Ben Kumar, Head of Equity Strategy, for 7iM shares the weekly musings. Ben’s piece can be seen below:
Have a look at this chart. It shows the price of three European shares, going back 10 years:
Source: 7IM/Factset, rebased to 100, 01/01/2014
Looks like three pretty different businesses right?
What would you think, just based on the share price performance?
The pinky/purpley one is maybe a small tech firm – did really well and has then been super volatile?
The blue/green might be a consumer staples company? Or the shares of a supermarket chain?
And the orange one is clearly a company which has been in decline for a while, and then lost their final big customer in about 2022. An exporter to China?
Obviously, there’s a twist.
They are all in the same business. And it’s a very, VERY weird business to be able to buy shares in.
Central Banking.
These are the central banks of Switzerland, Greece and Belgium.
We’re used to thinking of central banks as public institutions – basically arms of the government. You can’t buy shares in the Bank of England, the Federal Reserve, or the European Central Bank!
But actually, in a few countries in the world, you absolutely can*.
Usually, this is because when the central bank was set up the peoples of those countries had a suspicion of government, and didn’t want to let them run around unsupervised with their money …
OK so what explains the differences in share price performance?
- With the Swiss National Bank (SNB), it’s speculation. Over the last five years the SNB has accumulated a LOT of tasty assets; the $9 billion of Apple stock, the 1040 tonnes of gold tucked away in the vaults, the US Treasuries … The hope is that one day, maybe, shareholders might get a slice of the action. SPOILER ALERT: they probably won’t as it would require the Swiss government to give them up!
- So what about Greece and Belgium? They essentially share a currency and are part of the ECB; so why the big difference in performance? Well, just like the SNB, they have a lot of assets on their balance sheets. Unlike the SNB, these two are allowed to pay out some of the profits from those assets as a dividend – like a normal bank!
But the assets they own are very different. The National Bank of Belgium owns mainly European government bonds. And when rates started rising over the last two years, it started making losses. So in 2022, the dividend was cut from €97 to €1. Ouch!
Meanwhile the Bank of Greece, following the Eurozone debt crisis in 2011, owns a lot of Greek banks that it had to bail out. And, slowly, those banks are being sold back to the market – usually at a profit. Hence dividends!
It’s one of those strange niches of the markets; but it’s an important reminder that economics and monetary policy isn’t set in stone! There are lots of different ways central banks work – and the next decade is likely to demonstrate that as policy moves in different directions across the world.
