Bears Circle Swiss Stocks Already Slammed by Franc, China Slump

Updated on
  • The SMI is heading for its biggest monthly loss since 2009
  • Bearish option prices have shot up as exporters seen at risk

First it was the strengthening of its currency in January that sent Switzerland’s stocks down, only to recover two months later. Now it’s China’s economy, and this time options traders don’t see a speedy recovery.

With a 6.9 percent plunge in August, Swiss equities are heading for their biggest drop in six years, worse than the slump in January, when the nation’s central bank abandoned its franc cap. Now bears are paying the most since October to protect against further declines.

Before concerns about China triggered a $8 trillion rout in global stocks earlier this month, the Swiss Market Index was within points off a record. With exporters bleeding again, bulls are now reconsidering.

“Swiss companies have had the problem that the franc appreciated, and now you see that the situation is also deteriorating in emerging markets,” said Alessandro Bee, a strategist at Bank J Safra Sarasin in Zurich. “You have a lot of drags at the moment.”

Watchmakers Cie. Financiere Richemont SA and Swatch Group AG, which get more than 23 percent of their revenues from China, tumbled at least 11 percent in August. Syngenta AG, which was among the biggest gainers, is leading the declines this month after Monsanto Co. abandoned its efforts to buy the company.

The SMI had staged a stellar recovery from its low in January, recuperating all its losses in about two months, even with a stronger franc. At the beginning of August, the index climbed within 0.1 percent of the all-time high it reached in 2007. It dropped 7.5 percent since then, through yesterday.

Safe Haven

Some see signs of optimism. Switzerland’s economy unexpectedly avoided a recession in the second quarter, with its gross domestic product rising 0.2 percent when forecasters expected a 0.1 percent contraction.

Swiss shares represent a haven in times of crisis, and the decline is making them more attractive, says Jon Cox, the head of Swiss equities at Kepler Cheuvreux in Zurich. The SMI’s drop this month is smaller that the losses for most developed markets. The Euro Stoxx 50 Index has fallen more than 2 percentage points more.

“The more the uncertainty you see around the world, you may find people attracted to the Swiss market,” said Cox, whose recommendations include Swiss watchmakers and Nestle SA. “There’s still a chance we hit that new record before we end this bull market.”

Berenberg Bank Schweiz’s Thomas Lehr says Swiss stocks remain too expensive. Shares in the SMI trade at 17.2 times their estimated earnings, near a two-year high relative to the Euro Stoxx 50. 

“For the index to reach that high again, sentiment has to be better than at previous highs,” said Lehr, the head of investment strategy at Berenberg Bank Schweiz in Zurich. “When you sell, you sell the stocks which seem to be expensive. And Swiss stocks seem expensive.”