Losses Vanish in Switzerland as Stocks Post Best Rally Since ’11

Two months ago, the Swiss National Bank’s decision to remove the franc cap triggered a record stock slump. That didn’t last too long.

Equities have rebounded at the fastest pace since 2011 as companies took action to mitigate the currency hit and the franc pared some of its gains against the euro. The Swiss Market Index rose 0.9 percent to its highest level since Jan. 13, when it hit a seven-year high.

Even after the advance pushed the SMI to its highest valuation since 2008, Neue Aargauer Bank’s Konstantin Giantiroglou says the rally may have more to go as Switzerland’s economy remains strong. Many Swiss companies also get a large portion of their revenues in U.S. dollars and are profiting from its jump.

“Valuations can become even richer,” said Giantiroglou, head of investment advisory and research at Neue Aargauer Bank in Brugg, Switzerland. His firm oversees about $25 billion. “We are talking about big, SMI companies which are sourcing around the world. As long as the economy keeps on going, the stock market will also keep on going.”

Julius Baer Group Ltd., Credit Suisse Group AG and UBS Group AG were some of the biggest SMI gainers since the SMI hit a one-year low on Jan. 16. During the period, Switzerland’s third-largest wealth manager posted a surge in profit and the country’s biggest bank reported earnings that beat analysts’ estimates, while Credit Suisse named a new chief executive officer.

Dollar Surge

At the same time, the jump of the dollar will help Swiss companies, according to Alessandro Bee, a strategist at Bank J Safra Sarasin in Zurich. Credit Suisse and Novartis AG received at least 36 percent of their 2014 revenues in the U.S. currency, more than what they got in euros, according to their annual reports. Novartis has the biggest stock weighting in the SMI.

“A lot of the big companies on the SMI are more exposed to the dollar than the euro,” Bee said. “That means they’ll be less hurt by the appreciation of the Swiss franc, because all indicates that the dollar will continue to strengthen.”

Since January, the franc has pared almost all its gains versus the dollar. The Bloomberg Dollar Spot Index reached a record high on Feb. 13, according to data going back to 2005.

Still, Compass Capital’s Benedict Goette says he remains skeptical. The odds of Switzerland entering a recession over the next year have increased to 45 percent this month from 9 percent in December, according to Bloomberg surveys of economists.

Economic Forecasts

The SNB will unveil on March 19 its forecasts assessing the impact of its franc-limit removal, after data showed this month that the economy grew in the last quarter of 2014 twice as fast as estimated.

“The jury is still out, if the Swiss firms can adjust quick enough and which of them can,” said Goette, founder of asset-management firm Compass Capital in Zurich. “The next earnings season will bring more clarity.”

Swiss companies are used to having a strong franc, according to Christoph Riniker, the Zurich-based head of strategy research at Julius Baer. Since 2008, the currency has rallied against the euro every year but one.

Companies from Swatch Group AG to Julius Baer announced measures to counter the SNB’s move. The watch maker increased prices and the wealth manager cut costs. That’s helped push investors such as BlackRock Inc. and Bank J. Safra Sarasin back to Swiss equities. Trading of SMI stocks has increased 56 percent to its highest level since 2009 this year, with an average of 62.7 million shares changing hands each day through the end of last week, data compiled by Bloomberg show.

“On a fundamental perspective, Swiss companies have always been faced with a strong or strengthening franc,” said Christoph Riniker. “They were not completely unfamiliar with this situation and knew how to adjust.”

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