Where the Swiss lead...
WHICH company has a price/earnings ratio of just 0.02, annual profits almost as high as Apple's, and yet a market value of less than $500m? asks Matthew Lynn at MoneyWeek magazine.
It's the Swiss National Bank (SNB) – one of the oddest quoted businesses in the world.
This month, we learned that the Swiss central bank has been minting money on an epic scale. In 2017, its profits were CHF54bn ($56bn) – a record, and more than double those of 2016. The SNB's share price is now almost CHF5,000. A year ago, it was less than CHF1,700. It is the bitcoin of central banks.
How did it pull it off? The SNB intervenes massively in the foreign-currency markets to cap the strength of the Franc: its enduring role as a safe haven means it is constantly overvalued, threatening the health of what, outside of finance, is still mainly a manufacturing, export-based economy.
After years of buying other currencies to try to weaken its own, the SNB now has nearly CHF800bn in reserves. On those positions, it made CHF49bn last year. It has also built huge equity holdings by reinvesting past earnings.
It turns out the SNB is a canny investor. Stakes in companies such as Amazon and Facebook – the SNB is basically a "Fang" enthusiast – have paid off handsomely, swelling its profits to record levels.
Its profits aren't quite the bonanza for the Swiss you might expect. This year's earnings are just over CHF6,000 – almost £5,000 – for every Swiss citizen. Yet even in pricey Switzerland, you can buy something nice with that kind of money. The SNB is limited in its dividend payouts, but they will be going up, and the central government and the cantons will get a bit more, too.
The really interesting question, however, is: if the Swiss central bank can be turned into a money-making machine, why not the others as well?
Take the Bank of England. True, we do not have a safe-haven currency like the Swiss Franc – the Great British Peso, as ours became known in the markets after the Brexit referendum, is a long way from that. Just building up currency reserves will not necessarily be the one-way bet it usually is for the Swiss. Even so, there is still plenty the Bank could be doing.
It could manage its huge bond portfolio – a legacy of all that quantitative easing (QE) – more actively to make a profit. And if another recession hits, there is nothing to stop the Bank launching another round of QE, investing in stocks, then waiting for the profits to roll in. The Bank of Japan may well be in that position soon. It has bought a big slice of the Tokyo market.
On some estimates, the central bank is now a major shareholder in most of the country's biggest companies, with a portfolio of an estimated ¥20trn (£130bn). With the Nikkei hitting a 26-year high this week, the gains are likely to be impressive. The European Central Bank has also been buying government and corporate bonds. It wouldn't be a huge surprise if those made a profit, given the strength of the Eurozone recovery.
If the Bank of England could make anything like as much as its Swiss rival, it would add hugely to the government's finances. The £41bn the Swiss made is not that much less than the total raised from corporation tax in the UK. We could abolish corporate taxes completely, or slash income tax or VAT, or just boost spending – the healthcare budget could be 25% higher with that kind of money.
It might seem odd to turn your central bank into a profit centre. But in our through-the-looking-glass world of zero interest rates and banning cash, central banks look as though they are going to make money anyway.
It might as well be used for the good of us all.