An Island of Stability

10/21/2008 10:29 am EST

Focus: GLOBAL

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of Chartwell Advisor Global ETF Report, says Switzerland is still a good place to invest.

While only 137 miles by 216 miles in size, with a population of 7.2 million, Switzerland packs a punch and is a multinational powerhouse.

Switzerland has a strong currency [the Swiss franc] backed by ample gold reserves, fiscal discipline, a trade surplus, and very little foreign debt. Forty percent of its gross domestic product is attributed to exports. It's the third largest financial center in the world, after New York and London.

The country is also home to world-beating pharmaceutical, engineering, and food companies. It enjoys a stable government, a vibrant democracy, and a reputation as an asset haven in times of stress. The Swiss have had a functioning democracy for 500 years and have a fairly weak central government, with a legislature that meets for only two weeks, four times a year.

The move to amend complex or uncompetitive taxation by the country's 26 cantons marks the first step in a year-old campaign, backed by high-powered lobbies and supported by the government, to improve Switzerland's competitiveness as a financial center.

Hedge fund managers have long complained about Swiss tax treatment of performance fees and carried interest. The federal authorities have now said they will ascertain the exact state of play in each canton, and then recommend changes to bring Swiss tax rates to internationally competitive levels.

The move is intended to put an end to the "Swiss finish", the extra burden of requirements imposed by Swiss regulators on top of internationally binding rules on investment funds. While many "funds of hedge funds" are based in the country, the overwhelming majority of hedge funds themselves are elsewhere.

In times of stress, investors flee to quality markets like Switzerland, known for its fiscal discipline.

Currently, about 45% of iShares MSCI Switzerland Index's (AMEX: EWL) holdings are in three stocks: Nestle (OTC: NSRGY.PK), Roche Holdings AG (RHHBY.PK), and Novartis (NYSE: NVS), all of which are pretty good defensive plays.

Other top holdings in the ETF include; UBS (NYSE: UBS), Credit Suisse (NYSE: CS), and Zurich Financial (OTC: ZFSVY). I also like this ETF's sector breakdown led by health care (32%), financials (22%), and consumer staples (19%).

The sector balance, Swiss Franc currency and stability of the companies in the holdings of EWL lend to serious consideration of the ETF at this time. Even UBS, the one company that has flopped on this index, appears to be headed in the correct direction. (Editor's Note: last week the Swiss National Bank pumped billions of dollars into UBS and dramatically tightened capital requirements, among other measures—Editor.) 

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