Switzerland is appealing, but avoid the banks

Kathleen Brooks
SWITZERLAND’S economy is the one light in an otherwise gloomy Europe. It was one of the more stable economies during the downturn, growth in unemployment is slowing, and last week the Organisation for Economic Co-operation and Development (OECD) increased its growth forecast for the country to 1.8 per cent for this year.

The OECD argues that a pick-up in global trade and a continuing recovery in domestic consumption should boost the economy. Investment bank Credit Suisse also expects the Swiss economy to strengthen this year and calls it a “good defensive play on the financial markets”. It cites Switzerland’s strong fiscal position and exposure to global export markets as the main drivers of growth.

Credit Suisse expects the Swiss Market Index (SMI) –the local stock index – to rise to 7,350 in the next 12 months (it is currently trading at 6,340). The bank is particularly positive on Roche, the pharmaceuticals company, and Nestle, the food giant, which should perform well if the markets remain volatile because of their status as defensive stocks and the fact they have both have a strong global reach.

So how should investors get exposure to the Swiss economy? Elizabeth Gregory, market strategist at ACM, the online trading company, agrees that the fundamental backdrop to the Swiss economy is improving. However, she warns against a long position in the SMI because of its exposure to the banking sector. For example, UBS, the Swiss investment bank, makes up nearly a tenth of the entire index. “Worries about the banks have increased recently due to the problems in Europe, and the SMI could get sold off very quickly if there are any more fears about the health of the financial sector,” she says.

For investors who would rather invest in individual companies then Credit Suisse also has outperform recommendations on Sonova, the medical firm, Kaba, the security company, and Swatch, which it says is “structurally and geographically one of the best positioned players in the luxury sector, mainly due to the company’s strong diversification of its 19 watch brands across different price categories…and its high exposure to non-Japan Asia”.

However, ACM’s Gregory believes that the best way to trade on a strong Swiss economy is a long position in the Swiss franc against a short position in the euro. “The franc is supported on two fronts: firstly the economic fundamentals are strong, and secondly it is a safe haven currency, so it tends to rise during periods of volatility,” she says. The OECD also expects the Swiss National Bank (SNB) to raise interest rates from the end of this year. Since currencies are sensitive to rate movements, a growing interest rate differential with Europe should add to upward pressure on the franc for the medium term.

Using a contract for difference (CFD) is a good way to get exposure to this trade because CFDs are cheap to hold for a prolonged period and they offer leveraged exposure to the underlying asset. As long as you are willing to take the extra risk that a leveraged position involves, then a long Swiss franc position against the euro using CFDs could pay off later this year.