About That Swiss Neutrality ...

Includes: EWL, FXF
by: Russ Koesterich, CFA

Given faltering growth, Swiss stocks are starting to look overpriced. While we still favor Switzerland for the long term as part of the CASSH countries (Canada, Australia, Switzerland, Hong Kong), we’re changing our short term outlook to underweight from neutral.

Year-to-date, Swiss equities are up approximately 12%, according to Bloomberg. Given the recent rally, equity valuations appear a bit rich for an economy that’s slowing down. Reflecting Switzerland’s huge miss in second-quarter gross domestic product (GDP) and continued contraction in leading indicators, our GDP forecast has been revised down to 0.6% year-over-year expansion compared to a previously projected 1.7%.

The country’s domestic private consumption remains very strong. But exports show downward cyclical risk, as two-thirds of this business comes from neighboring countries within the eurozone, where a deep economic slump lingers. Until the region puts a proper firewall in place against economic contagion, we should continue to see elevation of the Swiss franc, which is considered a relatively safe haven compared to other currencies. As such, there is limited hope for external sector recovery via exchange rate adjustment.

That said, the short-term growth challenges should not be confused with the long-term fundamental appeal: Switzerland produces some of highest quality exports in the world, and Swiss corporations have historically enjoyed above-average profitability compared to counterparts in developed markets. Therefore, we remain constructive on Switzerland from a long-term perspective, while turning tactically cautious in near term.

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