Fading franc doesn't make Swiss stocks a bargain

Thought of the day

by Chief Investment Office 18 Apr 2018

The Swiss franc has been one of the biggest losers versus the euro over the past 12 months – down more than 10%. It is now very close to the 1.20 floor that the Swiss National Bank memorably abandoned in January 2015, provoking a 19% one-day surge in the franc and a 14% two-day slide in Swiss equities.

The franc's recent decline is indeed positive news for the Swiss equity market, with 90% of profits generated abroad. Partly as a result, Swiss firms are on track for record earnings this year, topping the previous 2006 peak.

But despite this currency tailwind, we still don't view Swiss stocks overall as a bargain for global investors. And while the weakening franc makes it tempting for Swiss investors to increase unhedged investments overseas, this is also risky.

  • Global investors should consider that the Swiss market is relatively defensive in composition, so it benefits less from strong global economic growth.
  • Valuations are not cheap. The Swiss Performance Index (SPI) is trading on a forward price-to-earnings ratio of around 17 times, above the 30-year average of 15x.
  • The bulk of the franc's fall may already have occurred. EURCHF is now close to our estimate of fair value at 1.21, and we expect the CHF to rise versus the USD. So although currency hedging is costly for Swiss investors, we believe such insurance is worth the price to reduce volatility.

So we remain neutral on Swiss stocks, and investors should remain selective, preferring quality dividend stocks. Meanwhile we believe Swiss investors should refrain from unhedged foreign investing.

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