Swiss Stocks Look as Sweet as Chocolate Thanks to Franc Move

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tdp2664 InvestorPlace Last week, the Swiss National Bank announced it would peg its franc to the euro at a conversion rate of 1.2. The Swiss franc reacted immediately to the downside, shedding 10% against the U.S. dollar and crushing one of the most widely held longs by hedge funds. Your opportunity as an investor right now is to focus on the handful of Swiss companies that are big exporters, who do business abroad and will benefit from favorable currency exchange rates against the weak franc. Those stocks could include ABB Inc. (NYSE: ABB ), Logitech ( NASDAQ : LOGI ) and Novartis (NYSE: NVS ), to name a few. The move with the Swiss franc came in response to fund managers who drove the franc to all-time highs in early August, seriously damaging the country’s exports, as well as its domestic economy. The Swiss National Bank found itself backed into a corner, but nonetheless, its action marked a bold move, especially from a nation that has a history of taking action piecemeal and not with a sledgehammer. The act of tying the franc to the euro means Switzerland is no longer immune to the ills of European sovereign debt and, therefore, does not provide the safe haven that has escaped the PIIGS nations’ woes. That is, the euro zone constituents Portugal, Ireland, Italy, Greece and Spain. Not knowing how low the euro can go, one can only speculate that the Swiss franc may trade at parity with the dollar in the next year. That’s assuming Europe’s fiscal mess gets a bit messier, which is not out of the question. My take on the euro is that it is trading at an artificially high level, fully supported by ECB open market purchases. Instead, I'd posit that the euro ought to be trading at 1.2 and ultimately will do so at some point in the not-too-distant future. Europe is on the verge of negative growth, and slapping a number of new austerity measures on what already are fragile economies is bad news for the euro. The one-year chart of the Swiss franc (below) illustrates the extreme with which it rallied as interest rates soared in Portugal, Italy, Ireland, Greece and Spain this time last month, before austerity programs were voted through, but have yet to be implemented. A lot still can go wrong with the euro zone, and the value of the euro could well descend from the current 1.4 level if the ECB fails to get full cooperation from member nations involved in resolving the sovereign debt crisis. Why the Swiss would chain their currency to the euro at a time when it could see a big move lower in the weeks ahead is a real head-scratcher. But from the chart above, the franc is trading back down to May levels and most certainly will help the export industry, as exchange rates have vastly improved. My guess is that Swiss bankers are betting on a lower euro so as to further improve foreign currency exchange rates. Even at its now lower level, the franc still is very high on a historical basis. At some point, if the euro starts to unwind, it wouldn’t surprise me in the least to see the Swiss National Bank un-peg the franc and let it free float again. But let’s assume that the Swiss bank decides to let the franc decline so as to juice up exports. In that case, it would be a lucrative move to buy into one or two Swiss-based blue-chip companies that do 90% of their business outside the country and have a strong exposure to emerging markets. Given the backdrop of investor sentiment that is fearful of a global slowdown, I would view consumer staples as a way to play this export scenario that has just gotten a shot in the arm, via devaluation of the franc. Oddly enough, most Swiss equities sold off on the news, which probably stems from fund managers running international portfolios who then dumped their Swiss holdings after it became joined at the hip with the future direction of the euro. The selling pressure witnessed this week in Swiss stocks makes for some very compelling buys that fit right in with the “new normal” landscape — a.k.a. growth coupled with austerity. Well, the Swiss already live an austere lifestyle, and the sudden decline in the value of the franc is sure to boost the bottom line of the country’s leading exporters. So it soon might be a good time to get in on stocks with exposure to non-cyclical businesses that are global leaders in their respective market sectors. And it makes a lot of sense to do so while these stocks are on sale. From a total return basis, it’s about as tasty as a Toblerone. Bryan Perry is the editor of the Cash Machine dividend stock newsletter.