SET Monthly Issue March 2017
Playing It Safe In Switzerland
When you make your own mental list of the world’s safest and most secure countries, chances are you’ll include Switzerland.
The perception is largely accurate, but doesn’t entirely mirror reality. One of Switzerland’s largest banks, UBS, was a big player in the U.S. subprime mortgage business. When the financial crisis hit in 2008, the bank scrambled to keep its head above water.
But when we invest in Swiss stocks, we’re investing in mature, conservative, and well-managed global companies. With all the global uncertainty, landlocked Switzerland serves as one of the world’s safest financial harbors, so we’re inclined to take advantage of its tranquility.
Switzerland doesn’t simply take pride in its quiet financial stability. It’s been baked into the character of the country for centuries. It shapes the behavior of its people and the performance of its companies.
Our recommendation this month is the iShares MSCI Switzerland Capped ETF (EWL).
SWITZERLAND’S STOCK MARKET
The Swiss Exchange, known as the SIX, is based in Zurich. Its main index is the SMI, the Swiss Market Index. There are 27 large and mid-cap stocks on the index.
The market itself is one of the world’s best-run. It was the first to launch fully automated trading, clearing, and settlements.
The stocks traded on the Swiss Exchange are global blue chips. They are concentrated in banking, insurance, chemicals, pharmaceuticals, and biotech. Many of the companies are familiar names such as Nestle, Novartis, UBS, Roche, and Swatch.
There’s also a name or two that’s not so familiar, such as Addeco, which is the world’s largest employment agency.
The ETF is capped, which means it adjusts the proportion of its holdings and weighs them to larger companies. It tracks 85% of the stocks traded on the SIX excluding small-caps.
A CLOSER LOOK: INSIDE THE ISHARES MSCI SWITZERLAND CAPPED ETF
The ETF tracks the MSCI Switzerland 25/50 Index. Net expenses are a modest .48%. The fund was established in 1996 and has assets of $1.1 billion USD.
TOP 5 SECTORS
Healthcare: 30.89%
Consumer Non-Cyclicals: 21.69%
Financials: 19.42%
Basic Materials: 10.34%
Industrials: 9.00%
TOP 5 HOLDINGS
By design, the ETF is heavily weighted toward its top holdings. These five stocks represent more than 50% of the fund’s value.
| Company Name | Sector | % Weight | |||
| Nestle S.A. | Food Products | 18.22% | |||
| Novartis AG | Pharmaceuticals | 13.25% | |||
| Roche Holding AG | Pharmaceuticals | 13.02% | |||
| UBS Group AG | Banking/Finance | 4.54% | |||
| ABB Ltd. | Conglomerate | 4.04% | |||
| 03/03/17 | |||||
Nestle S.A.
Nestle S.A. is a global food and beverage company headquartered in Vevey (where Charlie Chaplin spent the last years of his life and is buried). Nestle has been the world’s #1 food company for the past three years.
Novartis AG
Another global leader… Novartis is a multinational pharmaceutical company based in Basel. It is one of the largest pharmas based on both market cap and sales.
Roche Holding AG
F. Hoffmann-La Roche AG is a global health-care company that operates under two divisions: pharmaceuticals and diagnostics.
UBS Group AG
UBS is a global bank which provides wealth management, asset management, and investment banking services for private, corporate, and institutional clients. The Government of Singapore is one of the bank’s largest investors.
ABB Ltd.
ABB is a Swiss-Swedish firm focused on robotics, power, and automation technology. It is the world’s largest producer of electrical grids.
WHY SWITZERLAND?
Long-term safety in an increasingly uncertain world.
We aren’t blind to the money that has recently started pouring into Chinese “blue chips”. A fresh wave of momentum is sweeping through developing markets.
But we can’t help but wonder how sustainable these rallies will be. There could easily be a sudden downturn sparked by unsettling talk of tariffs, rumblings of currency devaluations, or policy changes.
Switzerland isn’t immune to the disruptions and uncertainty. The leading stocks on the Zurich exchange do business around the world. But these are cautious companies, conservative by pedigree, well-managed, and well positioned to coast across the speed bumps of global economic uncertainties.
What about the European Union? What about BREXIT and its impact on the Swiss markets?
The EU is Switzerland’s #1 trading partner. The UK is a strategic trading partner with Germany, and what happens on the business front in Switzerland is heavily impacted by developments in Germany. BREXIT probably won’t do Germany’s businesses any favors and this could drag down Swiss markets.
When the first BREXIT shock waves rolled through the markets last summer, the iShares MSCI Switzerland Capped ETF took an 8% hit. Post BREXIT, in a matter of days, the ETF plunged from $30.61 to $28.06.
The rebound has been striking. Over the past year, the ETF has made up for lost ground and now trades near its pre-BREXIT highs.
Economists, traders, and business leaders have now had nine months to digest BREXIT. It’s probably safe to say that most of the impact will be political. European markets will be prone to shakiness, but breathtaking plunges seem unlikely.
So, the concerns that Swiss companies face aren’t dominated by BREXIT. The risks are global in nature. Lower growth can ratchet down demand for Swiss products and services.
THE CURRENCY QUESTION
Another consideration is the performance of the Swiss franc. There’s always the chance of an accelerating flow of capital out of the Euro and into the franc.
Switzerland’s currency is traditionally seen as one of the world’s safest and most stable. If there is a sustained burst of upward pressure on the franc, the Swiss National Bank may need to step in and devalue the currency. The problems this creates is nothing new for Swiss companies.
So far, currency volatility has been limited, but a future devaluation, which would drive down the asset value of the ETF, is not out of the question.
Something else to consider…
Global investors who want to avoid the risks we see with markets such as those in China, Russia, and Brazil get exposure to Swiss-based companies with expansive global footprints.
It’s hard to go into a supermarket or a neighborhood grocer anywhere in the world without finding a product from Nestle. Zurich insurance has employees in 170 countries.
THE ROLE OF EWL IN YOUR ETF PORTFOLIO
The large, diversified, well-managed global companies tracked by the ETF represent a core, long-term holding. We expect price fluctuations to mirror the broader markets, but downturns to be softened by the quality of the companies.
The modest yield, currently 2.64%, is welcome news for income investors.
TRADE ALERT
Buy: iShares MSCI Switzerland Capped ETF (EWL) to $31.50
Recent Price: $31.27
Price Target: $39.00
Stop Loss: $29.00
52-WEEK SECTOR PERFORMANCE
| Consumer Discretionary | XLY | +13.03% | |||
| Consumer Staples | XLP | +5.50% | |||
| Energy | XLE | +18.30% | |||
| Financials | XLF | +37.06% | |||
| Health Care | XLV | +12.02% | |||
| Industrials | XLI | +23.02% | |||
| Materials | XLB | +20.39% | |||
| Real Estate | XLRE | +4.07% | |||
| Technology | XLK | +24.42% | |||
| Utilities | XLU | +9.15% |
PORTFOLIO UPDATES
. . . . SPDR S&P Pharmaceuticals ETF (XPH) – HOLD
Pharma stock prices continue to be impacted more by what’s expected in health care policy change than through earnings or product issues. The policy breezes have been blowing in different directions, pushing our ETF up and down. Over the past week, XPH has made up for lost ground, but we would not be surprised to see another dip before a longer-term uptrend locks in.
. . . . Vanguard REIT ETF (VNQ) – HOLD
Interest rate jitters and rate hikes have shaved off some of the ETF’s recent gains. Expect more turbulence ahead.
The dividend yield is a solid 4.6%.
. . . . PowerShares Dividend Achievers ETF $PFM – HOLD
PFM is another one of our holdings that has been trading in a narrow range. Current yield is 4.06%.
. . . . First Trust ISE Global Engineering & Construction Index Fund $FLM – BUY
Few changes. The ETF has given back some gains and we continue to look for stronger performance in the months ahead.
. . . . Vanguard High Dividend Yield ETF $VYM – BUY
No significant changes. Current yield is 2.81%.
. . . . First Trust ISE-Revere Natural Gas Index Fund $FCG – BUY
Natural gas prices have been firming for the past week following a month-long slide. The ETF has dipped below our buy up to price of $26.70. This is a good opportunity to acquire shares at a reasonable price.
. . . . PowerShares S&P SmallCap Energy ETF $PSCE – HOLD
We will be patient and hold, despite a slowdown in momentum, more profit taking, and more uncertainty about both pricing and supply levels.
. . . . Utilities Select Sector SPD $XLU – HOLD
No changes. Continue to hold. This ETF remains a core position.
Portfolio Changes
- Buy iShares MSCI Switzerland Capped ETF (EWL)
Category: SET Monthly Issues
