What attracted Facebook’s latest significant investor to invest in the tech giant? Is it the 85% gross margins, or its earnings per share growth of 180% year on year?
Some of that probably weighed into the equation. But the reality for one of Facebook’s largest investors (in the publicly traded shares), is that it views Facebook as safer than the bond market.
The Swiss National Bank (SNB) was attracted to Facebook primarily because bond markets are seriously expensive, supply is drying up, and they have an extraordinary amount of foreign reserves which need investing. This is all to the tune of $650b (USD).
The SNB now invests around 20% of these reserves in equity markets, a figure which has risen from 17% last year.
Where did all the Francs come from?
Grant’s Interest Rate Observer commented last week that “the SNB creates Francs out of Alpine air”. It’s an interesting observation, but given the economic turmoil and sovereign risks in Europe since the Global Financial Crisis, the Swiss Franc has benefited from the uncertainty. Money managers, Banks, Corporates... you name it, all chose to flee the Euro in favour of the Franc. But this put Switzerland’s economy at risk. A strong Franc crimped Swiss exports, and subjected their economy to imported deflation. The SNB acted, selling billions of Francs in favour of Euro, Yen and USD.
The SNB originally defended the Franc, but they gave up on maintaining the target when the European Central Bank decided to use negative interest rates. The SNB now also uses the disincentive of negative interest rates, to maintain a positive interest rate differential with other major economies. By way of example, Swiss deposit rates are -0.75% compared with the ECB’s -0.4%... a 35bps differential.
As a result of central bank policy (including the Bank of England and Japan), it is estimated around $8 trillion of global government bonds now offer yields below 0%! This means you pay to invest.
With that in mind, and a burgeoning foreign currency holding, the SNB has been quietly purchasing equities as part of its foreign currency portfolio. They now own around $120b in shares, with $62b in the US... and $741m in Facebook.
Who would have thought stocks would become a significant part of a foreign currency portfolio.
