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Switzerland: an affordable safe haven?

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Despite the recent market correction, we believe valuations of Swiss equities remain high versus historical averages. In this paper, we discuss why such high levels could represent a significant risk to investors and outline the four distinct catalysts that could potentially trigger increased market volatility.

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Despite the recent market corrections in February and May this year, we believe the valuations of Swiss equities are still high versus historical averages, without displaying irrational exuberance.

Since the beginning of 2016, we have seen Swiss equities slightly heating up when looking at the realised trailing Price-to-Earnings (P/E) ratio, with a current value at around 25x for the Swiss Market Index (SMI) and the Swiss Performance Index (SPI) (see Figure 1). Even when considering the forward-looking equivalent, the SPI is priced at a premium compared to its historical average, standing at 15.7x versus an average of 14.5x since 2005.

 

Figure 1: Trailing P/E ratio of the Unigestion Swiss Equities fund, SPI and SMI

Figure 1: Trailing P/E ratio of the Unigestion Swiss Equities fund, SPI and SMI

Source: Unigestion, Bloomberg, as at 31 May 2018.

Notes: Aggregated trailing P/E ratio computed using weighted-average market capitalisation over weighted-average earnings.

 

In light of the current European economic environment, high valuations could represent a serious risk to investors as we see four distinct catalysts potentially triggering increased market volatility:

  1. The recent developments across the Italian political scene are threatening the eurozone’s financial stability and may drive markets lower. In our view, worst-case scenarios, such as Italian Buoni del Tesoro Poliannuali haircuts and “Italexit”, could lead to a flight to safety, triggering an appreciation of the Swiss franc. Such developments would hurt the competitiveness of the country and push equities even lower.
  2. Even if the European Central Bank’s normalisation remains unclear, it could decide to tighten its monetary policy faster than the market is expecting, which we believe could be detrimental to the Swiss stock market, which by nature tends to be more defensively oriented.
  3. A third source of risk is the impact of the Trump administration’s policy to impose tariffs on imported goods from Europe, China, Canada and Mexico, which could lead to retaliatory measures from other countries and hurt global trade.
  4. Finally, we believe the slowdown and growing debt of the Chinese economy and its impact on global growth represent another potential threat to equity markets

In our view, caution needs to be taken in areas of the market where valuations are already excessive. Notably, index and passive low-volatility approaches tend to provide little or weak risk management (see our Perspectives October 2016, “Avoiding overvaluation in “low-risk” approaches”), and may be hazardous in an uncertain market environment by having the tendency to expose investors to unrewarded bets over the long term.

Our active risk-managed equities portfolios are designed to tackle a full spectrum of risks including overvaluation. As a result, Unigestion Swiss Equities exhibits a more sustainable performance decomposition with a higher proportion related to earnings growth than the SPI and SMI (see Figure 2) by consistently maintaining the valuation of our strategy below market levels (as illustrated in Figure 1).

 

Figure 2: Performance decomposition: speculation versus fundamentals

Figure 2: Performance decomposition: speculation versus fundamentals

Source: Unigestion, Bloomberg, as at 31 May 2018. Performance shown is gross of fees and is for the period 31 December 2013 to 31 May 2018.

Past performance is no guide to the future, the value of investments can fall as well as rise, there is no guarantee that your initial investment will be returned.

 

Important Information

Past and simulated performance is no guide to the future, the value of investments can fall as well as rise, there is no guarantee that your initial investment will be returned. This document has been prepared for your information only and must not be distributed, published, reproduced or disclosed by recipients to any other person. This is a promotional statement of our investment philosophy and services only in relation to the subject matter of this presentation. It constitutes neither investment advice nor recommendation. This document represents no offer, solicitation or suggestion of suitability to subscribe in the investment vehicles it refers to. Please contact you professional adviser/consultant before making an investment decision. Where possible we aim to disclose the material risks pertinent to this document, and as such, these should be noted on the individual document pages. Some of the investment strategies described or alluded to herein may be construed as high risk and not readily realisable investments, which may experience substantial and sudden losses including total loss of investment. These are not suitable for all types of investors. To the extent that this report contains statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive products, market acceptance risks and other risks. As such, forward looking statements should not be relied upon for future returns. Data and graphical information herein are for information only and may have been derived from third party sources. Unigestion takes reasonable steps to verify, but does not guarantee, the accuracy and completeness of this information. As a result, no representation or warranty, expressed or implied, is or will be made by Unigestion in this respect and no responsibility or liability is or will be accepted. All information provided here is subject to change without notice. It should only be considered current as of the date of publication without regard to the date on which you may access the information. Rates of exchange may cause the value of investments to go up or down. An investment with Unigestion, like all investments, contains risks, including total loss for the investor. Unigestion Swiss Equities fund is authorised in Switzerland. All investors must obtain and carefully read the prospectus, which contains additional information needed to evaluate the potential investment and provides important disclosures regarding risks, fees and expenses. Unless otherwise stated, performance is shown net of fees in CHF and does not include the commission and fees charged at the time of subscribing for or redeeming shares.

 


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