Swiss stock markets are reaching record highs this week, and firms are optimistic about the rest of the year. CIO remains neutral on Swiss equities in its global tactical asset allocation. It continues to favor quality dividend payers with growth.
Swiss equities have been surging of late. On Wednesday, the blue-chip Swiss Market Index (SMI) reached its highest level since August 2015, at 9,284 points. The index is up more than 12 percent year to date. Meanwhile, the broader-based Swiss Performance Index (SPI) clocked up an all-time high of 10,580. Markets have been buoyed by positive performance on Wall Street, investors' increasing perception that the European Central Bank will tighten monetary policy slower than previously expected, as well as encouraging global economic data.
With the third-quarter earnings season around the corner, what should investors expect for Swiss equities in the months ahead? "Most companies reported good results for the first half of the year, and are also radiating confidence about the rest of the year," says CIO analyst Stefan Meyer. "For the first time in two years we expect positive earnings growth in 2017 and 2018, resulting in record profits. For once, exchange rates are supporting corporate earnings. Swiss companies can expect moderate currency gains overall that will increase this year’s corporate earnings by half a percentage point, we estimate."
CIO expects mid-single-digit earnings growth for Swiss companies this year and next, and believes consensus expectations may be too optimistic. "Given the market’s defensive sector composition, companies in other regions may benefit more from the robust global economic expansion," Meyer says. He notes, too, that investors' optimism appears somewhat more cautious than firms'. "Yet the overall sentiment is that there are few alternatives to equities," the analyst adds.
Overall, CIO is neutral on Swiss equities in its global portfolio. Following the market's strong performance, valuations are high by historical standards: The SPI is trading on a 12-month forward price-to-earnings (P/E) ratio of around 17 to 18x, above its average since January 2000 of 15x. But although Swiss stocks are not cheap, CIO regards the risk premium (currently around 5.8 percent) and dividend yield (3.1 percent for the current financial year) as attractive.
Within Swiss equities, CIO continues to favor high-quality dividend payers with growth. "The yield advantage over CHF interest rates and bonds is high," says Meyer. "However, the growth factor is important too, as pure high yield equities can no longer benefit from falling interest rates." CIO also prefers selected companies that should benefit in particular from a stronger euro versus the Swiss franc.
For a full list of CIO's Swiss stock selections, please see the respective Equity Preferences List.