opted through the options market to buy insurance against a strongly rising Swiss franc (CHF), so that the companies were protected in that case.
Shortly after, the uncertainty escalated and the Swiss National Bank, SNB, which had intervened in the foreign exchange market since March 2009 to limit the CHF’s strength, had to abandon the intervention as the pressure became too great. Precisely because we had secured our loan portfolios, we could look at the strong movements in the foreign exchange markets with fairly serenity.
Fluctuations in the financial markets are still large, and the debt problems in southern Europe and elsewhere are not completely gone. The challenge is that it is largely dependent on political will, which path the different countries choose from the problems. And as long as the outcome depends on politics, the uncertainty will be great. Similarly, the uncertainty about the global growth picture is also quite large, and at present, it appears that interest rates, particularly in the EU and the US, will remain very low.
As a result, EUR appears as a loan currency as a clear first choice when we take into account the risk compared to alternatives such as CHF, USD, JPY.
Because the SNB has abandoned the intervention policy, and because the uncertainty is now much higher than in May (see the previous graph), we estimate that 100% EUR share in the loan portfolios is the optimal loan portfolio right now. The current strategy of buying insurance on CHF through the options market has become too expensive for us as investors. The connection is the well-known, the greater the uncertainty – the more expensive the price of the insurance (option).
Therefore, all loan portfolios are now 100% in EUR.
In all our decisions, we seek to optimize the returns – well to note when we take the risk into account. It is with this in mind that we secured the portfolios in May, and that we will not run the risk with financing currencies other than EUR right now.
Before, for example, we will again raise loans in CHF, one or more conditions must be met:
• Reasonable direct interest rate differential to current EUR funding
• The uncertainty/volatility must not be too high
• The loan must be able to be raised at an attractive level, and the probability of price falls must be very large
None of these conditions we believe is currently being met.