Swiss Revival

The Swiss Market Index, the most important basket of Swiss blue-chips, is often considered a value-investment, not only for the traditional role of Switzerland as a safe-haven but also for the predominance of defensive companies in its basket, some of which are among the largest companies by market capitalization the world.

Nevertheless, it is not so simple to link the aversion of investors to risk to the relative course of the Swiss stocks. When the investors look for safety, for example, the Swiss Franc is often the main beneficiary but a hard currency is not the best environment for global business and so is explained the relative weakness of the Swiss markets during the bearish trends of the euro against the Swiss franc.

In figure 1, the course of the euro against the Swiss franc is compared to the relative trend of the SMI versus the Stoxx600 Europe. When the franc is stronger the Swiss are likely to underperform the European stocks, even if both indexes are computed in the same currency.

Figure 1: Euro against Swiss franc (on top) and relative trend of the SMI index against Stoxx600 Europe (bottom), both in local (red) and currency adjusted values (blue). When the franc is stronger the Swiss stocks are weaker.

But the relative trend is not only a matter of forex. More than 60% of the Swiss index is made of just three companies, world leaders in the pharmaceutical and food sectors (Novartis, Roche, Nestle) which are typically defensive. It means that during the so-called risk-on phases, when the environments is favorable for riskier investments, the defensive stocks are usually left behind and the Swiss index tends to underperform. Here is why the relative weakness that the non-cyclical sectors have experienced in 2016 has translated into relative weakness for the SMI.

But the so-called defensive sectors, thanks to a sector rotation phenomenon that also reflects the beginning of a more prudential stance by the investors, after the sharp stocks advances of the last three months, are showing signs of a potential recovery.

Figure 2: The relative strength of European stocks sectors against Stoxx600: Food (in red) Health Care (in blue). Both have sharply underperformed since July 2016 and are now forming a base that could anticipate a reversal.

The SMI is also turning bullish, as shown in figure 3. The December outbreak of the bearish trend 2016 was followed by a congestion in the area 8200-8500. Two rising lows transformed such congestion into a bullish pattern pushing towards the January highs (8475) in a move that is likely to anticipate further strength.

Figure 3: Swiss market Index, daily data since 2016 with MACD indicator. A sound base above 8200 is pushing towards a break of the January highs (8475)

Alberto VIVANTI – SAMT Vice President – Graubünden and Liechtenstein Chapter– alberto.vivanti@samt-org.ch

Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.