Strategists are blowing their alpenhorns about the opportunity in Swiss stocks.
The alpine country’s shares are changing hands below their typical premium, the Swiss franc appears poised to slide further against the euro, and earnings growth looks good.
UBS strategists rank Switzerland as the No. 1 European market for investors, based on factors such as cheaper-than-normal valuations, profit-recovery potential, and dividend yield. And a recent client note from a Morgan Stanley team declares: “We have decided to make an overweight stance on Switzerland one of our key recommendations for the start of 2018.”
Switzerland’s market trades at a roughly 16% premium to Europe’s overall, according to Morgan Stanley, which looks at metrics such as price-to-earnings ratios and price-to-book values. That is “modestly below its long-run average, and hence provides no impediment to outperformance,” says the bank’s equity strategy team, led by Graham Secker.
The Swiss franc looks likely to weaken more, thanks in part to the Swiss National Bank’s sticking to accommodative policies, while other central banks tighten a bit. In addition to helping tourists in Zurich, that should lift Swiss multinational companies, which generate considerable sales in euros, dollars, and other currencies, then convert them into francs. Watch maker Swatch UHR, +2.54% , for example, gets only 10% of its revenue from its home country, according to FactSet.
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In 2017, the euro EURCHF, +0.2231% has gained about 9% on the franc, touching its highest level since the Swiss central bank removed its fixed floor for the currency pair in January 2015. The dollar is down against the franc this year, but only by about 3%.
Morgan Stanley cites Switzerland’s improving economy and notes that consensus earnings estimates for 2018 and 2019 are “rising nicely.” The Swiss equity market is getting the third-biggest rise in year-ahead forecasts of any country.
Among recent encouraging economic readings, an expectations indicator from Credit Suisse and the CFA Society Switzerland jumped to 40.7 in late November, its highest reading since mid-2010. Gross domestic product showed 1.2% year-over-year growth in the third quarter, up from a softer second quarter.
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Swiss stocks historically are considered defensive. They “should provide investors with a nice hedge against wider market volatility,” Secker and his colleagues say. In a recent note, UBS strategists, led by Karen Olney, say: “We like pharmaceuticals (versus other international defensives), and they feature in Switzerland.” Roche ROG, +0.00% and Novartis NVS, +0.24% NOVN, -0.36% are among the big names in the non-European Union country’s pharma industry.
The most popular U.S. exchange-traded fund focused on Swiss stocks is iShares MSCI Switzerland Capped EWL, +0.40% , which has about $1.3 billion in assets, according to ETF.com. Other options are iShares Currency Hedged MSCI Switzerland HEWL, +0.30% and First Trust Switzerland AlphaDEX fund FSZ, +0.64% .
The iShares MSCI ETF has gained about 19% this year, while Switzerland’s blue-chip benchmark, the Swiss Market Index SMI, -0.17% , has tacked on roughly 14%. The fund trades at 19 times forward-year estimated earnings, above the iShares Europe ETF’s IEV, +0.21% multiple of 16, but below the SPDR S&P 500 ETF’s SPY, -0.01% 20. Its dividend yield is 2.1%.
Health-care shares account for 29% of the fund’s holdings; financials and consumer non-cyclicals, 21% apiece, and industrials, 10%. The ETF’s five biggest holdings are Gerber and Häagen-Dazs parent Nestlé NESN, -0.41% ( NSRGY, +0.71% Novartis, Roche, Swedish-Swiss engineering conglomerate ABB ABB, +0.27% ABB, -0.64% and banking heavyweight UBS, +0.17% UBSG, -0.17% Swatch makes it into the ranks of the ETF’s top 20 holdings.
Morgan Stanley has Overweight ratings on Nestlé, Novartis, and UBS, along with Cartier parent Compagnie Financière Richemont CFR, -0.11% and financial giants Credit Suisse CS, +0.11% CSGN, -0.69% and Swiss Re SREN, +0.55% .
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Among the broad European equity gauges, they are all on track to finish 2017 with gains. With less than one month to go in 2017, Germany’s DAX DAX, -0.15% is up about 14% for the year, while France’s CAC 40 PX1, -0.11% has advanced 11% and the U.K.’s FTSE 100 UKX, -0.13% has added 5%. They have been boosted by such factors as an expanding global economy, rising corporate profits, and anemic expected returns for other assets.
“Both France and Germany look overbought,” warn the Morgan Stanley strategists. Beyond buying Switzerland, the bank’s team is recommending that investors underweight what they dub “Europe’s FANG” markets—France, Austria, the Netherlands, and Germany.
What about U.K. stocks? That market might resemble a nice deal like Switzerland, but it’s “hard to value the market ahead of Brexit,” say Olney and her UBS colleagues, referring to Britain’s planned exit from the European Union.
This is an updated version of a story that was first published on MarketWatch on Dec. 2, 2017.