Koesterich Rates Switzerland Short-Term Underweight
Buoyed by the fact the country is not a member of the eurozone, Swiss equities have enjoyed a solid run thus far in 2012. That performance is highlighted by the 11.1 percent year-to-date gain for the iShares MSCI Switzerland Index Fund (NYSE: EWL), the dominant Switzerland-specific ETF.
The iShares MSCI Switzerland Index Fund is up almost five percent in the past month, an impressive run for an ETF tracking a country that is home to slowing economic growth and near-term headwinds. Along those lines, iShares Global Chief Investment Strategist Russ Koesterich has pared his near-term view on Switzerland to Underweight from Neutral. Koesterich still has a constructive long-term outlook on Switzerland.
"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%," Koesterich wrote in a blog post.
Part of the reason EWL has held up well this year is its sector weightings. While Switzerland is viewed as a banking mecca, the financial services sector accounts 19.1 percent of the fund's weight, but health care and consumer staples names combine for 53 percent of the ETF's weight. That conservative posturing is evident with EWL's individual holdings, too. Nestle (OTC: NSRGY), the world's largest food company, and Swiss pharmaceuticals giant Novartis (NYSE: NVX) combine for 35 percent of EWL's weight.
Still, EWL does have a beta of 1.3 against the S&P 500 and the fund sports an price-to-earnings ratio of 19.4, which is above the P/E ratio on the iShares MSCI Germany Index Fund (NYSE: EWG) and the higher risk iShares MSCI Italy Index Fund (NYSE: EWI). Speaking of eurozone nations, it is those countries that pose a near-term risk to the Swiss economy.
"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," wrote Koesterich.
Given that the region is still subject to headline risk and economic contagion, the Swiss franc could continue to rise given its safe-haven status, limiting "hope for external sector recovery via exchange rate adjustment," according to Koesterich.
A strong franc pressures the bottom line for export-dependent companies such as Nestle. The CurrencyShares Swiss Franc Trust (NYSE: FXF) is up nearly three percent in the past month. Still, Koesterich sees a strong long-term outlook for the nation known for its neutrality and production of high-end chocolate and watches.
"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," he wrote. "Therefore, we remain constructive on Switzerland from a long-term perspective, while turning tactically cautious in near term."
An alternative to EWL to consider is the newly minted First Trust Switzerland AlphaDEX Fund (NYSE: FSZ). FSZ debuted in February and is pricier than EWL with annual fees of 0.8 percent. The First Trust offering is also more highly concentrated to financials with a 33.5 percent weight to that group. FSZ is up 7.3 percent in the past month and almost 10 percent in the past three months.
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