The S&P 500 and MSCI emerging market index are both sitting on healthy gains since the start of the year but the Swiss SMI is range bound around 6,500 points. Why? One analyst believes it is all down to the weak dollar.
“The principal reason is the sharp depreciation in the US dollar. The dollar has lost more than 10 percent of its value against the Swiss franc since December 2009,” said Philipp Bärtschi, the chief strategist at Sarasin in Zurich in a research note.
“Whereas earnings estimates for US equities have risen by more than 30 percent since January 2010, they have risen by a paltry 4 percent for Swiss equities.”
“This discrepancy is mainly due to the strong appreciation of the Swiss franc. Conversely, the weak dollar has had a positive effect on the earnings of US companies,” said Bärtschi
With the dollar expected to rise against the Franc this year in Bärtschi’s opinion the SMI could be set for some healthy gains with defensive stocks in particular likely to outperform.
“Now that we have passed the peak in the economic cycle, the relative historical performance has switched from the cyclical to the defensive sectors”
“The winners in the coming months are likely to be the healthcare and consumer staples sectors, which have a strong weighting in the Swiss equity market” said Bärtschi
“Since we do not expect interest rates in Switzerland to rise sharply in the coming quarters, the risk premium on equities, measured as the earnings yield minus the bond yield, is likely to remain historically elevated.”
“Due to the continuing high risk premium, money should continue to flow from the bond markets into the equity markets, despite cyclical concerns. Given the present interest rate level, this trend is likely to be particularly pronounced in Switzerland.”
7,000 for the SMI might be a bit too much to hope for this year, according to Bärtschi, who is now predicting the index will top 6,800 by year end.