Credit Suisse, Financial Markets and other interesting facts

Questions and answers

You have had many questions and concerns about everything that is going on these days in the market. Find here the answers to your most burning questions.

Have you invested in Credit Suisse (CS) shares for your clients?

Yes, indirectly via the Swiss SPI ETF. This contained 0.74% Credit Suisse shares.

How large was the share of CS in my Selma portfolio?

In a typical growth-oriented Selma portfolio, the Swiss SPI ETF has a share of less than 10%. This resulted in a Credit Suisse share in the portfolio of about 0.04%.

Are we "in" or "about to enter" a recession?

The major industrialized economies have so far managed to avoid a recession, contrary to many negative forecasts. Whether the recent turmoil in the financial markets will have an impact on the economic climate remains to be seen.

Is it worth buying Credit Suisse shares now?

Since Credit Suisse has been taken over by UBS, CS shares will be exchanged for UBS shares at a fixed ratio. Thus, it no longer makes sense to buy CS shares, even if they may still be tradable, unless you believe that the merger will fail and Credit Suisse’s shares will perform better than UBS shares. Furthermore, you should generally aim to spread your investments broadly, i.e. to be “diversified”. The Credit Suisse case has clearly shown the risks of making one's investments dependent on individual companies.

What happens to the money that was invested in Credit Suisse? Is everything lost?

The money invested in CS shares suffered a loss of 60% due to the UBS takeover, but not a total loss. The remaining value will be exchanged for UBS shares at a predetermined ratio.

Will more banks get into the fray now?

Credit Suisse's demise seems to be rather unrelated to the problems that some smaller regional US banks have experienced lately. However, it also seems clear that the earnings outlook for many banks is hurt by the losses on bond investments (due to the steep rise in interest rates since last year). Eventually, it should be in the interest of central banks and governments to do whatever it takes to avoid an escalation of fears. In any case, it's important to keep in mind that your investments in ETFs are not owned by the bank where they are deposited. They belong just to you, the investor. Hence, even in the case of a bank default, your ETF would only be subject to the market fluctuations, but it would continue to exist without a write-down by the depositing bank.

Why do AT1 bondholders get a total write-down and shareholders do not?

The regulations of the AT1 bonds actually allowed the Swiss authorities to order the complete write-down of the investments. Doing so helped to improve the financial stability of Credit Suisse, as part of the public effort to support the merger between UBS and Credit Suisse. As the FINMA writes: "AT1 instruments in Switzerland are designed in such a way that they are written down or converted into Common Equity Tier 1 capital before the equity capital of the bank concerned is completely used up or written down. The instruments publicly issued by large banks are mainly held by institutional investors due to their risk profile and large denominations."

Is it worth buying UBS shares now?

Investing in a large basket of companies is generally better than trusting your wealth with the fate of a single company. The Swiss ETF that Selma uses contains over 200 companies. UBS has a share of 3.95% in that ETF. Hence, if you are investing with Selma, you are also investing into UBS, but in a safer way.

Selma reduced the impact of the Credit Suisse crisis on your portfolio

Selma continuously scouts for better products to make sure your portfolio investments are broadly spread (aka “diversified”). Just last October Selma switched to a broader diversified ETF for the Swiss market, including now over 200 instead of just 20 companies. This led to better returns and further reduced the weight of Credit Suisse in our client portfolios.

Furthermore, Selma’s dynamic precious metals feature contributed positively to portfolio performance. As of writing, the price of gold has gone up 9% since March 8th. Silver has even gained 15%.

Your money is safe at Selma

Selma’s partner banks are Saxo Bank (Switzerland) and VZ Vermögenszentrum. At both banks, your cash is secured up to 100’000 CHF. Furthermore, you always own your investments – they are not on the balance sheet of a bank, so they are not affected if a bank is not doing well. 

Selma usually invests your money into ETFs that “physically replicate” the underlying index. In simpler terms, this means that you directly own company shares through the ETF. This is in contrast to so-called “synthetically replicating” ETFs, which use a financial construction called “swaps” to reproduce the movements of the underlying index. Selma uses such ETFs only in cases where their advantages clearly outweigh their disadvantages.

The benefits of diversification at Selma

At Selma, you invest in a globally diversified portfolio. This means, your investments are spread around the world and include many different kinds of investments – stocks, bonds, private equity, real estate, and precious metals.

When you invest with Selma, you get a personalized investment plan and portfolio based on your financial situation. An average typical portfolio is put together by up to 11 ETFs (Exchange Traded Funds). These ETFs are cost-efficient and smart as they allow you to invest in many things at once – in your typical Selma portfolio this amounts to about 1’700 companies and 14’000 bonds! Also in Selma’s sustainability portfolios, where companies are screened and some are excluded, this still amounts to 900 companies and 2’000 bonds.

Don’t let frustration and impatience get the better of you

Heightened concerns, or even frustration, about yet another period of uncertainty going on in financial markets is of course noticable. The downturns in financial markets over the last one and a half years or so have actually been less deep than many others in history. What seems to create this uneasy feeling among some investors is the long wait for a strong recovery. It’s been quite a long time since markets were at a “peak”, about 15 to 20 months, depending on the type of portfolio.

Morgan Housel wrote in his book “The Psychology of Money”, “volatility is the price of admission. The prize inside is superior long-term returns.” In simpler words, it means that you could compare financial markets with many other things or experiences in life, where you have to pay a price first, but you’ll enjoy the benefits later.

Why should I invest now and stay invested?

Nowadays, some market commenters are quick to draw parallels between the recent turbulence among banks and the global financial crisis of 2008-09. As a reader of Selma articles, you’ll know that we don’t try forecasting market developments. We would just point out that even in the big financial crisis of 2008-09, it took less than two years to make a profit from investing into a broadly diversified index of company shares, such as the US S&P500. Even in the worst case scenario, putting your money to work just one day before the collapse of Lehman Brothers*, you would have been in positive territory 2 years and 3 months later.

*Note: Lehman Brothers was a major US Investment Bank. Its sudden default triggered one of the nastiest market crashes in the history of mankind.

You may rightly argue that 2 years is a long time. That’s why we always recommend only committing money to investments that can stay there for 5 to 10 years, or even longer.