- We are closing our BUY rating and assigning a SELL rating on the Swiss stock market (ETF: EWL) at 8250.10.
- The BUY rating that we are closing has helped investors earn potential gains of 37.87%.
We have a negative medium-term bias on Switzerland's market index.
We think that the current economic growth will slow even more in the months ahead and the weakened sentiment will find its way into the real economy in Switzerland. In the past few months, growth seems to be incrementally weaker, not stronger. Our Leading Indicator for Switzerland also points to a sharper slowdown in the next twelve months, which will be first reflected in the manufacturing sector. Incomes are under pressure as earnings continue to be squeezed by falling real and nominal wages. Without real income growth, consumers are forced to reduce spending to afford higher food and energy prices. In addition, unemployment is stuck well above its pre-crisis level in Switzerland and employment growth has slowed. The longer the unemployment rate remains high, the greater the likelihood that it is being boosted by structural as well as cyclical forces.
Long positioning in Switzerland's market index is now extremely stretched. Our Sentiment Indicator has also recently reached levels, which are usually followed by a price correction. Many speculators have a tendency to accumulate relatively large positions toward the end of a market trend, when they let human nature get the best of them by letting greed dictate their actions, but the smart money is starting to do the opposite. According to our money flow indicators, hedge funds have started to cut their long exposure significantly in the past several weeks after having been extremely long. The current buyers of stocks in Switzerland are the late-to-the-party speculators receiving stocks in Switzerland from the early buyers. Because these late buyers are purchasing the asset at already-elevated prices, they are subject to almost immediate losses on any market pullback.
It seems clear that, what's discussed above could have a sizeable adverse impact on the Swiss economy at a time when it already faces significant headwinds in the form of falling exports, high levels of private sector debt, rising inflation, and a weak labor market. While our forecast for Switzerland is clearly below consensus for this year, the view of a number of leading macro hedge funds seems quite similar to our own - a very weak consumer picture, a jobless recovery, and sluggish demand for some time. Looking further ahead, what we are dealing with is less about systemic risk and more about the fundamental problem of weak growth and a profit crunch. Overall, these concerns underpin our bearish view on the Swiss market index. Consequently, our team thinks the scope for a sharp sell-off in the Swiss stock index is quite real, and our view on the market is negative, even in the longer term.