Megan Brooks
Central banks are known for being the lender of last resort, but in the past 12 years, national banks in the US and Europe have also become investors of last resort. In the wake of the credit crunch, central banks announced multi-billion-dollar bond-buying programs. Now, with the Covid pandemic causing market volatility and economic uncertainty, these strategies are back. Central banks are buying stocks, chasing better returns in this low-rate environment. Nearly 1 in 4 central bankers say their institution owns stocks or plans to own stocks in the near future. The Swiss National Bank, for example, has CHF32bn (£26bn), or 20% of its portfolio, invested in shares spread across 6,800 individual stocks.
| Characteristics | Values |
|---|---|
| Reason for buying stocks | Low bond yields |
| Central banks buying stocks | Swiss National Bank, Czech National Bank, Bank of Israel, Bank of Japan |
| Amount invested by Swiss National Bank | CHF32bn (£26bn), or 20% of its portfolio |
| Number of stocks invested in by Swiss National Bank | 6,800 individual stocks |
| Number of stocks the Czech National Bank is invested in outside Europe | 4 |
| Management of Czech National Bank's reserves | BlackRock and State Street Global Advisors |
| Percentage of reserves of the Bank of Israel invested in stocks | 10% |
| Average annual CHF-denominated return of the Swiss National Bank since introducing equities in 2005 | 4.5% |
| Average annual return of the Swiss National Bank on bonds over the same period | 0.9% |
| Central banks not buying stocks | European Central Bank, Bank of England, U.S. Federal Reserve |
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What You'll Learn
Central banks buying stocks to improve risk-return profiles
Central banks are known for being conservative investors, with their primary objectives being capital preservation and ensuring liquidity. However, in recent years, some central banks have started to venture into the stock market, moving away from their traditional holdings in government bonds. This shift can be attributed to the low yields on bonds, which have fallen below the rate of inflation, leading to a devaluation of reserves.
One notable example is the Swiss National Bank (SNB), which had invested CHF32 billion (approximately £26 billion), or 20% of its portfolio, in stocks as of the first quarter of 2020. The SNB's goal in diversifying its holdings was to improve the risk-return profile of its exchange reserves. By the end of the first quarter of 2020, these reserves amounted to CHF160 billion (approximately £132.6 billion). Since introducing equities to its portfolio in 2005, the SNB has achieved an average annual CHF-denominated return of 4.5%, compared to 0.9% on bonds over the same period.
Another central bank that has made significant moves into the stock market is the Bank of Japan, which plans to more than double its stock position. The Czech National Bank and its Slovakian counterpart, Národná banka Slovenska, have also invested in global equity portfolios. The Israeli central bank, which has held stocks since 2012, increased its equity allocation to 17.5% in 2019.
While some central banks are hesitant to directly purchase stocks, they may consider alternative methods to gain exposure to the stock market. For instance, the U.S. Federal Reserve cannot make direct stock purchases but could potentially fund a Special Purpose Vehicle that invests in a diverse basket of stocks through indexes or Exchange Traded Funds.
In conclusion, central banks are indeed planning and, in some cases, executing purchases of stocks. This strategy aims to improve their risk-return profiles by diversifying their holdings beyond traditional government bonds, particularly in a low-yield environment. While this approach may offer potential benefits, it also introduces new risks and considerations for central banks and the broader economic landscape.
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The US Federal Reserve not joining the stock-buying trend
Central banks around the world have been increasingly buying stocks, chasing better returns in a low-rate environment. Nearly 1 in 4 central bankers say their institution owns stocks or plans to own stocks in the near future, according to a Bloomberg report. The Swiss National Bank, the Bank of Israel, the Czech National Bank, and the Bank of Japan are some examples.
However, the US Federal Reserve does not appear to be joining this stock-buying trend. The Fed is not permitted to make direct stock purchases. Instead, it provides the nation with a safe, flexible, and stable monetary and financial system. While the Fed has not directly purchased stocks, it has implemented other measures such as multi-billion-dollar bond-buying programs and quantitative easing to stimulate the economy.
The Federal Reserve's role as the central bank of the United States is to maintain a stable monetary and financial system. They have a variety of tools at their disposal, such as managing interest rates and providing liquidity to the financial system, to achieve their goals without directly intervening in the stock market.
The Fed's mandate focuses on promoting maximum employment, stable prices, and moderate long-term interest rates. Their policies are designed to influence economic conditions and support the stability and growth of the economy as a whole, rather than directly influencing specific markets or sectors.
While the US Federal Reserve has not joined other central banks in directly buying stocks, they have implemented other measures to support the economy and promote financial stability. Their actions aim to provide a solid foundation for economic growth and maintain the stability and integrity of the financial system in the United States.
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Central banks buying stocks for higher yields
Central banks are traditionally conservative investors, focusing on capital preservation and taking little risk to ensure quick access to national hard currency stockpiles in the event of an emergency. However, some central banks have begun to buy stocks in search of higher yields. This shift can be attributed to the low yields available from top-rated sovereign bonds, which has prompted central banks to diversify their portfolios and seek higher returns.
The Swiss National Bank (SNB), for example, has invested in equities since 2005, with CHF32 billion (approximately £26 billion) invested in shares spread across 6,800 individual stocks. In 2012, Israel's central bank started buying equities, investing 2% of its foreign exchange reserves in U.S. stocks, with plans to eventually raise this to 10%. The Czech National Bank has also ventured into the stock market, with 10% of its reserves invested in equities. Similarly, South Korea's central bank's share of stocks in its reserves grew to 5.4% in 2012, up from 3.1% in 2009.
Central banks' move into stocks is not without risks. For example, the Swiss National Bank experienced price losses on equity that exceeded dividends in 2012. Additionally, central banks' involvement in the stock market may send a signal of ""unlimited central bank ammunition," which could be concerning from a regulatory perspective.
Despite these considerations, nearly one in four central bankers surveyed by Bloomberg reported that their institution owns stocks or plans to own stocks in the near future. This trend may be driven by the need for central banks to get their economies moving again, particularly in the aftermath of the credit crunch and the COVID-19 pandemic, which have both resulted in market volatility and economic uncertainty.
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Central banks buying stocks to stimulate the economy
Central banks typically hold reserves in government bonds, which are easy to buy and sell. However, with yields falling below the inflation rate, holding bonds devalues their reserves. As a result, some central banks have begun to diversify their assets and invest in stocks to chase higher returns. This strategy is similar to that of retirees and other individual investors who seek higher yields with dividend-paying stocks when faced with low interest rates.
The Swiss National Bank (SNB), for example, had CHF32 billion (£26 billion), or 20% of its portfolio, invested in shares spread across 6,800 individual stocks as of the first quarter of 2020. The Bank of Japan also plans to more than double its stock position, and the Czech National Bank has handed over the management of 10% of its reserves to BlackRock and State Street Global Advisors for investment in stocks. The Bank of Israel has also ventured into stock market investing, with two-thirds of its investments in European firms and the remainder in US, British, Japanese, Canadian, and Australian stocks.
Central banks' purchases of stocks can have a significant impact on the global economy. By printing money and buying assets such as stocks, bonds, and commodities, central banks drive up the prices of these assets. This, in turn, can stimulate economic growth and help manage inflation. For instance, the US Federal Reserve can lower interest rates by purchasing securities and injecting money into the money supply, thereby increasing economic activity.
However, some economists argue that central bank share purchases are not a desirable trend. Jörg Krämer, chief economist at Commerzbank, points out that while these transactions may facilitate corporate investments and signal unlimited central bank ammunition, they can also send shivers down the spines of observers with regulatory awareness.
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Central banks buying stocks to influence money supply
Central banks typically hold reserves in government bonds, which are easy to buy and sell. However, with yields falling below the rate of inflation, holding bonds devalues their reserves. As a result, some central banks have started to diversify their portfolios and invest in stocks to improve their risk-return profiles.
The Swiss National Bank (SNB) had 20% of its portfolio invested in shares spread across 6,800 individual stocks, with an average annual CHF-denominated return of 4.5% since introducing equities to its portfolio in 2005, compared to 0.9% on bonds over the same period. The Bank of Israel also bought stocks for the first time in 2012, and the Czech National Bank has handed over the management of 10% of its reserves to BlackRock and State Street Global Advisors, with two-thirds invested in European firms. The Bank of Japan plans to more than double its stock position, and the Swiss National Bank and Czech National Bank have boosted stock ownership to at least 10% of their reserves.
Central banks can influence the money supply by buying or selling government securities through the process known as open market operations (OMO). When a central bank wants to increase the money supply, it purchases government securities from commercial banks and institutions, injecting more money into the economy. This frees up bank assets, allowing them to provide more loans to individuals and businesses, which leads to increased spending and economic growth.
By diversifying their portfolios and investing in stocks, central banks aim to improve their risk-adjusted returns and ensure the health of their nation's economy. While this strategy may provide some benefits, it is important to consider the potential risks and regulatory implications associated with central banks' involvement in the stock market.
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Frequently asked questions
Yes, central banks do buy stocks. Nearly 1 in 4 central bankers say their institution owns stocks or plans to own stocks in the near future. Some examples include the Swiss National Bank, the Bank of Israel, the Czech National Bank, and the Bank of Japan.
Central banks tend to hold reserves in government bonds, which are easy to buy and sell. However, with yields falling below the rate of inflation, holding bonds devalues their reserves. Thus, they have begun diversifying into other assets, chasing higher returns.
Central banks can buy stocks through open market operations (OMOs), which involve purchasing or selling securities in the open market to influence the money supply. Buying securities adds money to the system, lowers interest rates, makes loans easier to obtain, and increases economic activity.
